Atec Associates Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 October 2016 |
| Neutral Citation | [2016] UKFTT 714 (TC) |
| Date | 24 October 2016 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Guy Brannan, Mr Michael Sharp FCA
Renee Kalia, former director, appeared for the appellant
Michael Holland QC, Howard Watkinson and James Jackson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Input tax – MTIC – Fraudulent evasion of VAT – Whether tax losses caused by fraudulent evasion – Yes – Whether appellant's transactions were connected with fraudulent evasion – Yes – Whether the appellant knew or should have known that its transactions were so connected – Yes – Alleged suppression of evidence by HMRC – Appeal dismissed.
[1] The appellant, Atec Associates Limited (“Atec”), appeals against the decisions of HMRC denying it an entitlement to the right to deduct input tax in the total amount of £7,790,503.88 claimed on 53 purchases in the monthly VAT periods 04/06, 05/06, 06/06 and 07/06.
[2] In the course of the hearing, Atec made it clear that it had withdrawn its appeal in respect of its claim to input tax on deal 53 with the result that there were now 52 transactions in dispute. We note that Atec argued that deal 53 had already been withdrawn. It is unnecessary for us to delve further into this point because the agreed position was that an appeal in respect of deal 53 was not before the Tribunal.
[3] Until 3 February 2015, there were two additional appeals, concerning a related company called Wireless 5 Limited (“Wireless 5”) which involved transactions in 2010 (“the 2010 transactions”). On that date, however, Wireless 5 withdrew its appeals. As we shall see, the evidence in relation to those 2010 appeals remained relevant to the remaining 52 appeals and, for the reasons given below, we decided should remain in evidence.
[4] This is what is commonly known as an alleged MTIC appeal. There have now been many decisions of this Tribunal, the Upper Tribunal and the Court of Appeal in respect of alleged MTIC transactions and it is therefore unnecessary to give another explanation of how MTIC fraud is carried out. A convenient explanation is given by Christopher Clarke J (as he then was) in Red 12 Trading Ltd v R & C Commrs VAT[2010] BVC 166 at [2] – [10] which covers both “plain vanilla” MTIC transactions and the more complex “contra-trading” variant of the fraud – both versions of MTIC fraud are alleged to be relevant to these appeals.
[5] The decisions denying Atec the right to deduct input tax and against which Atec now appeals are as follows:
1) by a letter dated 20 August 2007, HMRC notified Atec that it was denied the right to deduct input VAT in the sum of £2,474,089.63 claimed on the purchase of mobile telephones in VAT monthly period 04/06 and £2,244,464.25 claimed on the purchase of mobile telephones, iPods, PlayStations, laptop computers and pocket PCs in monthly VAT period 05/06;
2) by a letter dated 19 November 2007, HMRC notified Atec that it was denied the right to deduct input VAT in the sum of £1,270,062.50 claimed on the purchase of mobile telephones, iPods, PlayStations, and digital video recorders in the monthly VAT period 06/06 and £1,078,437.50 claimed on the purchase of mobile telephones, satellite navigation systems and palm top PCs in VAT period 07/06; and
3) by a letter dated 29 February 2008, HMRC notified Atec that it was 40 denied the right to deduct input VAT in the sum of 723,450 in respect of monthly VAT period 05/06.
[6] In each case, HMRC's reason for denying Atec its right to deduct input VAT was that Atec's purchases were connected with the fraudulent evasion of VAT and that Atec knew or should have known that its transactions were so connected.
[7] On 9 March 2015, this Tribunal (Judge Brannan) directed that Atec should not be entitled to cross-examine certain HMRC witnesses pursuant to the decision of the Upper Tribunal in R & C Commrs v Fairford Group plc (in liquidation) VAT[2014] BVC 529. These witnesses were largely HMRC officers giving evidence in respect of defaulting traders or contra-traders. The reasons for the Tribunal's direction are set out in a separate decision. Although Atec was not entitled to cross-examine these witnesses, it was entitled to (and did) submit that the evidence tendered by those witnesses did not satisfy the burden of proof.
[8] Atec did not accept that HMRC's evidence demonstrated that in respect of each deal HMRC has suffered a tax loss as a result of fraudulent evasion. Moreover, Atec did not accept that HMRC had established that its deals were connected with that fraudulent evasion. Furthermore, Atec contended that it neither knew nor should have known that its deals were connected with the fraudulent evasion of VAT.
[9] Inevitably, therefore, because every issue is in dispute and given the volume of the evidence before us, this will be a long decision.
[10] Furthermore, there was a dispute which emerged towards the end of the hearing concerning whether HMRC had suppressed evidence or had engaged in an abusive course of conduct towards Atec. This required a further hearing conducted over three days in November and December 2015.
[15] In the course of numerous MTIC appeals it is now established that the parties in the alleged transaction chains are usually described by certain terms. A party in the position of the appellant in this appeal who exports (technically, for VAT purposes, “dispatches”) goods to a foreign purchaser is known as the “broker”. A party who buys from the importer of the goods (“the acquirer”) and intermediate purchasers between that party and the appellant are usually known as “buffers”. We shall use these expressions in this decision simply for convenience but without in any way prejudging the issue.
[11] The basic applicable legal principles can be summarised as follows.
[12] The legal right to a deduction for input tax is enshrined in articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 and in sections 24, 25 and 26 of the Value Added Tax Act 1994.
[13] There is no legal right to a deduction for input tax, however, where fraud is involved. There is now extensive case-law on this subject both before the European Court of Justice and our domestic courts. The position was summarised by Lewison J in the decision of the Upper Tribunal in R & C Commrs v Brayfal Ltd VAT[2011] BVC 1,615 as follows:
While Brayfal's appeal has been making its way through the system, the law has been considered by the courts on a number of occasions. It finds its latest authoritative pronouncement in the decision of the Court of Appeal in Mobilx Ltd (in administration) v R & C Commrs; R & C Commrs v Blue Sphere Global Ltd; Calltel Telecom Ltd v R & C Commrs VAT[2010] BVC 638. This decision was handed down on 12 May 2010, a couple of months after the revised decision of the FTT. That case examined the ramifications of the decision of the ECJ in Kittel v Belgium; Belgium v Recolta Recycling SPRL ECASECASVAT(Joined Cases C-439/04 and C-440/04) [2008] BVC 559 (“Kittel”). What the Court of Appeal decided was:
A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and fails to meet the objective criteria which determine the scope of the right to deduct. (para. 43)
If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. (para. 52)
The principle does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion. (para. 60)
The test is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. (para. 59)
If HMRC wishes to assert that a trader's state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. (para. 81)
In answering the factual question, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focusing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was. (para. 82)
I should also record that it was common ground that these principles should be applied in the light of the circumstances prevailing at the date of the taxable person's own transactions: Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd v C & E Commrs ECASECASECASVAT(Joined Cases C-354/03, C-355/03 and C-484/03) [2006] BVC 119.
[14] We respectfully adopt...
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