Edgeskill Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 January 2014 |
| Neutral Citation | [2014] UKUT 38 (TCC) |
| Date | 27 January 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0038 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Hon. Mr Justice Hildyard
Andrew Trollope QC, Michael Patchett-Joyce and Leon Kazakos, instructed by P & Co LLP, appeared for the Appellant
John McGuinness QC and Howard Watkinson, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - MTIC fraud - (1) Whether First-tier Tribunal erred in law in applying the Kittel principle as interpreted by the Court of Appeal in Mobilx Ltd (in Administration) v R & C Commrs[2010] BVC 638 - Whether subsequent ECJ judgments cause that interpretation to be open to doubt - Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Foigazgatósága; Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó Foigazgatósága(Joined Cases C-80/11 and C-142/11) [2012] BVC 458; Tóth v Nemzeti Adó- és Vámhivatal Észak-magyarországi Regionális Adó Foigazgatósága(Case C-324/11) [2012] BVC 618; "Obzhalvane I upravlenie na izpalnenieto" - Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite(Case C-285/11) [2012] ECR I-0000 - (2) Whether findings of fact or conclusions drawn by First-tier Tribunal from its findings of fact were perverse or irrational - Appeal dismissed and application for reference to ECJ refused.
[1]This is an appeal against a decision of the First Tier Tribunal ("FTT") dismissing the Appellant's appeal against the refusal by the Respondents ("the Commissioners") to allow the Appellant to recover input Value Added Tax ("VAT") in the sum of £15,294,335 relating to 93 transactions for the purchase and export by the Appellant of mobile telephones.
[2]The Commissioners had denied recovery by the Appellant of input VAT on the basis that the Appellant knew or should have known that the transactions were all connected with fraudulent tax losses, some of which were generated in the course of what is known to the Commissioners (and more generally, though it is not a term of art) as "contra-trading fraud".
[3]Contra-trading fraud is a sophisticated stratagem calculated to disguise or camouflage Missing Trader Inter-Community fraud ("MTIC fraud" or "carousel fraud"). I elaborate on the nature of this type of fraud later: suffice it for the present to take the following brief summary from a very recent decision supplied to me whilst completing this judgment, namely Fonecomp Ltd v R & C CommrsVAT[2014] BVC 502:
it is a term used to describe a trader which (a) buys goods from a defaulter [that is, a person who defaults on his obligation to pay VAT] and exports them claiming, in what is termed "the dirty chain", the input VAT ("the dirty input VAT") on the purchase; and (b) in a "clean chain", imports goods and sells them to a third trader, and then offsets the dirty input VAT against the clean output VAT on the sale to the third trader. The dirty input VAT is by this means sought to be transmuted into clean input VAT in the hands of the third trader; or at any rate that the third trader is sought to be so distanced from the default that he could not know of his connection to it, or HMRC discover it.
[4]MTIC fraud is by no means uncommon, especially in the context of trades in bulk mobile phones and computer chips, and causes huge losses of revenue to the United Kingdom (estimated at some 12.6 billion Euros in 2006).
[5]In this case, the fraudulent evasion of VAT relied on by HMRC as justifying its refusal to repay input tax in relation to 93 transactions comprised (a) 52 transactions said to involve "direct" or "straight" fraud, traced back to a defaulting trader and (b) 41 transactions in apparently "clean" chains which were alleged to trace back to a tax loss via a dishonest "contra-trader".
[6]The Appellant has not challenged the FTT's findings that (1) the defaulting trader in what it terms the "straight line deals" (the 52 transactions traced back directly to a defaulting trader) and (2) the ultimate defaulting trader in the contra-deals (the remaining 41 transactions which can be traced back to a tax loss via a dishonest contra-trader, a company called Uni-Brand (Europe) Limited ("Uni-Brand"), were fraudulent.
[7]The real issues have always been (1) whether the Appellant knew or should have known that (a) the "straight" chains traced back to a fraudulent tax loss and (b) Uni-Brand was a dishonest contra-trader in respect of the contra-trades, and (2) whether a sufficient connection had thereby (or otherwise) been established between the Appellant and the fraudulent evasion of VAT, so as to disentitle the Appellant from recovering input tax.
[8]The FTT, having heard the evidence, including cross-examination of 19 witnesses over the course of a hearing that lasted from 8 November 2010 to 3 December 2010, found that the Appellant did indeed have actual knowledge of those frauds.
