S&I Electronics Plc v Revenue and Customs Commissioners

JurisdictionUK Non-devolved
CourtUpper Tribunal (Tax and Chancery Chamber)
Judgment Date12 March 2012
Neutral Citation[2012] UKUT 87 (TCC)
Date12 March 2012

[2012] UKUT 87 (TCC).

Upper Tribunal (Tax and Chancery Chamber).

Newey J, Judge John Walters QC.

Revenue and Customs Commissioners
and
S & I Electronics plc

Michael Patchett-Joyce (instructed by the Khan Partnership LLP) for the appellant.

Malcolm Davis-White QC and Aidan Robertson QC (instructed by the Solicitor to HM Revenue and Customs) for the respondents.

The following cases were referred to in the decision:

Blue Sphere Global Ltd v R & C CommrsUNKVAT [2009] EWHC 1150 (Ch); [2009] BVC 580

BT Pension Scheme Trustees Ltd v British Telecommunications plcUNK [2011] EWHC 2071 (Ch)

Calltel Telecom Ltd v R & C CommrsVAT [2009] BVC 555

Condé Nast Publications Ltd v C & E CommrsUNKVAT [2006] EWCA Civ 976; [2006] BVC 625

Crane v Sky In-Home LtdUNK [2008] EWCA Civ 978

Edwards v BairstowELRTAX [1956] AC 14; (1956) 36 TC 207

Elchinov v Natsionalna zdravnoosiguritelna kasaECAS (Case C-173/09) [2011] 1 CMLR 29

Fleming (t/a Bodycraft) v C & E CommrsUNKVAT [2006] EWCA Civ 70; [2006] BVC 310

4 Distribution LtdTAX [2009] UKFTT 242 (TC); [2010] TC 00191

Honeyfone LtdVAT No. 20,667; [2008] BVC 2,394

Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECASVAT (Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161

Kücükdeveci v Swedex Gmbh & Co KGECAS (Case C-555/07) [2010] ECR I-365

Mobilx Ltd v R & C CommrsUNKVAT [2010] EWCA Civ 517; [2010] BVC 638

Netto Supermarkt GmbH & Co OHG v Finanzamt MalchinECASVAT (Case C-271/06) [2009] BVC 157; [2008] ECR I-771

Phillips and Strattan v Dorintal Insurance LtdUNK [1987] 1 Ll Rep 482

POWA (Jersey) Ltd v R & C CommrsVAT [2012] UKUT 50 (TCC); [2012] BVC 1,596

R (Criminal proceedings against)ECASUNK (Case C-285/09) [2011] STC 138

R (on the application of B) v London Borough of IslingtonUNK [2010] EWHC 2539 (Admin)

R (on the application of Cart) v Upper TribunalUNK [2009] EWHC 3052 (Admin)

R (on the application of Teleos plc) v R & C CommrsECASVAT (Case C-409/04) [2008] BVC 705; [2007] ECR I-7797

Skatteverket v Gourmet Classic LtdECAS (Case C-458/06) [2008] ECR I-4207

Value added tax - Missing trader intra-Community (MTIC) fraud - Input tax credit - Loss of right to deduct - Correct test for knowledge or means of knowledge of fraud - Necessary connection - Taxpayer company dealing in mobile phones - Whether First-tier Tribunal applied correct test for knowledge or means of knowledge - Whether nature of connection required should be referred to ECJ - Whether taxpayer knew or should have known that transactions connected with VAT fraud - Case remitted to FTT.

These were an appeal by HMRC and a cross-appeal by the taxpayer against a decision of the First-tier Tribunal (FTT) in a case of missing trader intra-Community (MTIC) fraud ([2009] UKFTT 108 (TC); [2009] TC 00076).

The taxpayer company carried on business as a dealer in mobile phones. In the period April to July 2006, it sold some 132 lots of phones, 99 of which were exports. The taxpayer made substantial VAT repayment claims in each month during that period. HMRC carried out an investigation into those transactions and concluded that 89 of the export sales could be traced back to a fraudulent transaction within the supply chain. They maintained that the taxpayer knew or should have known of the fraudulent connection and refused the taxpayer's input tax claims. The total amount of input tax at issue was £4.3m.

The taxpayer appealed to the First-tier Tribunal (FTT) which found that the bulk of the challenged batches could be traced back to persons who had fraudulently evaded VAT. The taxpayer did not know that its deals were connected with fraud, but should have known that it was more likely than not that the transactions were connected with fraud earlier in the chain of supply. However, the FTT took the view that the tax denied should not exceed that lost in the related fraud. HMRC were thus held to have been justified in denying most of the input tax claimed by the taxpayer ([2009] UKFTT 108 (TC); [2009] TC 00076).

HMRC appealed challenging the FTT's view that the tax denied should be limited to the tax loss. By a cross-appeal, the taxpayer maintained that no input tax should have been denied at all.

