Euro Stock shop Ltd v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 July 2010 |
| Neutral Citation | [2010] UKUT 259 (TCC) |
| Date | 23 July 2010 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2010] UKUT 259 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Arnold J.
Nicola Preston (instructed by Keystone Law) for the appellant.
Christopher Foulkes (instructed by Howes Percival) for the respondent.
The following cases were referred to in the judgment:
Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECASVAT (Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161
Mobilx Ltd v R & C CommrsUNKVAT [2009] EWHC 133 (Ch); [2009] BVC 205
Mobilx Ltd v R & C CommrsUNKVAT [2010] EWCA Civ 517; [2010] BVC 638
Value added tax - Input tax - Disallowance of input tax - Missing trader intra-Community (MTIC) fraud - Whether fraudulent evasion of VAT - Whether taxpayer knew or should have known purchases connected with fraud - Taxpayer's appeal dismissed.
This was an appeal by the taxpayer company from a decision of the First-tier Tribunal ([2009] UKFTT 182 (TC); [2010] TC 00137) dismissing the taxpayer's appeal against three decisions of HMRC refusing deduction of input tax in the total sum of £1,710,930.39 in respect of purchases of Intel P4 CPUs in the periods 04/06 and 05/06.
The ground for those decisions of HMRC was that the input tax incurred by the taxpayer arose from transactions connected with the fraudulent evasion of VAT and that the taxpayer knew or should have known of that fact. On the taxpayer's appeal, the First-tier Tribunal identified three questions: (1) whether the transactions were connected to a VAT loss; (2) whether the tax loss had been attributable to fraud; and (3) whether the taxpayer had known that the transactions were connected to fraud. The tribunal dismissed the taxpayer's appeal holding that the taxpayer'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 HMRC were without commercial substance and were contrived. The taxpayer's directors knew the transactions they undertook were part of a scheme to defraud the revenue. Thus all three of the questions which the tribunal had identified should be answered in the affirmative, and in fact the taxpayer had had actual knowledge of the fraud.
The taxpayer challenged the decision of the tribunal on a number of grounds. Those grounds fell into two groups. The first group consisted of contentions that the tribunal misdirected itself as to the law. The second group consisted of contentions that the tribunal made findings of fact which it was not entitled to make because there was no evidence to support those findings.
Held, dismissing the taxpayer's appeal:
1. The law was as set out in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161 and the decision of the Court of Appeal in Mobilx Ltd v R & C Commrs [2010] EWCA Civ 517; [2010] BVC 638 which had been delivered since the decision of the tribunal in this case. The tribunal had not misdirected itself on the law. It had made a finding of actual knowledge on the part of the taxpayer, and accordingly its findings had satisfied the test as clarified by the Court of Appeal in Mobilx. It had not erred in respect of due diligence; due diligence was not irrelevant, but tribunals should not focus unduly on that issue.
2. It was not open to the appeal court to conduct a review of the evidence to see whether it would have reached the same conclusion. An appellate court was poorly placed to assess the value of oral evidence given before the tribunal. Moreover, if the analysis of the evidence was such that reasonable judicial minds might differ on the outcome, there was no basis for saying that the decision of the tribunal of first instance was wrong. In reality, the taxpayer was asking the Upper Tribunal to review the evidence with a view to persuading it to reach a different conclusion to that reached by the tribunal below. That was not an appropriate basis upon which to challenge the tribunal's conclusions. In any event, considering the evidence relied upon before the tribunal, it was entitled to make the findings it did. It was important to note that the tribunal found that the evidence of the taxpayer's director was not credible. That finding could not be successfully attacked on appeal. That made it difficult for the taxpayer successfully to challenge the tribunal's conclusion of actual knowledge. There was evidence before the tribunal from which it was entitled to conclude that the taxpayer had actual knowledge that its purchases were connected with the fraudulent evasion of VAT. (Mobilx Ltd v R & C Commrs [2009] EWHC 133 (Ch); [2009] BVC 205 and Georgiou v C & E Commrs [1996] BVC 236 applied.)
Arnold J: Introduction
1. This is an appeal from the First-tier Tribunal (Tax) (Tribunal Judge Dr K Khan and Mr PD Davda FCA) dated 23 July 2009 ([2009] UKFTT 182 (TC); [2010] TC 00137 ). By its decision the First-tier Tribunal, which hereinafter I will refer to for brevity simply as "the Tribunal", dismissed the appeal of Euro Stock Shop Ltd ("ESS") against three decisions of the Commissioners of Her Majesty's Revenue and Customs ("HMRC") to deny entitlement to the right to deduct input tax in the total sum of £1,710,930.39 in respect of purchases of Intel P4 CPUs in the periods 04/06 and 05/06. The ground for those decisions was that the input tax incurred by ESS arose from transactions connected with the fraudulent evasion of VAT and that ESS knew or should have known of that fact. The Tribunal's decision was given after a seven day hearing at which a number of witnesses gave evidence, including Bharat Shaunak, a director of ESS.
2. The Tribunal's decision is a lengthy and detailed one running to 116 numbered paragraphs and 39 single-spaced pages. It is structured as follows: in paragraphs 1-3 there is an introduction; in paragraphs 3-6 there is an explanation of missing trader intra-Community (MTIC) fraud; in paragraphs 7-14 the Tribunal identifies the relevant legislation and case law; in paragraph 15 the Tribunal summarises ESS's arguments; at paragraph 16 the Tribunal summarises HMRC's arguments; in paragraphs 17-29 the Tribunal summarises the applicable law; in paragraphs 31-39 the Tribunal summarises the history of ESS; in paragraph 40 the Tribunal summarises the transactions in question; in paragraph 41 the Tribunal poses the questions that need to be answered in order for HMRC's case to succeed; in the remainder of paragraph 41 through to paragraph 73 the Tribunal considers the first of those questions, namely whether ESS's transactions were connected to a VAT loss; in paragraphs 74-84 the Tribunal considers the second question, namely whether the tax loss was attributable to fraud; and in paragraphs 85-115 the Tribunal considers the third question, namely whether ESS knew that the transactions were connected to fraud. The Tribunal's answer to each of those questions was in the affirmative. So far as the third question is concerned, the Tribunal found in paragraph 108 that ESS had actual knowledge of the fraud, a finding which was repeated and elaborated in paragraphs 114 and 115.
3. In Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161 the European Court of Justice (Third Chamber) held as follows:
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54. As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Gemeente Leusden v Staatssecretaris van FinanciënECASECAS (Joined Cases C-487/01 and C-7/02) [2006] BVC 740; [2004] ECR I-5337, paragraph 76). Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C-367/96 Kefalas v Greece [1998] ECR I-2843, paragraph 20; Case C-373/97 Diamantis v Greece [2000] ECR I-1705, paragraph 33; and I/S Fini H v SkatteministerietECAS (Case C-32/03) [2007] BVC 415; [2005] ECR I-1599, paragraph 32).
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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 retroactively (see, inter alia, Rompelman v Minister van FinanciënECAS (Case 268/83) (1985) 2 BVC 200157; [1985] ECR 655, paragraph 24; Intercommunale voor Zeewaterontzilting (INZO) v BelgiumECAS (Case C-110/94) [1996] BVC 326; [1996] ECR I-857, paragraph 24; and GabalfrisaVAT[2002] BVC 333; [2000] ECR I-1577, paragraph 46). 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 (see Fini H, paragraph 34).
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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.
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57. That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.
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58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.
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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".
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60. It follows from the foregoing that the...
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