Digi Trade Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 August 2011 |
| Neutral Citation | [2011] UKFTT 566 (TC) |
| Date | 22 August 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 566 (TC)
Judge Guy Brannan (Chairman); Andrew Perrin FCA
Andrew Young, Counsel, instructed by Dass Solicitors for the Appellant
James Waddington and Richard O'Brien, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Input tax - MTIC fraud - Whether transactions connected to fraud - Whether appellant knew or should have known of connection with fraud - Contra-trading - Whether knowledge of details of the fraud must be proved - Transactions in clean chain taking place before transactions in dirty chain - Whether conspiracy must be proved in contra-trading - The appeal was against a decision of the commissioners to deny input tax credit of £564,009 on the purchase of computer central processing units and software in VAT periods 03/06 and 06/06 - The commissioners contended that the appellant knew or ought to have known that the transactions were connected with the fraudulent evasion of VAT - All the disputed transactions, except one, were alleged to involve contra-trading - Having considered the evidence, the tribunal concluded that the appellant's transactions were connected to fraud - The next issue for the tribunal was to decide whether the appellant knew or should have known of the connection - The appellant submitted that the commissioners had to prove that it knew, or ought to have known, either of the fraudulent evasion in the dirty chain or of the fraudulent cover-up being carried on by the alleged contra-traders - It also submitted that the commissioners could only prove that it had actual knowledge of contra-trading if it was a co-conspirator, since the transactions in the dirty chain took place after the transactions in the clean chain - The appellant contended that, as a matter of law, in order to prove that it had actual knowledge or means of knowledge of the fraud which post-dated its supplies, the commissioners must be in a position to prove that it was a party to a conspiracy - The commissioners argued that there was no requirement for them to prove that the appellant was a conspirator - The test was the same for the appellant's transactions in the context of contra-trading as it was for the one transaction which was part of a tax loss chain - Held, that, in the opinion of the tribunal, the appellant had actual knowledge that all of the disputed transactions were connected to the fraudulent evasion of VAT - There were several factors supporting this conclusion, including: the substantial turnover built up from nothing by a company with limited capital; the inconsistency between the business plan and the actual trade; the contrived nature of the deal chains; the lack of credibility of the appellant's directors; and the disregard for due diligence undertaken on the companies with whom the appellant was dealing - In the judgment of the tribunal, the appellant knew that, by its purchases, it was taking part in transactions connected with the fraudulent evasion of VAT - The appellant's state of knowledge was such that its purchases were outside the scope of the right to deduct input tax - Appeal dismissed.
1.This is an appeal against decisions of the Commissioners for Her Majesty's Revenue and Customs ("HMRC") to deny the Appellant's entitlement to the right to deduct input VAT. HMRC have refused the right to deduct input tax because it contends that the Appellant knew or ought to have known that the transactions which it entered into and which gave rise to its input tax claim were connected with the fraudulent evasion of VAT. This is, therefore, what is commonly known as a missing trader intra-community, or "MTIC", appeal. One feature of the appeal is that all the disputed transactions, except one, are alleged to involve what is called "contra-trading".
2.By a letter dated 12 October 2007, HMRC denied the Appellant's entitlement to deduct input tax in the amount of £462,290.68 claimed in respect of the purchase of computer Central Processing Units ("CPUs") and computer software in the VAT accounting period ended 31 March 2006 ("03/06") in the amount of £87,176.26 claimed on the purchase of CPUs in the VAT period ended the 30 June 2006 ("06/06").
3.In addition, by a letter dated 11 April 2008, HMRC denied the Appellant's entitlement to the right to deduct input tax in the amount of £14,542.50 claimed in respect of the purchase of CPUs and software in respect of the VAT period 03/06.
4.The decisions were issued after completion of an extended verification process conducted by HMRC. Notices of appeal in respect of the above decisions were filed, on behalf of the Appellant, on 15 October 2007 and 14 April 2008 respectively.
5.In their Statement of Case, HMRC contend that the Appellant's transactions formed part of transaction chains which were connected with the fraudulent evasion of VAT and that the Appellant knew or should have known of that fact.
