Digit Three Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 May 2013 |
| Neutral Citation | [2013] UKFTT 288 (TC) |
| Date | 03 May 2013 |
| Court | First-tier Tribunal (Tax Chamber) |
[2013] UKFTT 288 (TC)
Judge Greg Sinfield, Nigel Collard
Andrew Young, counsel, instructed by Peter Smallwood, VAT consultant, appeared for the Appellant
Adam Hiddleston and Ben Hayhurst, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
VAT - MTIC fraud - repayment of input tax refused - whether tax loss caused by fraud - held yes - whether appellant knew transactions connected with fraudulent evasion of VAT - held yes - whether appellant should have known transactions connected with fraudulent evasion of VAT - held yes - appeal dismissed
[1]The Appellant ("DTL") was a dealer in mobile phones. This appeal concerns input tax of £394,600.99 incurred by DTL on the purchase of four lots of mobile phones, two in June and two in July 2006, which were sold and despatched to buyers in the EU as zero-rated supplies. Some of the input tax claimed was allowed and the amount in dispute is £393,058.73.
[2]HMRC formed the view that the transactions were part of a missing trader intra-community ("MTIC") fraud. A brief description of the type of MTIC fraud alleged/accepted to have occurred here was given by Lewison J in R & C Commrs v Livewire Telecom LtdVAT[2009] BVC 172 at [1] as follows:
A trader … imports goods from another Member State. No VAT is payable on the import. Typically the goods are high value low volume goods, such as computer chips or mobile phones. He then sells on those goods to a domestic buyer and charges VAT. He dishonestly fails to account for the VAT to HMRC and disappears. The domestic buyer sells on to an exporter at a price which includes VAT. The exporter exports the goods to another Member State. The export is zero-rated. So the exporter is, in theory, entitled to deduct the VAT that he paid from what would otherwise be his liability to account to HMRC for VAT on his turnover. If he has no output tax to offset against his entitlement to deduct, he is, in theory, entitled to a payment from HMRC. Thus HMRC directly parts with money. Sometimes the exported goods are re-imported and the process begins again. In this variant the fraud is known as a carousel fraud. There may be many intermediaries between the original importer and the ultimate exporter. These intermediaries are known as "buffers". The ultimate exporter is labelled a "broker". A chain of transactions in which one or more of the transactions is dishonest has conveniently been labelled a "dirty chain". Where HMRC investigate and find a dirty chain they refuse to repay the amount reclaimed by the ultimate exporter.
[3]It is settled law (see Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 ("Kittel")) that, where a taxable person knew or should have known that, in purchasing goods, he was taking part in a transaction connected with the fraudulent evasion of VAT, that taxable person loses the right to deduct input tax on those goods. In a decision letter dated 21 March 2007, HMRC refused DTL's claim to recover the input tax incurred on the purchase of the mobile phones in June and July 2006. The grounds for the refusal of the claim were that HMRC considered that DTL, through the controlling mind of its director Stephen Titheridge, knew that the transactions were connected with the fraudulent evasion of VAT or, alternatively, that Mr Titheridge should have known that they were so connected.
[4]DTL accepts that all of its transactions in mobile phones, except for the two transactions involving V2 UK Limited ("V2") in July 2006, were connected with the fraudulent evasion of VAT. In relation to the two transactions in July 2006, DTL accepts that there were tax losses but not that they were connected with the fraudulent evasion of VAT. DTL contends that there is no evidence that V2 intended to defraud HMRC and, even if it so intended, an unsuccessful attempt to defraud does not engage Kittel.
[5]Even if it is admitted (June 2006) or proved (July 2006) that the transactions were connected with the fraudulent evasion of VAT, DTL does not admit that its director, Mr Titheridge, knew or should have known that they were so connected.
[6]Accordingly, there are only two issues in this appeal, namely:
(2) Were the two transactions in July 2006 connected with the fraudulent evasion of VAT?
(3) Did Mr Titheridge know or should he have known that the transactions in June and, subject to the first issue, July 2006 were connected with the fraudulent evasion of VAT?
[7]For the reasons given below, we have concluded that the two transactions involving V2 UK Limited ("V2") in July 2006 were connected with the fraudulent evasion of VAT. We have also found that Mr Titheridge knew that the transactions in June and July 2006 were connected with the fraudulent evasion of VAT. Even if we are wrong in our conclusion that Mr Titheridge knew that the transactions were connected with fraud, we have no doubt that, taking account of all the circumstances, he should have known that the transactions were connected with the fraudulent evasion of VAT. Accordingly, our decision is that DTL's appeal is dismissed.
[8]The Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment, ("the Sixth VAT Directive"), which was the Directive in force at the time of the transactions that are the subject of this appeal. eu-directive 77/388 article 17Article 17 of the Sixth VAT Directive provided that a taxable person has a right to deduct VAT which the taxable person has paid or is liable to pay in respect of goods and services supplied to the taxable person to the extent that the goods and services are used for the purposes (ie are cost components) of the taxable person's taxable transactions (ie supplies of goods and services other than exempt supplies) or transactions treated as such carried out in the course of an economic activity.
[9]The Court of Justice of the European Communities ("the ECJ") has determined that there is an exception to the right to deduct. In Kittel, the ECJ held at [54]-[59]:
[54]As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive … Community Law cannot be relied on for abusive or fraudulent ends …
[55]Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retrospectively … It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends.
[56]In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud irrespective of whether or not he profited by the resale of the goods.
[57]That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.
[58]In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.
[59]Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of "supply of goods effected by a taxable person acting as such" and "economic activity".
[10]At [61], the ECJ summarised the position as follows:
…where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with the fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.
[11]Relevant to the Tribunal's considerations in this regard are the steps, if any, that the Appellant took to protect itself. At [51] of Kittel, the ECJ stated:
…traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT…
[12]In Mobilx Ltd (in Administration) v R & C CommrsVAT[2010] BVC 638 ("Mobilx") the Court of Appeal considered the proper interpretation and application of the ECJ's decision in Kittel. Moses LJ, with whom Carnwath LJ and Sir John Chadwick agreed, held at [52]:
If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with the 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. … A trader who fails to deploy the means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.
[13]Moses LJ considered the extent of knowledge that was required at [53]-[60]. He concluded at [59]:
The test in Kittel 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...
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