Earthshine Ltd v Revenue and Customs Comrs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 June 2014 |
| Neutral Citation | [2014] UKUT 271 (TCC) |
| Date | 20 June 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0271 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Judge Colin Bishopp, Judge Edward Sadler
Mr Patrick Green QC, Mr James Rivett and Ms Abigail Cohen, instructed by Maitland Walker, appeared for the Appellant
Mr Ben Collins and Mr Jamie Sharma, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - Input tax - Denial of right to deduct on grounds of knowledge of connection of appellant's transactions to fraud - Whether First-tier Tribunal entitled to reach conclusion of knowledge or means of knowledge - Yes - Appeal dismissed.
[1]This an appeal against a decision of the First-tier Tribunal (Judge Barbara Mosedale and Mrs Lynneth Salisbury) ("the F-tT") released on 20 October 2011. The F-tT dismissed an appeal by the appellant, Earthshine Limited ("Earthshine"), against a decision of the respondents ("HMRC") to refuse credit for input tax of £303,646.35 incurred by Earthshine in July, October and November 2006. The grounds on which HMRC refused that credit were that Earthshine, through its directors, knew or ought to have known that the transactions in respect of which the input tax had been incurred were connected with fraud elsewhere in the chains of supply. It will be apparent from that short introduction that this was what is commonly referred to as an MTIC appeal.
[2]Earthshine disputed the allegation of connection, and argued that even if a connection was established, its directors did not know and had no reason to think that Earthshine's transactions were so connected. The F-tT concluded that the connection was established, that one of the two directors of Earthshine knew of the connection to fraud, and that the other either knew, or chose to turn a blind eye to material available to him which should have made it plain, that there was such a connection. It accordingly dismissed the appeal in its entirety.
[3]Permission to appeal to this tribunal was refused by the First-tier Tribunal and again, on paper, by this tribunal. The application was, however, renewed and at an oral hearing permission was granted on six out of the 18 grounds initially advanced by Earthshine. The grounds on which permission has been granted are, in summary, as follows:
(2) that the tribunal adopted an impermissibly selective approach to the evidence and its effect;
(3) that the tribunal fundamentally misunderstood a letter of 3 June 2004 written by HMRC to Earthshine;
(4) that the tribunal misdirected itself as to the relevance of line checks;
(5) that the tribunal misunderstood and in consequence reached impermissible conclusions from the evidence of HMRC's expert witness;
(6) that the tribunal, despite reciting the evidence it had heard and seen on a number of topics, failed to reach any conclusions about those topics;
(7) that the tribunal misunderstood Earthshine's position in respect of a document which had not previously been disclosed by HMRC.
[4]We should record, for better understanding of what follows, that permission to appeal was refused on, among others, the grounds that it was not open to the F-tT to find orchestration without also finding that Earthshine was party to a conspiracy (a finding which would not have been open to the F-tT as conspiracy was not pleaded or put); that the F-tT applied the wrong standard of proof; and that it was not open to the F-tT to find that Earthshine's transactions were connected with fraud. The last of the permitted grounds we have set out does have some relevance to connection, but the remaining five grounds on which permission has been granted, and the primary focus of this appeal, is on the question whether or not Earthshine, in the person of its officers, knew or ought to have known of the connection to fraud, and those five grounds are all directed in their differing ways to that question.
[5]The F-tT's decision records that Earthshine was incorporated in 2001, when it registered for VAT and began trading in mobile phones and computer chips. The transactions with which the F-tT was concerned, however, were all in mobile phones. In every case, Earthshine bought the phones from a VAT-registered UK trader, thus incurring input tax, and sold the phones to a trader in another member State of the European Union. The sales were, correspondingly, zero-rated and Earthshine was left with a claim for credit or repayment of the input tax it had incurred, but no corresponding output tax liability. It was what is known in the jargon used in cases such as this as a "broker".
