HM Revenue and Customs v Total Network SL
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr Justice Hodge |
| Judgment Date | 10 January 2005 |
| Neutral Citation | [2005] EWHC 1 (QB) |
| Docket Number | Case No: HQ03X02063 |
| Court | Queen's Bench Division |
| Date | 10 January 2005 |
[2005] EWHC 1 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
The Honourable Mr Justice Hodge
Case No: HQ03X02063
HQ03X02560
John Martin QC & Philip Coppel (instructed by Customs & Excise Solicitors Office) for the Claimants
Charles Flint QC & Tom Weisselberg (instructed by Byrne & Partners Solicitors) for the Defendant
Hearing dates: 23 rd November 2004
APPROVED JUDGMENT
1) This case concerns a series of alleged Carousel Frauds. The British taxpayer is the loser in this particular form of dishonesty. Between £1.7 and £2.6 billion were estimated to be lost through such frauds in 2000–2001. The frauds can arise because of the VAT rules that affect cross-border trade within the European Union. High value items such as computer chips and mobile phones are usually "traded" in these frauds.
2) At their simplest Carousel Frauds operate as follows. A VAT registered trader in one European Union member state (A co) sells taxable goods to a VAT registered trader in the UK (B co). This sale is zero rated in A co's member state for VAT purposes. B co should declare the purchase and pay acquisition tax in the UK, its own member state but it does not do so. Instead B co sells the goods on to C co, a UK VAT registered trader and charges VAT. C co then re-sells the goods out of the UK back to A co within the other member state of the EU. No VAT is charged.
3) B co should account to the Customs and Excise for the VAT paid to it by C co. It does not; it disappears and becomes "a missing trader". C co has paid VAT but its sale back to A co across EU borders is zero-rated. It can, however, reclaim from the Customs and Excise the VAT it paid to B co from the Customs and Excise. B co has charged VAT but not accounted for it. C co is paid its reclaim. There is an overall loss to the British taxpayer of the VAT involved.
4) Such frauds are generally more complicated than this simple example. There are often a series of transactions and a number of companies involved. There can be genuine purchasers in the chain of transactions. The ultimate sale out of the jurisdiction may not be to the original seller. But for the fraud to work there will be a "missing trader" and usually a company that acts as "broker" (C co in these examples). Carousel Frauds are also known as "Missing Trader Inter-Community Frauds".
5) The Defendant is a Spanish company. The Claimants allege that the Defendant is part of a conspiracy to cheat the Customs and Excise in the UK. The Defendant is said to be in the position of A company in the example above. The Defendant denies it is part of a conspiracy. It also says the Claimants have no cause of action against it. It is that last issue which forms the preliminary issue tried in this case.
Factual Background
6) Under Section 6(2) Customs and Excise Management Act 1979 the Claimants are responsible for collecting and accounting for and otherwise managing the revenues of Customs and Excise. They are responsible for the care and management of Value Added Tax (Schedule 11 para. 1(1) Value Added Tax Act 1994). The Defendant company is incorporated in Spain and based in Barcelona. It has two bank accounts in the United Kingdom but is not taxable here. Its business includes the buying and selling of mobile telephones. It is not and never has been registered for VAT in this country.
7) The Defendant is said by the Claimants to have been involved in a series of Carousel Frauds in relation to the sale of mobile phones from Spain to the United Kingdom. The particulars of claim refer to thirteen occasions during the period June to October 2002 in which the Defendant and other named companies —
"With intent to cheat the claimants of revenue and/or to defraud the revenue, conspired and combined together to cheat and/or defraud the claimants by unlawful means"
"The unlawful means" said to have been adopted within the conspiracy was the common law offence of cheating the Public Revenue. The Claimants claim to have suffered losses as the result of these alleged conspiracies totalling more than £1.9 million pounds.
8) The thirteen alleged conspiracies follow a broadly similar pattern. The first conspiracy alleged in the claim form provides an example. The Defendant on 15 October 2002 sold 3,780 Nokia mobile phones to Redlaw Ltd a company incorporated in England and Wales for the sum of £1,672,224.75p. That company, on the same day, sold the phones on to Lockparts Ltd for a sum of £1,423,170 plus VAT in the sum of £249,050.75. The total price was, therefore, £1,672,224.75. Lockparts Ltd again on the same day then sold the phones on for slightly greater sums, including VAT, to GAK Ltd. That company again sold the phones on for slightly greater sums to Accessory People PLC who sold the phones for a further slightly increased sum to Alldech Ltd. That company paid £1,447,740 plus £253,345 VAT for the phones. Again on the same day, 15th October, Alldech Ltd sold the phones back to the Defendant for £1,508,020. That sale being out of the United Kingdom was zero-rated.
