Fonecomp Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice McFarlane,Lord Justice Burnett |
| Judgment Date | 03 February 2015 |
| Neutral Citation | [2015] EWCA Civ 39 |
| Docket Number | Case No: A3/2014/0293 |
| Court | Court of Appeal (Civil Division) |
| Date | 03 February 2015 |
[2015] EWCA Civ 39
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
The Upper Tribunal (Tax and Chancery Chamber)
Sales J and Judge Berner
FTC/90/2013
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice McFarlane
and
Lord Justice Burnett
Case No: A3/2014/0293
Mr Paul Lasok QC (instructed by The Khan Partnership LLP) for the Appellant
Mr John McGuinness QC, Mr Mark Cunningham QC, Mr James Puzey, Mr Nicholas Chapman and Mr Howard Watkinson (instructed by HM Revenue and Customs Solicitors Office) for the Respondents
Hearing dates: 22–23 October 2014
This appeal, from the decision of the Upper Tribunal ("the UT") (Sales J and Judge Berner) dated 6 December 2013, is about the limits on the ability of a trader to claim repayment of or credit for VAT paid by him on purchasing goods. The usual position is that, where a trader has received VAT on sales made by him, he has the right to credit for input tax which he has paid on his purchases. If the input tax exceeds the output tax for which he must account to the respondent ("HMRC") at the end of the relevant period, he is entitled to repayment of the difference. Those rights are fundamental to the way VAT operates. The fundamental nature of the right may be seen from, for example, the judgment of the Court of Justice of the European Union ("the CJEU") in Case C-285/11 Bonik EOOD v Direktor na Direktsia 'Obzhalvane i upravlenie na izpalnenieto':
25. It should be borne in mind that, according to settled case-law, the right of taxable persons to deduct VAT due or already paid on goods purchased and services received as inputs from the VAT which they are liable to pay is a fundamental principle of the common system of VAT established by the relevant EU legislation (see Joined Cases C-80/11 and C-142/11 Mahagében and Dávid [2012] ECR, paragraph 37 and the case-law cited).
26 In that regard, the Court has consistently held that the right of deduction provided for in Article 167 et seq. of Directive 2006/112 is an integral part of the VAT scheme and in principle may not be limited. In particular, the right of deduction is exercisable immediately in respect of all the taxes charged on transactions relating to inputs (see Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 43; Case C-63/04 Centralan Property [2005] ECR I-11087, paragraph 50; Joined Cases C-439/04 and C-440/04 Kittel and Recolta Recycling [2006] ECR I-6161, paragraph 47; and Mahagében and Dávid, paragraph 38).
I shall refer in more detail to Bonik below.
The right to repayment or credit may not, therefore, be restricted by national law. However, the CJEU has also held that a trader cannot invoke EU law in order to achieve abusive or fraudulent ends. In those circumstances, EU law may deem the trader's transactions not to have taken place so that the trader loses his right to a credit. National courts must withhold the right of deduction where the right of repayment is relied on for abusive or fraudulent ends. They must do so where the trader is himself committing a tax fraud. However, traders may also be unable to claim repayments or deductions where another party fraudulently defaults in paying VAT.
The trader in this case, Fonecomp, firstly contends that it will only lose its important right to claim a credit or repayment if it knows or ought to know that the default will occur in the same chain of supply as his purchase, but not if that default occurred in a different chain of supply. Fonecomp also contends that, in that last-mentioned situation, the relevant connection and knowledge do not exist. This is so, on its case, even where the third party who orchestrates the scheme camouflages the plan to cause a default by a party liable to pay VAT by interweaving transactions in several chains of supply. This is common in VAT fraud and is known as "contra-trading". Fraudsters use "contra-trading" to make a substantial profit out of the VAT system. There was a third ground of appeal but this has not been pursued.
EU law does not impose strict liability on traders but holds that they are participants in the evasion of VAT if they have the appropriate level of knowledge. As the CJEU put it in Joined Cases C-439/04 and C-440/04 Kittel and Recolta Recycling [2006] ECR I-6161, the original authority establishing the " Kittel principle":
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, Case 268/83 Rompelman [1985] ECR 655, paragraph 24; Case C-110/94 INZO [1996] ECR I-857, paragraph 24; and Gabalfrisa, 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).
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.
57 That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.
58 In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.
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'.
60 It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void – by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller – causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.
61 By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.
The key issue in this appeal is therefore whether, as Fonecomp argues, Bonik and other cases in the CJEU demonstrate that the Kittel principle is limited to cases where the default occurs in the same chain of supply. The need for there to be a fraud in the same chain of supply is the leitmotif of its grounds of appeal.
In Bonik, the CJEU went on to hold:
43. Consequently, since the refusal of the right of deduction is an exception to the application of the fundamental principle constituted by that right, it is incumbent upon the competent tax authorities to establish, to the requisite legal standard, the objective evidence needed to substantiate the conclusion that the taxable person knew, or should have known, that the transaction relied on as a basis for the right of deduction was connected with fraud committed by the supplier or by another trader acting upstream or downstream in the chain of supply (see Mahagében and Dávid, paragraph 49).
44. It follows that, if the referring court were to find that the supplies of goods at issue in the case before it had actually been carried out and that Bonik had subsequently used those goods for the purposes of its taxed transactions, it would be for that court subsequently to determine whether the tax authorities concerned had established the existence of objective evidence to the effect described above.
45. In those circumstances, the answer to the questions referred is that Articles 2, 9, 14, 62, 63, 167, 168 and 178 of Directive 2006/112 must be interpreted as meaning that, in circumstances such as those of the case before the referring court, a taxable person may not be refused the right to deduct VAT in relation to a supply of goods on the ground that, in view of fraud or irregularities committed upstream or downstream of that supply, the supply is considered not to have actually taken place, where it has not been established on the basis of objective evidence that the taxable person knew, or should have known, that the transaction relied on as a basis for the right of deduction was connected with VAT fraud committed upstream or downstream in the chain of supply – a matter which it is for the referring court to determine.
If Fonecomp is right, then it did not lose its right in the present case as the default did not occur "in the chain of supply" which included the relevant...
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