Fonecomp Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 December 2013 |
| Neutral Citation | [2013] UKUT 599 (TCC) |
| Date | 05 December 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 0599 (TCC)
Mr Justice Sales, Judge Roger Berner.
Michael Patchett-Joyce, instructed by Dass Solicitors, appeared for the Appellant
Mark Cunningham QC and James Puzey, instructed by Howes Percival LLP, appeared for the Respondents
VAT - 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 that interpretation is open to doubt by subsequent CJEU judgments - 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; "Obzhalvane i upravlenie na izpalnenieto" - Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite(Case C-643/11) [2013] ECR I-0000 - No - (2) Whether conclusions drawn by First-tier Tribunal from its findings of fact were irrational - No - Appeal dismissed and application for reference to CJEU refused.
[1]This is the appeal of Fonecomp Limited ("Fonecomp") from the decision of the First-tier Tribunal ("FTT") (Judge Hellier and Mr Nigel Collard), released on 3 February 2012, dismissing Fonecomp's appeal against the decision of HMRC to deny credit for input tax in respect of Fonecomp's purchase of mobile phones in two transactions which took place in July 2006. The amount of input tax in dispute was £183,951.30.
[2]The basis for the refusal of input tax credit by HMRC was that Fonecomp's purchases were connected to the fraudulent evasion of VAT by a company called Softlink Limited ("Softlink"), and that Fonecomp knew or should have known of the connection to VAT fraud. This is therefore a further example of cases which have been described as missing trader intra-Community fraud (or MTIC) cases which have fallen to be considered on a number of occasions by the courts and tribunals. In this case the FTT found that such a connection to VAT fraud had been made out, and that Fonecomp should have known that its purchases were connected with the fraudulent evasion of VAT. On that basis, the FTT dismissed Fonecomp's appeal.
[3]Following submissions of the parties following the release of the FTT's decision on the appeal, the FTT released on 25 June 2012 a further decision refusing the application of Fonecomp that a reference be made to the Court of Justice of the European Union.
[4]The facts are extensively set out in the decision of the FTT, reported at [2012] TC 01798, and can for the purpose of this appeal be stated quite briefly.
[5]The two transactions of Fonecomp in issue were:
(a) Deal 1: the purchase by Fonecomp of 1100 Nokia 9300i phones and 1200 Nokia 8801 phones from PDA Stuff Limited for £759,226.25, including VAT of £113,076.25, and the sale of those phones to Axess Denmark ApS ("Axess"), a company incorporated in Denmark, for £679,200. The purchase and sale invoices were dated 11 July 2006; and
(b) Deal 2: the purchase by Fonecomp of 900 Nokia N80 phones and 500 Nokia N91 phones from TM Global Limited (trading as Team Mobile) for £475,875, including VAT of £70,875, and the sale of those phones to Axess. The purchase and sale invoices were dated 26 July 2006.
[6]The FTT found that Softlink had defaulted in its VAT payment in respect of transactions undertaken by it in August 2006, after the date of the July transactions carried out by Fonecomp. Softlink was not involved in transactions in the goods bought and sold by Fonecomp, but the FTT found that Fonecomp's purchases were connected to Softlink's default through what has been described as a "contra-trader", a company called Klick (UK) Limited ("Klick").
[7]As the FTT recorded (at [5]), contra-trader is a term used by HMRC (Mr Patchett-Joyce referred to it as "an HMRC construct") to describe a trader which (a) buys goods from a defaulter 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 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.
[8]That is a description of a straightforward example of contra-trading. More complex examples may be found, where the goods pass through a number of intermediate traders in a chain. In this case Fonecomp, alleged to be the third trader in the description of contra-trading, did not purchase the goods from Klick. It was distanced from Klick by one or two intermediate traders in the clean chain. It was alleged by HMRC that, first, the activities of Klick provided the connection between Fonecomp's purchases and Softlink's default, and secondly that there was a wider managed scheme associated with Klick's transactions, involving 37 other traders including Fonecomp, in an organised assault on the revenue which involved reclaiming the VAT on which Softlink defaulted, amounting to some £66 million.