[9]The FTT held that the Appellant's transactions were all connected with fraudulent tax losses, that the Appellant knew this, that the relevant transactions were connected in the required way with the fraudulent evasion of VAT, and that accordingly the Appellant had correctly been denied any right to deduct VAT in relation to its transactions in March, April and June 2006.
[10]More particularly, the FTT held that the Appellant, through its relevant director, Mr Adil Rashid ("Mr Rashid"), had actual knowledge that
(2) the straight chains traced directly back to a fraudulent tax loss; and
(3) Uni-Brand was a dishonest "contra-trader" in respect of the contra-trades.
[11]In point of approach, and as explained in paragraph 429 of its Decision, the FTT reserved its consideration of the Appellant's arguments until after its determination of the facts, since it considered that if it decided on the facts that the Appellant had no knowledge of the connection between its transactions and the fraudulent evasion of VAT, any further analysis of the law was unnecessary.
[12]The FTT explained the circumstances as it found them, the relevant law and the reasons for its conclusions in a decision ("the FTT Decision") running to some 150 pages.
[13]The FTT Decision follows a number of previous decisions, and it may owe its structure to previous analyses; it is a careful and comprehensive document.
[14]In reaching its conclusions on the facts, the FTT found the evidence of Mr Rashid, the relevant director of the Appellant, to be almost wholly incredible, and the evidence against the Appellant to be overwhelming. As to the law, it followed the guidance of the Court of Appeal in Mobilx Ltd (in Administration) v R & C CommrsVAT[2010] BVC 638 ("Mobilx"), clarifying the test in the leading case in the European Court of Justice ("the ECJ", or now "the CJEU"), namely the joint matters of Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559, together ("Kittel").
[15]The FTT itself refused permission to appeal, for reasons it set out in considerable detail in a Decision Notice issued to the parties on 16 December 2011 ("the 2011 FTT Decision Notice").
[16]However, the Appellant made a further application to the Upper Tribunal ("the UT"); and by a Decision Notice issued to the parties on 28 February 2012 ("the 2012 UT Decision Notice") Judge Roger Berner granted the Appellant permission to appeal on all the grounds set out in its application.
[17]The Appellant now advances 14 principal grounds of appeal, which are in effect headings for a myriad of further points, some of law and others of fact. In the latter context (appeals on matters of fact) it is clear, and not disputed, that the UT cannot interfere with the findings of the FTT unless the findings are perverse or the conclusions drawn from the facts as found are irrational.
[18]There was an issue between the parties as to whether the permission thus given to the Appellant covered its 14th ground of appeal as put forward to this court, being in a different (and more extensive) form than that put forward to Judge Berner. I will address that in context later.
[19]The Appellant's arguments on the facts were put forward by Mr Andrew Trollope QC, leading Mr Michael Patchett-Joyce and Mr Leon Kazakos. Mr Patchett-Joyce, who has made this area of tax law a speciality and has appeared in numerous cases on the issues that arise, presented the Appellant's legal arguments.
[20]The essential legal argument put forward on behalf of the Appellant was that (1) the authority of cases decided in the Court of Justice of the European Union ("the CJEU"), formerly called the European Court of Justice ("the ECJ"), trumped any English authority; (2) properly analysed, the European cases only sanctioned the denial of input tax claimed in respect of transactions within the scope of VAT in the case of a trader who claims in respect of a purchase from a fraudster and with knowledge of the fraud, and (3) do not in any event sanction such denial where the fraudulent evasion of VAT is perpetrated by traders in another chain of supply in which the person claiming deduction is not involved.
[21]Against this, the Respondents, the Commissioners for Her Majesty's Revenue and Customs ("the Commissioners" or "HMRC"), who appeared by Mr John McGuinness QC, leading Mr Howard Watkinson, contend that none of the many grounds of appeal avails the Appellant.
[22]They submit that the law is concluded by English Court of Appeal authority and is clear, and contrary to the Appellant's case. They contend that the European cases, as analysed by the Court of Appeal, permit the denial of input tax deduction when the claimant has knowledge, or the means of it, of the fraudulent evasion of VAT. They submit that there is no basis disclosed for concluding that any of the relevant findings of fact was perverse; and that there is no other permissible basis for overturning the FTT's...
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