6.This appeal is mainly concerned with contra trading. HMRC allege that all deals but one (Deal 10 in period 03/06) concern contra-trading. Deal 10, so HMRC allege, forms part of a simple tax loss chain where the Appellant acts as a broker/exporter (see below as regards terminology).
7.The concept of MTIC transactions and contra-trading is, by now, well-known. Essentially, contra-trading is a variation on basic MTIC trading. The contra-trader attempts to disguise its export transactions by engaging in a separate series of transactions where its role involves the making of standard rated supplies. A good description is contained in the decision of the VAT and Duties Tribunal decision in Livewire Telecom Ltd VAT[2008] BVC 2208 (Dr John F Avery Jones CBE (Chairman) and Sheila Wong Chong FRICS) as follows:
In order to demonstrate where the loss of tax arises from MTIC fraud we start with a simple example of an import of goods by X who sells them to Y who exports them. The tax on acquisition (import) by X is cancelled by input tax of the same amount, and the output tax charged on sale by X will be cancelled by input tax repaid to Y on the export, so that the United Kingdom exchequer receives no net tax. If both X and Y are fraudsters Y will have to finance the output tax charged by X, which is recovered by X not paying the output tax to Customs. The only gain by the fraud is if Customs pay the input tax to Y when the exchequer is left with a loss of the amount of the input tax; the non-payment of output tax by X is merely the recovery of what Y put in. If the exporter is innocent of that fraud he is entitled to repayment of the input tax that he has actually paid to X even though this represents tax never paid by A [the missing trader] and the exchequer is left with the same loss of the amount of the input tax.
… [T]his appeal is concerned with contra-trading. In contra-trading there are, in its simplest theoretical form, two chains of transactions. First, the "dirty chain," in which there is a missing trader, defaulting trader, or trader using a hijacked VAT number ("missing trader" for short), comprising A (the missing trader) who is the importer of goods into the UK, who sells them to B, who sells them to C who exports the goods, and is thus in a VAT reclaim position. (For simplicity we shall use the expressions import and export for intra-Community trade, acknowledging that these are not the proper labels.) Secondly, the "clean chain," in which there are no missing traders, comprising C, who is this time the importer, who sells to D, who sells to E, the exporter (the Appellant in this appeal is in the position of E). The effect of the clean chain is that the net input tax position of C in the dirty chain is cancelled by output VAT in the clean chain. There is no benefit to C in this as C has paid the input tax to B, and therefore C could be a trader who happens to carry out both import and export transactions unconnected with any fraud, or C could be a trader who is controlled by a "puppet master" to enter into the cancelling transactions to disguise A's involvement in a fraud. The effect of the contra-trades is that C does not excite Customs' attention as it is not applying for a repayment; the non-payment of tax by A is less noticeable since without a return Customs do not know how much tax A owes. The input tax reclaim that C had in the dirty chain has moved to E who is at the end of a clean chain. The only way for Customs to refuse repayment of E's input tax is to show that E knew or ought to have known of A's fraud in a completely different chain, and possibly of C's involvement. Since … the only gain from A's fraud is the recovery of input tax by E this must imply that E is a participant in the fraud and, unless he is the puppet-master, is presumably sharing the tax recovered with someone else. As Mr Scorey pointed out it is difficult to see how a case of E having means of knowledge, rather than actual knowledge, can arise.
The nature of contra-trading is easy to state in the above way but the problem in real life is that there is no logical connection between the clean and dirty chains. First, the VAT accounting periods for C and E will not coincide; E may be on a monthly accounting period as it is a habitual exporter, but C may be on a three-monthly period, and C need only arrange that the net tax is nil during that three-monthly period by entering into transactions after E's transactions. Secondly, the goods dealt in may be different in the two chains. Thirdly, for a particular C there may be many different equivalents to A and E, and for a particular E there may be many equivalents of C, each with more than one equivalents to A. Fourthly, C may not have deliberately entered into imports in the clean chain in order to cancel the input in the dirty chain; C may merely be both an importer and an exporter whose outputs in relation to the former happen roughly...
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