[9]The FTT made detailed findings of fact in relation to Softlink, Klick and the alleged wider "Klick" scheme. It concluded:
(a) Softlink had a liability to pay VAT in respect of 194 deals it had undertaken between 15 and 25 August 2006, that it did not pay that VAT and that at the time it entered into the transactions it had not intended to pay that VAT. Softlink fraudulently evaded, and at the time of the deals had intended to evade, the £66 million of VAT on its sales to Klick between those dates (FTT, [164]).
(b) Klick's activities in June, July and August 2006 were part of a planned scheme which encompassed Softlink's default. The object of that scheme was to fuel chains of supply in June and July 2006 with input tax credits which could eventually be claimed by exporters, and to match those credits with a later fraudulent VAT default by Softlink leaving a small VAT reclaim at the end of the quarter. All Klick's sales in June and July 2006 were by this arrangement connected to Softlink's later fraudulent default. Softlink's default was planned as part of the same operation as Klick's activities in those months (FTT, [166]-[167]).
(c) Fonecomp's acquisition of the phones in Deal 1 in July 2006 was connected with Klick's acquisition and disposal of them in the senses: (i) that they were the same phones and were sold and acquired in transactions close in time, (ii) that the input and output VAT were offset, and (iii) that the acquisition aided Klick's sales (FTT, [203]).
(d) Fonecomp's acquisition of the phones in Deal 2 in July 2006 was in the same sense connected with Klick's acquisition and disposal of them (FTT, [205]).
(e) Accordingly, for each Deal, the FTT found that Fonecomp's purchase was connected with Klick's fraudulent arrangements in relation to, and hence was connected with, the fraudulent evasion of VAT by Softlink (FTT, [206]-[210]).
[10]The FTT concluded that Fonecomp's participation as an exporter in the scheme involving Klick and Softlink did not mean that it necessarily knew that it was part of the scheme (FTT, [219]). It nonetheless found that, since Fonecomp knew when it made its purchases all the facts from which it should have concluded that the deals assisted or were connected to VAT fraud, it should have known that its purchases were connected with fraud at the time it made them (FTT, [228]).
[11]The FTT summarised its reasons for reaching that conclusion at [222]-[229]. At [222] it referred to its findings in relation to the following matters as indicating that the parties to Fonecomp's transactions were not concerned with precisely what phones they were buying and selling, and hence proceeded in a manner which was at variance from what one would expect in a normal commercial transaction:
(a) the lack of specification, particularly on purchase orders from Axess;
(b) the lack of proper inspection of the phones despite their value;
(c) the purchase and sales of phones designed for the US market and sold with "Central European spec"; and
(d) the lack of defined clear contractual terms (time of payment, title etc.).
[12]The FTT found that the only explanation of these factors was that what Fonecomp's customer (and possibly Fonecomp and its supplier) wanted was that there would be a sale and export (that is, any sale and export), and was indifferent to precisely what was said to be exported because the recipient already knew precisely what it was getting because the chain had been pre-arranged (FTT, [223]).
[13]At [224], the FTT focused further on the European and US specifications of the phones that were the subject of the transactions. It referred back to its findings at [136] to [144], where it concluded that the nature of both the types of phones was such that there was no likely explanation other than that they had been imported into the UK in order to be exported. The FTT further concluded, at [225], that the only reasonable explanation of these features was that the Deals were part of a scheme for the import, onsale and later export of the phones, and that the only explanation for such a scheme was that the transactions in the phones were part of, and aided, a VAT fraud.
[14]Earlier in its judgment, the FTT had found that Fonecomp knew the mechanics of VAT fraud, it knew that its suppliers were back-to-back trading and it knew there...
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