THE VATMAN STRIKES BACK

he anguish felt by victims of phoenix fraud is understandable, to say the least. Often owed thousands by the defunct firm, unpaid creditors watch powerless as the new-born firm trades merrily on.

How, they ask, do they get away with it?

Well they don't, always, as the recent prosecution of scaffolder William Leane by HM Customs & Excise has shown. C&E, which describes construction as a 'particularly fruitful sector for cynical phoenix operators', is now targeting phoenix fraud in several areas, including building and civil engineering. A special 12-man unit has been devoted to the exercise.

But in pursuing those who premeditate the contrived liquidation of their own firms, C&E has to take care not to harass legitimate entrepreneurs.

C&E spokesman Mark Thompson says: 'If we have good reason to believe a new firm will go bust owing tax, we can require directors to deposit a sum of money with us as security. This might be œ30,000 deposited for two years. If the purpose of the company was to go into contrived liquidation, then that sum acts as a powerful deterrent. We have to be careful though, not to penalise directors who are genuinely trying to save their business. œ30,000 to them might well put them under for good.'

In considering whether a deposit is required of a company trying to restart itself, C&E look at the amount of debt, and whether the directors have been involved in previous company restarts. The more insolvent companies a director has been involved with, the more closely C&E may examine his case.

'Sometimes it is fairly obvious something is wrong,' says Thompson. 'We had a case of one man who started 17 firms simultaneously and folded them all. Each had an outstanding VAT bill of œ50,000!'

Thompson says that suppliers can be less likely to lose out than the tax man: 'When the liquidation is contrived, you find that the company has paid its gas, electric and telephone bill along with the rent and vital suppliers. It knows it will need them later. Often the main loser is us as VAT and money owed to the Inland Revenue come, as you might imagine, fairly low down these people's list of priorities.'

So how does Customs and Excise decide, for example, whether to prosecute a company for VAT fraud?

'We have to feel confident we can prove to a jury that the liquidation was contrived. And that is not easy,' says Thompson.

'A VAT raid, for instance will arrest perhaps 30 people and remove literally tons of documents. The 36 hours allowed to interview suspects is used to find out who in the company actually does what. After that, maybe only three people will be charged. Provng contrivance is the trickiest bit.'

The problem of proof is also the reason why so few directors are referred for investigation by the DTI. If directors play by the rules, there is often little that can be done.