Euro Stock Shop Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 July 2009 |
| Neutral Citation | [2009] UKFTT 182 (TC) |
| Date | 23 July 2009 |
| Court | First-tier Tribunal (Tax Chamber) |
[2010] TC 00137
[2009] UKFTT 182 (TC)
DR K Khan (Chairman), MR P D Davda FCA
For the Appellant Ms Nicola Preston, Counsel, instructed by Wolters Kluwer (UK) Ltd
For the Respondents Mr Christopher Foulkes, instructed by the General Counsel and Solicitor to HM Revenue and Customs
Value added tax - Input tax - Disallowance of input tax - MITC fraud - Whether fraudulent tax loss - Yes - Whether appellant knew or should have known - Yes - Whether appellant allowed to recover input tax - No - Appeal dismissed
Input tax - MITC fraud - Wholesale supply of computer parts and peripherals - Whether fraudulent tax loss - Whether appellant knew or should have known of fraud - The commissioners disallowed input tax of £1,710,930 on the basis that it arose from transactions connected with the fraudulent evasion of VAT and the appellant should have known of that fact - The appellant denied that it knew of any fraud in the chain of transactions and challenged the commissioners to prove the supply lines and, if they were able to do that, to show that any defaults in the supply chains were fraudulent rather than merely arising from misfortune or oversight - The commissioners argued that the appellant's transactions were connected to a tax loss - There was evidence of defaults in the chains of supply and those defaults were contrived and fraudulent - In the commissioners' view, the appellant knew or should have known that its transactions were connected to fraud - Held, that the appellant's directors had substantial experience and knowledge of the industry and were fully aware of the risks inherent in trading large quantities of computer parts and of the fraud in that industry - The transactions identified by the commissioners were without commercial substance and were contrived - The appellant's directors knew the transactions they undertook were part of a scheme to defraud the revenue - Appeal dismissed.
1. The disputed decisions of the Commissioners of HM Revenue and Customs ("the Commissioners") are as follows:-
(a) A decision to deny entitlement to the right to deduct input tax in the sum of £1,175.485.51 for the period 04/06 and
(b) A decision to deny entitlement to the right to deduct input tax in the sum of £499,156.88 for the period 05/06.
On 29 August 2007, the Commissioners wrote to the Appellant setting out a further decision to deny input tax in the sum of £36,288.00 claimed in the Vat period 05/06.
2. The Commissioners grounds for their decision is that the input tax incurred by the Appellant arose from a transaction or transactions connected with the fraudulent evasion of VAT and the Appellant knew or should have known of this fact.
3. By Notice of Appeal dated 13 June 2007 the Appellant appeals against these decisions. The grounds of appeal may be summarised as follows:
(i) That the decisions of the Commissioners are wrong in fact and law;
(ii) That the decisions of the Commissioners are made without reference to the relevant case law;
(iii) That the Commissioners interpretation of the effects of the Axel Kittel and Bond House judgments is unsustainable;
(iv) That the Commissioners have failed to particularise the nature of each alleged fraudulent evasion of VAT, how each transaction in which the Appellant participated was connected with the fraudulent evasion of VAT and how it is said that the Appellant knew or should have known of such connection at the time it entered into the transaction in question;
(v) That the Appellant enjoys a "right to deduct" the claimed VAT credit pursuant to eu-directive 2006/112 article 167Article 167 et seq, of the re-cast VAT Directive, 2006/112/EC, which right must be given effect to immediately, and Value Added Tax Act 1994 section 24ss.24-26 of the ("VATA 1994") must be construed purposively, ie in accordance with the relevant provisions of the VAT Directive,
(vi) The decision to disallow the claimed input VAT credit is in breach of fundamental principles of EC law.