[6]The F-tT heard evidence and submissions on 17 days in 2010 and 2011, and released an extremely detailed decision extending to 648 paragraphs over 112 pages, despite the fact that there were only seven transaction chains in issue. Four of the chains, if HMRC and the F-tT were right (and with the single exception to which we come later we must, of course, take it they were), could be traced back to defaulting traders, and the remaining three to what is commonly known as a contra-trader. After reaching those findings the F-tT turned its attention to the second limb of the test expounded by the Court of Justice of the European Union in what is universally accepted as the leading authority on the topic, Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 ("Kittel"), as explained by the Court of Appeal in what is so far the leading domestic authority, Mobilx Ltd (in administration) v R & C CommrsVAT[2010] BVC 638 ("Mobilx"). The first limb is the fact of a connection to fraud; the second, the issue before us, whether the trader concerned, in this case Earthshine, knew or should have known of the connection.
[7]The essence of the F-tT's conclusions is set out at [621] of its decision:
Earthshine by its officers were well aware of the risk of MTIC fraud in the market in which they say they traded; yet they continued to trade despite (we find):
•knowing there was no rational commercial explanation for the market in which they were trading, and choosing not to investigate oddities such as why Continental companies wanted phones with 3 pin plugs nor taking any steps to increase their profits by cutting out the middlemen even though they knew the chain was long;
•knowing they were able to make substantial profits for doing virtually nothing but issuing invoices, inspecting goods and having ready capital. Earthshine's officers were not able to explain to this Tribunal a commercial rationale for how a market might have arisen which allowed them to do this without taking commercial risk;
•knowing at least in one deal that the goods were being imported from Continental Europe and then immediately re-exported;
•being of the opinion that their suppliers were dealing back to back and making too little profit to undertake inspections of the goods;
•knowing their customers had no real interest in the specification of the products they were purchasing. They offered no rational explanation of how this could happen in a genuine market.
[8]The F-tT went on to add its finding that the trades were part of an orchestrated fraud, though without a finding that Earthshine had been instrumental in the orchestration; that Earthshine's share of the overall profit from the trades was substantial, and an indication that it knew that its transactions were driven by fraud; that the evidence of one of the directors, Mr Anthony Sharp, about the negotiation of the deals was unreliable, a factor which reinforced its conclusion that the specification of the products was a matter of no genuine interest; that Earthshine's due diligence was not seriously undertaken but was "window dressing"; and that although Earthshine had taken advice from HMRC, it had failed to follow it. It did find in Earthshine's favour that it carried out fairly thorough inspections of the goods, while also finding that it did so for the purpose of ensuring it could recover the input tax that it had incurred, rather than for any true commercial reason. It added that it made those findings on the balance of probabilities, which it considered (correctly) to be the appropriate standard, but would have reached the same conclusion to the criminal standard had that been the requirement.
[9]We interpose at this stage, since it informs what follows, the essential test of knowledge or means of knowledge, as it was articulated by Moses LJ in Mobilx 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 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. He may properly be regarded as a participant for the reasons explained in Kittel.
[10]Earthshine was represented before us by Mr Patrick Green QC, leading Mr James Rivett and Ms Abigail Cohen, and HMRC by Mr Ben Collins leading Mr Jamie Sharma.
[11]The essence of Earthshine's complaint under this heading is that the F-tT consistently disregarded evidence which favoured Earthshine or undermined HMRC's case, but instead accepted HMRC's evidence where it favoured their case, and ignored inconsistencies or concessions made by HMRC's witnesses during the course of cross-examination, as well as assertions in their witness statements which were shown to be incorrect. That approach was also, Earthshine says, reflected in the F-tT's failure to engage with its extensive and detailed closing submissions...
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Earthshine Limited v The Commissioners for HM Revenue and Customs
...[2014] UKUT 0271 (TCC) VALUE ADDED TAX — input tax — denial of right to deduct on grounds of knowledge of connection of appellant’s transactions to fraud — whether First-tier Tribunal entitled to reach conclusion of knowledge or means of knowledge — yes — appeal dismissed Appeal number: FTC......