Bond House Systems Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 April 2003 |
| Date | 29 April 2003 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
Blackqueen Ltd VATNo. 17,680; [2002] BVC 2221
BLP Group plc v C & E Commrs VAT(Case C-4/94) [1995] BVC 159
BUPA Hospitals Ltd VATNo. 17,588; [2002] BVC 2155
C & E Commrs v DFDS A/S VAT(Case C-260/95) [1997] BVC 279; [1997] ECR I-1005
C & E Commrs v Reed Personnel Services Ltd VAT[1995] BVC 222
C & E Commrs v Robert Gordon's CollegeVAT[1996] BVC 27
Emsland-Stärke v Hauptzollamt Hamburg-Jonas (Case C-110/99) [2000] ECR I-11569
First National Bank of Chicago v C & E Commrs VAT(Case C-172/96) [1998] BVC 389
Fischer v Finanzamt Donaueschingen VAT(Case C-283/95) [1998] BVC 431
Garage Molenheide BVBA v Belgian State VAT(Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96) [1998] BVC 106
Genius Holdings BV v Staatssecretaris van Financiën VAT(Case 342/87) [1991] BVC 52
Grunwick Processing Laboratories Ltd v C & E Commrs VAT (1987) 3 BVC 29
Halifax plc v C & Commrs VATVAT[2002] BVC 370; No. 17,124; [2001] BVC 2240
HJ Glawe Spiel- und Unterhaltungsgeräte Aufstellungsgesellschaft mbH & Co KG v Finanzamt Hamburg-Barmbek-Uhlenhorst VAT(Case C-38/93) [1994] BVC 242
Interleasing Ltd VATNo. 17,819; [2003] BVC 2142
James v United Kingdom (1986) 8 ECHR 123
"Au blé vert"(Case 229/83) [1985] ECR 1
Mol v Inspecteur der Invoerrechten en Accijnzen VAT(Case 269/86) (1989) 4 BVC 205; [1988] ECR 3627
Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen, Arnhem VAT(Case C-60/90) [1993] BVC 88
RBS Property Developments Ltd VATNo. 17,789; [2003] BVC 2074
Rompelman v Minister van Financiën VAT(Case 268/83) (1985) 2 BVC 200,157
Tynewydd Labour Working Men's Club and Institute Ltd v C & E Commrs VAT(1979) 1 BVC 282
Van Tiem v Staatssecretaris van Financiën VAT(Case C-186/89) [1993] BVC 52
Wellcome Trust Ltd v C & E Commrs VAT(Case C-155/94) [1996] BVC 377
Witzemann v Hauptzollamt München-Mitte VAT(Case C-343/89) [1993] BVC 108
Input tax - Refusal by commissioners to allow input tax credit - "Carousel" fraud - Whether established - Whether transactions without economic substance - Whether payments made as VAT properly so regarded - Principles of legal certainty and proportionality - Directive 67/227, the first VAT directive, art. 2; Directive 77/388, the sixth VAT directive, art. 2, 4, 5, 17, 18 and 28A; Value Added Tax Act 1994, s. 4, 24, 25 and 26; Value Added Tax Regulations 1995 (SI 1995/2518), reg. 29; European Convention on Human Rights, art. 14, First Protocol, art. 1.
The issue was whether taxable, zero-rated supplies made by the appellant company, and substantiated by the requisite documentary evidence, were sufficient to justify the deduction of input tax charged by the appellant's suppliers or, as the commissioners contended, there was no entitlement to input tax credit because the series of transactions to which the appellant was a party was devoid of economic substance and was nothing more than a device for gaining a pecuniary benefit by fraud. Since illegal transactions were outside the scope of VAT, the question was whether payments made by the appellant to its suppliers were VAT. A secondary issue was whether the commissioners had sufficient evidence to justify their conclusion of fraud in the chain of supply. Subsidiary issues were: whether the commissioners' inconsistent treatment of the appellant and other companies in the chain of transactions manifested an inability to distinguish between what was and was not VAT; and whether the commissioners' approach offended the appellant's human rights and the principles of proportionality and legal certainty.
