M&M (Cambridge) LLP
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 February 2020 |
| Neutral Citation | [2020] UKFTT 107 (TC) |
| Date | 20 February 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 107 (TC)
Judge Jeanette Zaman, Gill Hunter
Mr Matthew Sherratt QC and Mr Ben Walker-Nolan, counsel, instructed by The Khan Partnership LLP, appeared for the appellant
Mr Christopher Foulkes and Mr Joshua Carey, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Acquisition and export of luxury vehicles – Denial of input tax credit on Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 grounds – Denial of zero rating on Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága (Case C-273/11) [2012] BVC 640 grounds – Whether defaulting traders fraudulent – Yes – Whether appellant knew or should have known – Held appellant knew and should have known – Appeal dismissed.
The FTT dismissed the company's appeal against HMRC's denial of input tax and denial of zero-rating on goods shipped out of the UK to EU and non-EU destinations. The FTT concluded that the company knew that its transactions were connected with fraud and therefore the assessments were upheld on Kittel and Mecsek grounds.
M&M (Cambridge) LLP bought and sold luxury vehicles. HMRC considered that the LLP was involved in a number of fraudulent supply chains and that i) input tax recovery could be denied on Kittel grounds and ii) output tax was due on Mecsek grounds. HMRC issued assessments in respect of nearly 130 transactions entered into by the company over the course of six VAT periods. The input tax denied exceeded £800k and the output tax assessed exceeded £500k.
The ECJ established in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 that where a purchaser knew or should have known that a transaction was connected to fraud, the purchaser can be denied input tax recovery. The Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága (Case C-273/11) [2012] BVC 640 established that if a supplier knew or should have known that their customer was involved in fraud, zero-rating for sales of goods overseas (both EU dispatches and non-EU exports) can be denied.
The questions to be asked in cases such as this are well established, and were articulated by the FTT at para. 91, thus:
- was there a tax loss;
- if so, did the tax loss result from fraudulent evasion;
- if so, were the M&M's transactions which are the subject of appeal connected with that fraudulent evasion;
- if so, did M&M know or should it have known that its transactions were so connected, and, in respect of the Mecsek decisions, did M&M take every reasonable step within its power to prevent its own participation in that fraud.
In addressing these questions the burden of proof is on HMRC and the standard is the balance of probabilities.
M&M accepted that there had been tax loss (point 1) and that its transactions were connected to that tax loss (point 3). However, it disputed that the tax loss resulted from fraudulent evasion (point 2) and that, if fraudulent evasion had occurred, that it knew or should have known (point 4).
The FTT was presented with a considerable amount of detailed evidence in the course of the hearing. The documentation required 12 lever arch files and several witnesses gave evidence in person. HMRC presented evidence concerning 11 suppliers and customers with whom M&M had dealings. This evidence included, inter alia, the accounts of visiting officers, transactions demonstrably being excluded from VAT returns, VAT returns not being filed, businesses being uncontactable at their given address. M&M had dispatched some vehicles to the Republic of Ireland and the Irish Revenue provided information about customers in this territory.
Although some of HMRC's evidence was disregarded by the FTT, it concluded that the suppliers and customers involved in the disputed transactions were all involved in the fraudulent evasion of VAT. As point 2 was answered in the affirmative, the case thus turned upon point 4, whether M&M either knew or should have known this.
In regard to point 4, the FTT considered the due diligence checks M&M had carried out and heard evidence from the partner with primary control of the business's operations (the “managing partner”).
HMRC officers first visited M&M in 2011, over four years before the transactions with which this appeal is concerned took place, and because the business was classified as high risk several follow up visits occurred. HMRC provided evidence that information on MTIC fraud had been provided to M&M, a copy of Notice 726 had been provided and various “Tax Loss Letters” notifying the LLP that it was involved in transactions which might be connected to fraud had been issued.
In summary the FTT considered that M&M had not made any changes to its procedures as a result of its contact with HMRC. Its due diligence on business contacts was inadequate and the evidence of the managing partner was not credible. Some of the transactions entered into by the LLP were deemed to be contrived with customers directing M&M from whom to purchase cars. Thus, M&M should have known of a connection to fraud and “at the very least [the managing partner] buried his head in the sand” (see para. 493).