9) GAK Ltd, one of the companies in the chain, on the 15 October 2002 on the written instructions of Lockparts Ltd paid the Defendant the sum of £1,672,224.75 by a payment into the Defendant's United Kingdom bank account. This avoided the money passing through the accounts of either Redlaw Ltd or Lockparts Ltd who were both liable to pay VAT upon the sale of the phones.
10) Redlaw Ltd and Lockparts Ltd have both ceased to trade and have not paid the VAT due on the transactions. Alldech Ltd acquired the mobile phones on the 15 October 2002 with VAT value of £253,345.50. They sold the phones on the same day zero-rated. Had the transactions been genuine Customs and Excise would have been entitled to a total of £253,345 in VAT but would have been obliged to make repayment to Alldech Ltd in the same amount. In fact they made the repayment to Alldech but received from other parties in the Carousel chain only £3,298. The loss which the Claimants say they have suffered in this conspiracy is, therefore, £250,047.
11) The other 12 conspiracies follow a similar pattern. All the transactions occurred on or about the same day. They all involve what would have been a substantial drop in price between the first and second transactions had the importing company intended to pay VAT.
12) In July and August 2003 two freezing orders were obtained by the Claimants in respect of the Defendant's London bank account. By consent those two orders were replaced by a single freezing order on the 10 November 2003. Two claims were also issued by the Claimants. They have been consolidated into this claim.
13) The Defendant denies being party to any conspiracy, or combination of conspiracies to cheat or defraud the Claimants by unlawful means. It denies it had any intent so to do and asserts there is no truth to the allegations made by the Claimants.
14) As well as denying that there was any combination, intention or conspiracy as alleged by the Claimants the Defendant also denies that the complainants' allegations are capable of constituting a cause of action for the purposes of the tort of conspiracy.
Preliminary Issue
15) The denial by the Defendant that there is any cause of action in conspiracy available to the Claimants has given rise to the Preliminary Issue. By a consent agreement set out in an order sealed on the 13 July 2004 it was agreed that the proceedings in the consolidated claim be stayed and there by a trial of the following Preliminary Issue.
"Do the Claimants have, as a matter of law, a cause of action in conspiracy against the defendant as pleaded in the consolidated and amended particulars of claim?"
16) The parties have agreed the Court should approach the Preliminary Issue on the basis of an assumption that the Claimants will be able to establish the factual case it has pleaded. Accordingly this matter has proceeded on the basis that it is to be assumed in relation to each of the thirteen sales that the Defendant was a party to a conspiracy whose intention was to cheat the Claimants by unlawful means, that the transactions took place as pleaded and that the transactions had no other economic purpose than to cheat and/or defraud the Claimants. It is important to note that from the Defendant's point of view the agreed factual basis for deciding the Preliminary Issue continues in fact to be denied.
The Claimant's Case
17) As a result of the alleged conspiracies the Customs and Excise has paid out more than £1.9 million. The proceedings are brought to recover that money. In each Carousel some monies by way of purchase price were paid into the Defendant's London bank account. The missing trader never paid any VAT. A trader further down the line, in the example given GAK Ltd, paid the price direct to the Defendant's bank account. The Claimants have no effective remedy against the missing trader even if it can be found.
18) The Claimants rely on an unlawful means conspiracy. To succeed they must establish that two or more persons have combined together to do an unlawful act with the intention but not necessarily the predominate intention, of damaging the Claimants and that damage has in fact resulted to the Claimants.
19) In Kuwait Oil Tankers Co. SA v Al Bader and others [2000] 2 All ER 271 (Comm) at para 106 onwards, the Court of Appeal considered the legal principles involved in the tort of conspiracy. They described a conspiracy to injure by unlawful means at para 108 as follows: —
"A conspiracy to injure by unlawful means is actionable where the claimant proves that he has suffered loss or damage as the result of unlawful action taken pursuant to a combination or...
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