The taxpayer argued, amongst other things, that the approach of the Court of Appeal in Mobilx Ltd v R & C Commrs [2010] BVC 638, which had been followed in POWA (Jersey) Ltd v R & C Commrs [2012] BVC 1596, failed to reflect EU law accurately and should not be followed by the Upper Tribunal. In particular, the words "impliquee dans" in the French text of Kittel v Belgium (Case C-439/04) [2008] BVC 559; [2006] ECR I-6161 had been translated in the English text as as "connected with", when a more accurate translation would be "involved in" or "part of". Further, HMRC by denying input tax credit to exporters such as the taxpayer, but not to those in the chains who bought and sold in the UK, was in breach of the EU principle of non-discrimination. Moreover, the FTT had erred in concluding that input tax could be denied if the taxpayer had known that the relevant transactions were more likely than not to be connected with fraud.

Held, remitting the case to the FTT:

1.The ECJ had not reviewed the relevant law in any significant way since Mobilx was decided, and it was therefore incumbent on the Upper Tribunal to follow the interpretation of the law adopted by the Court of Appeal in Mobilx. The taxpayer should not be permitted to pursue the mistranslation point: it was not taken before the FTT, and it would not be fair to give permission to raise it now. In any event, irrespective of whether the test should be expressed as "connected with fraudulent evasion" or "involved in the fraudulent evasion", if the taxpayer should have known that the transactions in which it was engaged were part of a chain in which one or more earlier transactions were fraudulent, albeit that its immediate supplier was not dishonest, the test derived from Kittel was satisfied. It was not appropriate to refer the translation point to the ECJ. (Condé Nast Publications Ltd v C & E Commrs [2006] BVC 310 and POWA (Jersey) Ltd v R & C Commrs [2012] BVC 1596 applied.)

2.The non-discrimination principle was not engaged, since the appeal concerned the decision that the objective criteria determining the right to deduct input tax had not been met. Therefore, the taxpayer was not entitled to repayments, irrespective of the position of anyone else. (POWA (Jersey) Ltd v R & C Commrs [2012] BVC 1596 applied.)

3.The FTT had framed its decision, before Mobilx, by reference to what it took to be the appropriate test, i.e. whether the taxpayer should have known that its transactions were more likely than not to be connected with fraud. That was wrong, since the Court of Appeal held in Mobilx that the right to deduct input tax would be lost if a trader knew or should have known that he was taking part in a transaction connected with fraudulent evasion of VAT, but not if he merely knew or should have known that the transaction was more likely than not to be so connected. It was not clear that, on the application of the correct test, the only reasonable conclusion open to the FTT was that the taxpayer knew or should have known that its transactions were connected with fraud. Nor was it clear that the FTT would have come to the opposite conclusion. Accordingly the case had to be remitted to the FTT to consider that question.

4.In the light of Mobilx it was clear that the FTT was mistaken in thinking that input tax should be denied only to the extent of the tax loss. The position was rather that a trader who fell to be treated as a participant in tax fraud lost the right to any input tax credit, whatever the extent of the tax loss. It followed that, but for the taxpayer's cross-appeal, the Upper Tribunal would have upheld HMRC's appeal and decided that HMRC had been entitled to disallow the relevant input tax claims in their entirety rather than merely to the extent of the proven tax loss.

DECISION
Introduction

1.This case concerns "missing trader intra-Community" (or "MTIC") VAT fraud. HM Revenue and Customs ("HMRC") denied the entitlement of the appellant, S&I Electronics plc ("S&I"), to deduct input tax in respect of various purchases of mobile phones on the footing that S&I knew or ought to have known that the transactions were connected with VAT fraud. The First-tier Tribunal (Judge Charles Hellier and Mr Cyril Shaw FCA) upheld the disallowance of the input tax to a considerable extent, but by no means entirely (see [2009] UKFTT 108 (TC); [2009] TC 00076). Both sides appeal.

Basic facts

2.S&I began running a family electrical business in 1980. By 2006, it had three divisions. One of these involved the import of small household electrical items, another importing and exporting consumer electrical goods such as televisions and camcorders. The turnover of these divisions was, however, dwarfed by that of the third division, the business of which consisted predominantly of the purchase and sale of mobile phones. This division had a turnover of some £11.5 million in April 2006 alone. S&I would typically (though not always) buy phones within the United Kingdom and export them.

3.Between April and July 2006, S&I entered into 132 transactions for the sale of mobile phones. 99 of the 132 sales were for export.

4.In 2007, HMRC denied S&I's entitlement to deduct input tax in respect of its purchase of the phones comprised in 90 of the 99 export sales. This was on the basis that, in each case, the phones in question had previously been sold by a person who had fraudulently evaded VAT (or, in one instance, by a "contra trader") and that S&I knew or should have known that its transactions were connected with fraud. The sums disallowed amounted to about £4.3 million.

5.S&I's appeals from HMRC's decisions occupied the First-tier Tribunal ("the FTT") for some 14 days in the autumn of 2008. The FTT summarised in these terms...

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