3. This case can only be properly understood with a brief explanation of MTIC fraud which explains the way in which this VAT fraud is perpetrated. The Respondents' case is that the defaults were fraudulent
4. The VAT system when correctly operated allows an amount of VAT charged by one VAT registered trader to another VAT registered trader to be accounted for as output tax. The amount of VAT charged as output tax, may subsequently be reclaimed by the purchaser as input tax. This ensures that the tax is neutral. When a business' input tax claim exceeds the output tax they may be entitled to make a claim for repayment of VAT. In MTIC fraud the output tax is not collected from the "missing" trader but is still claimed as input tax that subsequently results in a claim for a repayment of VAT. It is estimated that substantial sums are lost every year to the Treasury as a result of these transactions.
5. A transaction chain in MTIC fraud involves a "missing" trader, a "hijacked" trader or a "defaulting" trader, who acquires (imports) goods from another EU Member State. The goods are sold to a number of UK intermediary companies called "buffer" traders and finally to a "broker" trader. The broker finally re-exports the goods back to the EC. The missing trader is a VAT registered entity in a transaction chain who purports to acquire goods zero-rated from another EU Member State, sells them in the UK charging VAT at the standard rate and disappears before accounting for the acquisition and sales VAT due to HMRC. A missing trader will not complete or submit a VAT return and deliberately does not pay the VAT when it becomes properly due. A hijacked or cloned missing trader, is a trader who adopts the identity of another VAT registered trader and takes the role of the missing trader. The trader who adopts the identity of another VAT registered trader is not himself registered for VAT and therefore does not complete or submit a VAT return and deliberately does not pay the VAT when it becomes properly due. A defaulting trader is a trader who may complete and submit a VAT return but deliberately does not pay the VAT when it becomes properly due. Each participating entity in the transaction chain is known as an intermediary or buffer trader. The traders are each VAT registered and may be entitled to reclaim the VAT charged to him or her as input tax and in turn charge VAT when they make an onward sale. The final entity in the UK transaction chain is known as the broker. The broker will then export the goods to another EU Member State or export them outside the EU. The broker is entitled to reclaim the VAT charged to them by their suppliers and subject to conditions, may zero-rate the removal of the goods from the UK. The trader in the EU Member State who acquires (imports) the goods then despatches (exports) the same goods to another country. They are called conduit traders. The goods may be consigned back to the UK missing trader and the carousel of transactions will start again. When the same goods are identified as circulating again it is known as an MTIC carousel fraud. It is often the case that settlement of the invoices for the goods is done by third party payments. In addition, it is not unusual for traders participating in this type of fraud to have overseas accounts or to make payments from overseas. A broker trader will normally be registered for monthly VAT accounting and a buffer trader would normally be registered for three monthly VAT accounting.
6. There are certain characteristics of a MTIC fraud transaction. The first is third party payments. In a transaction tainted by fraud, the sale of the goods to the buffer trader or would be defaulter would normally give instructions that payment should be made not to them but to a third party. Instead of receiving the full income including the VAT, the would be defaulter may only receive a small amount of money which represents a commission for participating in the transaction. The trader therefore is unlikely to have assets to account for the VAT which arises on the transaction. Secondly, it is a common feature of MTIC fraud that goods used to facilitate the fraud are not delivered to the customer but are delivered to and stored in a freight forwarder's warehouse. The title to the goods changes while being stored in the warehouse. The freight forwarder will normally arrange appropriate documentation with the buying and selling of the goods which means that the deals are done as paper transactions. The storage and other costs of the freight forwarder would normally be met by the broker in the transaction. Each time the goods are sold a release note and appropriate documentation will be prepared by the freight forwarder. Thirdly, the commercial rationale of any genuine business must be to maximise profit. Transactions involving MTIC fraud would normally display a lack of commercial rationale. Fourthly, an MTIC fraud transaction would normally show a tax loss and involve a commodity which is high value but small size, for example, CPUs, camcorders and mobile phones. The transactions in the chain are normally concluded rapidly and it is not unusual for all the transactions to take place in one day.
7. Articles eu-directive 2006/112 article 167 article 168167 and 168 of Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT provides:
167 A right of deduction shall arise at the time the deductible tax becomes charged.
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168 In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or...
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