The appellant dealt in computer components and especially processor chips (CPUs). Most of its business involved the purchase from UK suppliers of CPUs and the onward wholesale of those goods to traders in other European Union member states. The appellant was incorporated in 1999 and in each subsequent monthly VAT return until May 2002 its supplies to overseas customers resulted in substantial VAT reclaims. In that month, the appellant sold CPUs to the value of £95,421,407 (exclusive of VAT) and 99.1 per cent of which related to sales to customers in other member states. The appellant's suppliers provided proper VAT invoices. All the usual conditions for both the deduction of input tax and the zero-rating of the onward sales were met. There was no dispute that the appellant charged customers a price somewhat higher than it had paid for the goods to its suppliers. The repayment claimed by the appellant in its return for May 2002 was £16,287,204 but the commissioners rejected the claim, later authorising repayment of part of the amount claimed.
The tribunal heard, in evidence from the commissioners, that the activity known as carousel fraud had resulted in a loss of revenue of about £2.6 billion in the year 2000-01 and that similar fraud was perpetrated throughout the European Union. The fraud results from VAT-registered traders supplying taxable goods at the zero rate of VAT to a registered trader in another member state. The purchaser then sells the goods to another registered trader in his own member state, charging and receiving VAT on the supply. However, it subsequently fails to account for VAT to the tax authorities and effectively disappears, but after issuing a VAT invoice to its customer as evidence to reclaim, as input tax, the VAT paid. The customer then sells the goods as a zero-rated supply to a registered trader in another member state and the goods continue to circulate. The essence of the fraud is that the goods are merely a token necessary to give structure to the transaction and it is effectively the VAT, or purported VAT, that is being traded.
The appellant's primary submission was that it had an absolute right to deduct input tax incurred on its various purchases of CPUs, derived from art. 17 and 18 of Directive 77/388, the sixth VAT directive; the principles of these provisions having been correctly transposed in the UK legislation, appearing as s. 25(2) and (3) and 26 of the Value Added Tax Act 1994 and reg. 29 of the Value Added Tax Regulations 1995 (SI 1995/2518). The appellant maintained that it could deduct the input tax in question and that, although certain conditions were imposed, none was relevant in the present case. In the appellant's opinion, it had an absolute entitlement, independent of any exercise of judgment and still less dependent upon the opinion of the commissioners. There was no basis on which a genuine trader could have its legitimate claim for input tax credit refused because another trader, of which the appellant knew nothing, coming before it in the chain of transactions, had failed to account to the commissioners for the output tax that it owed. There was nothing in the sixth directive or in the domestic legislation to support the commissioners' view that the activities of a fraudster transformed otherwise legitimate business transactions into activities that were not "economic", as the commissioners alleged. Not only did the legislation not support the commissioners' proposition, but also there was no case law from which they could derive authority. In fact, decided cases made it clear that each transaction in a chain must by examined individually. The appellant submitted that if the commissioners considered that other traders were evading tax, they should pursue those traders; it was not for the appellant to do the commissioners' work. On the question of whether, as contended by the commissioners, the amount shown on the suppliers' invoices as VAT was not VAT, the appellant submitted that such an argument could not be sustained. The computer chips had been purchased from another taxable person in the UK in what was indisputably a taxable transaction. The character of such a transaction could not be transformed by the activities of other traders, not party to the transaction. The appellant stated that if the commissioners were found to be correct, the result would be absurd. A trader would never know whether his supplier might decide to suppress the sale and he could not be expected to guess the supplier's intentions.
The commissioners' case depended primarily on the interpretation of the sixth directive and upon the tribunal's finding of fact that the relevant transactions, that is the whole chain of transactions, were designed as a vehicle for fraud. The commissioners submitted that it was well established that a purposive interpretation should be placed on the EC directives. Both the first and the sixth directives were concerned only with real economic activity and had no application to transactions which were not effected in the course of trade; their purpose was to promote free trade and not fraud, which was quite alien to its scope. Transactions carried out for the purpose of perpetrating a fraud were not, in the commissioners' view, within the scope of the sixth directive and, accordingly, were not subject to VAT. The disputed transactions engaged in by the appellant were instrumental in the perpetration of a fraud and were not, therefore, within the scope of the sixth directive. The payment made by the appellant to its suppliers, which it thought was VAT, was not VAT and could not produce an input tax credit. The commissioners submitted that there was a line of authority which demonstrated that, in determining whether a supply had been made, regard must be had not only to the legal analysis of the contract between the parties but also to the commercial reality of the situation. The use or abuse of legal form in order to obtain a benefit had been disapproved by the European Court. If it were accepted that only the objectively determined character of the transactions was relevant, and that the appellant's belief or intention was immaterial, it must follow, in the commissioners' view, from application of the principles to be drawn from those cases that the...
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