HM Revenue and Customs v Total Network SL
| Jurisdiction | England & Wales |
| Judge | Lord Justice Ward |
| Judgment Date | 31 January 2007 |
| Neutral Citation | [2007] EWCA Civ 39 |
| Docket Number | Case No: 2005/0123/QBENF |
| Court | Court of Appeal (Civil Division) |
| Date | 31 January 2007 |
[2007] EWCA Civ 39
Lord Justice Ward
Lord Justice Chadwick and
Lord Justice Gage
Case No: 2005/0123/QBENF
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION
MR JUSTICE HODGE
Royal Courts of Justice
Strand, London, WC2A 2LL
Charles Flint QC and Tom Weisselberg (instructed by Byrne & Partners) for the Appellant
John Martin QC and Philip Coppel (instructed by Solicitor's Office to Her Majesty's Revenue and Customs) for the Respondent
This is the judgment of the Court to which all members have contributed
This is an appeal by the defendant Total Network SL (a company incorporated in Spain) against an order made by Mr Justice Hodge on 10 January 2005 following the trial of a preliminary issue. By his order the judge held that the claimants, the Commissioners of Customs & Excise, did have a cause of action against the defendant “in conspiracy where the unlawful means alleged is a common law offence of cheating the public revenue”. The judge reached his decision on the basis of an agreement that he should treat the facts as set out in the Consolidated and Amended Particulars of Claim. At the same time he granted the claimants permission to amend the Consolidated and Amended Particulars of Claim. In accordance with the latter order the claimants amended their Particulars of Claim with permission. Subsequently a Re-Re-Amended Consolidated Particulars of Claim was made without permission and placed in the bundle for this court. During the course of the hearing with the consent of the defendants the claimants further amended their pleadings and we are asked to decide the appeal on the basis of this further Amended Consolidated Particulars of Claim.
The claim concerns a series of alleged carousel frauds. Such frauds are best described in a passage from a decision of the VAT Tribunal in Bond House Systems Limited and adopted by the Advocate General in the Court of Justice of the European Communities in Optigen Ltd and Others v Customs and Excise Commissioners Conjoined Cases C – 354/03, C – 35/03 and C – 484/03. It reads:
“In its simplest form a carousel fraud works in this way. A VAT-registered trader, A, in one European Union member state sells taxable goods to a VAT-registered trader, B, in another member state. A's sale to B is zero-rated in A's member state”.
“According to article 28c (A) (a) of the Sixth Directive, the supply of goods to an operator in another member state is exempted from VAT. In the wording of the United Kingdom Value Added Tax Act 1994, the supply is “zero-rated”. B should declare the purchase and pay acquisition tax in its own member state and on the premise that it is intending to use those goods in order to make onward taxable supply, then claim credit for the same amount as input tax. Usually, if it is a participant in a carousel fraud, it does neither. B then sells the goods to another VAT-registered trader C, in its own member state, charging and receiving VAT on the consideration. However, it fails to account to the tax authorities for that VAT and effectively disappears; it becomes what the commissioners refer to as a “missing trader”. Nevertheless, at the time of making its sale to C, while it is still registered for VAT and before the commissioners are aware that it is or might become a missing trader and had been able to intervene … it provides a VAT invoice to C, which claims the VAT it has paid to B as input tax. C (to whom the commissioners refer as a “broker”) then sells the goods to registered trader in another member state: the hallmark of the simplest fraud is that this purchaser is A, and it is this circularity which gives rise to the “carousel fraud”. C has an input tax to claim but, because its sale to A is zero-rated in C's own member state is not required to account for any output tax. As noted above, the supply of goods to an operator in another member state is exempted from VAT. The vendor is entitled to recover input tax pursuant to article 17(2) (d) of the Sixth Directive as inserted by article 28f(1) thereof. The result, if the fraud is successful is that B has received, but not accounted for the VAT which the tax authorities must pay to C…. The goods are no more than a token, necessary to lend verisimilitude to the transactions…A (at least, if it is participant in the fraud) likewise has no genuine business motive in buying back that which it has sold.”