This conclusion was sufficient to find in HMRC's favour. However, the FTT went on to consider whether M&M did know of a connection to fraud.
The FTT concluded that M&M did know that it was involved in fraudulent transaction chains and took no steps to protect itself. The fact that the managing partner was found to have been untruthful when giving evidence was particularly damaging to the appellant's case in this regard.
HMRC conducted a VAT inspection of M&M several years before the transactions relevant to this appeal took place. This case demonstrates once again that, if businesses fail to take action following the receipt of a warning from HMRC that they are at risk of involvement in MTIC fraud, it is unlikely that they will successfully challenge an assessment.
[1] HMRC have issued seven decisions against which M&M (Cambridge) LLP (“M&M”) appeals. The first decision denies credit for input tax on the basis of the Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 principle, and the remaining six decisions deny M&M's claim to zero rate transactions based on the Mecsek principle (each as explained further below). The VAT periods which are under appeal are 11/13 to 08/14.
[2] The decisions are:
- decision dated 3 June 2015 denying repayment of £952,051.29 (and issued an assessment for £147,202) claimed in respect of 74 transactions for the periods 08/13, 11/13, 02/14, 05/14 and 08/14 on the basis that M&M knew or should have known that its transactions were connected with the fraudulent evasion of VAT. On 16 October 2017 this was reduced to the denial of £876,008.24 in respect of 66 transactions for the periods 11/13, 02/14, 05/14 and 08/14 (thus removing transactions in 08/13 from this appeal);
- decision dated 14 July 2015 denying M&M's claim to zero rate five transactions in 02/14 on the basis that M&M knew or should have known that its transactions were connected with fraud committed by its customer, and that it did not take every reasonable precaution to prevent its participation in that fraud. This resulted in an output tax liability of £56,666 (reduced because of a calculation error from £62,703);
- decision dated 28 July 2015 denying M&M's claim to zero rate five transactions in 05/14 on the basis that M&M knew or should have known that its transactions were connected with fraud committed by its customer, and that it did not take every reasonable precaution to prevent its participation in that fraud. This resulted in an output tax liability of £80,166 (reduced because of a calculation error from £86,437);
- decision dated 2 November 2015 denying M&M's claim to zero rate 25 transactions in 11/13 and 02/14 on the basis that M&M knew or should have known that its transactions were connected with fraud committed by its customer, and that it did not take every reasonable precaution to prevent its participation in that fraud. This resulted in an output tax liability of £74,930.37;
- decision dated 31 December 2015 denying M&M's claim to zero rate ten transactions in 02/14 and 05/14 on the basis that M&M knew or should have known that its transactions were connected with fraud committed by its customer, and that it did not take every reasonable precaution to prevent its participation in that fraud. This resulted in an output tax liability of £118,366;
- decision dated 25 February 2016 denying M&M's claim to zero rate three transactions in 02/14 on the basis that M&M knew or should have known that its transactions were connected with fraud committed by its customer, and that it did not take every reasonable precaution to prevent its participation in that fraud. This resulted in an output tax liability of £26,666; and
- decision dated 5 September 2016 denying M&M's claim to zero rate six transactions in 02/14 on the basis that M&M knew or should have known that its transactions were connected with fraud committed by its customer, and that it did not take every reasonable precaution to prevent its participation in that fraud. This resulted in an output tax liability of £91,035.
[3] M&M has filed six Notices of Appeal (the second of which relates to two decisions, those dated 14 and 28 July 2018), which have been consolidated. The grounds of appeal challenged whether the transactions were connected with a fraudulent evasion of VAT and denied that M&M had knowledge or should have known of that connection, denying that the indicators relied upon by HMRC provided such evidence.
[4] We find the following as facts on the basis of the evidence before us. In view...
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Middlesex Wines Ltd
...s83(1)(c) Value Added Tax 1994. Authority on reviewing HMRC's conduct [106] The First-tier Tribunal said this in M&M (Cambridge) LLP [2020] TC 07601 at [284]: … this Tribunal does not have jurisdiction to undertake a judicial review of HMRC's conduct; any such complaint can only be made in ......