This type of fraud is not confined to the United Kingdom. Material before us shows that it is common in other countries within the European Community. It is best known in this country as carousel fraud but generally known throughout the European Community as missing trader intra-community (MTIC) fraud. It is described as a sophisticated criminal attack on the VAT system which in the year 2004/05 is estimated to have cost between £1.12 and £1.9 bn. It is usually committed by using goods such as mobile telephones and computer chips but includes other electronic goods. It involves the goods being imported VAT-free from other European Union Member States being sold through contrived business-transaction chains and subsequently exported. As is apparent from the above description the tax loss occurs when the VAT charge on the initial sale of the goods in United Kingdom is not paid to the Commissioners because the seller disappears. The purchaser can still reclaim VAT, so the loss crystallises when the trader who exports the goods from the United Kingdom makes a repayment claim.
The Consolidated Particulars of Claim allege thirteen separate conspiracies all following a broadly similar pattern. It will suffice to refer to the details of the first alleged conspiracy. The facts alleged in this conspiracy are as follows. On 15 October 2002 Total sold 3,780 Nokia mobile telephones to Redlaw Ltd, a company incorporated in England and Wales, for the sum of £1,672,224.75. On the same day Redlaw sold the telephones on to Lockparts Ltd for £1,423,170 plus VAT in the sum of £249,050.75. The total price was therefore, £1,672,224.75. Lockparts again on the same day sold the telephones on for slightly greater sums including VAT to GAK Ltd. GAK sold the telephones on for slightly greater sums to The Accessory People Plc who in turn sold them for a further slightly increased sum to Alldech Ltd. Alldech paid £1,447,740 plus £253,345 VAT for the telephones. Alldech then sold the telephones back to Total for £1,508,020. That sale was zero-rated because it was a sale out of the United Kingdom. All these transactions took place on the same day, namely 15 October 2002.
Redlaw and Lockparts have both ceased to trade and have not accounted for the VAT on the transactions in which each was involved. Alldech by virtue of having acquired the telephones with a VAT value of £253,345.50 and having sold them out of the United Kingdom zero-rated, claimed and was paid a VAT refund from the Commissioners which included the sum of £253,345.50. The Commissioners allege that the loss suffered by reason of this conspiracy is a sum in damages equivalent to £250,047.
There are common features in respect of all thirteen conspiracies. In each conspiracy all the transactions were carried out on the same day. Total was the first and last link in all of the conspiracies. Redlaw features in two of the conspiracies. The Accessory People feature in six of the conspiracies. In nine of the thirteen conspiracies, Alldech is the final company in the United Kingdom which sold to Total outside the United Kingdom and claimed repayment of VAT from the Commissioners.
Before the judge Total put forward three grounds in its application to strike out the Consolidated Particulars of Claim which were tried as a preliminary issue. Those grounds were that the alleged conspiracies circumvented the statutory scheme; there was no unlawful means conspiracy on the facts; and that the Commissioners could not demonstrate harm to a business. The judge rejected all three grounds. Before this court only the first two grounds are pursued.
As we have indicated, the judge dealt with the preliminary issue on the basis of an assumption that the facts alleged were true. In its final form, produced on the morning of the second day of the hearing of the appeal, the Commissioner's case was put in the following way:
The First Conspiracy
4. In or about October 2002, the Defendant, together with:
(i) Redlaw Ltd, a company incorporated in England and Wales with the company number 04455520, having VAT registration number 795944559 and having its registered office at Office No.5, Leonard House,21–14 Silver Street, Tamworth B79 7NH;
(ii) Lockparts Ltd, a company incorporated in England and Wales with the company number 04092001, the VAT Registration No 801 6831 51, and having its registered office at Allen House, the Maltings, Station Road, Sawbridgeworth, Hertfordshire, CM21 9JX;
(iii) Alldech Ltd, a company incorporated in England and Wales with the company number 03659760, having a VAT registration number 697 7746 51, and having its registered office at 2 nd floor, 1 King's Yard, 20 High Street, Uxbridge, UB8 1JN,
Or any one or more of the three, with intent to cheat the Claimants of revenue and/or defraud the revenue, conspired and combined together to cheat and/or defraud the Claimants by the following unlawful means ( which the Defendant intended and knew would be used), namely by either or both of;
(a) the commission by Redlaw Ltd and/or Alldech Ltd of the common law offence of cheating the revenue;
(b) the making by...
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