HM Revenue and Customs v Total Network SL
| Jurisdiction | UK Non-devolved |
| Judge | LORD HOPE OF CRAIGHEAD,LORD SCOTT OF FOSCOTE,LORD WALKER OF GESTINGTHORPE,LORD MANCE,LORD NEUBERGER OF ABBOTSBURY |
| Judgment Date | 12 March 2008 |
| Neutral Citation | [2008] UKHL 19 |
| Date | 12 March 2008 |
| Court | House of Lords |
[2008] UKHL 19
Appellate Committee
Lord Hope of Craighead
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Lord Mance
Lord Neuberger of Abbotsbury
HOUSE OF LORDS
Appellants:
John Martin QC
Philip Coppel
(Instructed by Solicitor Her Majesty's Revenue and Customs)
Respondents:
Charles Flint QC
Tom Weisselberg
(Instructed by Byrne and Partners)
My Lords,
The issue in this case is whether the Commissioners can maintain a civil claim for damages under the tort of unlawful means conspiracy against a participant in a missing trader intra-community, or carousel, fraud. Two questions need to be considered. The first is whether it is open to the Commissioners to maintain a cause of action in damages at common law as a means of recovering VAT from a person who has not been made accountable or otherwise liable for that tax by Parliament. The second is whether, if so, it is an essential requirement of the tort of unlawful means conspiracy that the conduct which is said to amount to the unlawful means should give rise to a separate action in tort against at least one of the conspirators.
On the second issue the Court of Appeal considered itself bound by prior Court of Appeal authority to hold that the unlawful means had to be independently actionable: [2007] EWCA Civ 39, paras 78-79. Its decision to strike out the Commissioner's claim for this reason is the subject of the appeal to this House by the Commissioners. The Court of Appeal decided the first issue in favour of the Commissioners: paras 31-32. Total Network SA ("Total") has cross-appealed on the first issue.
The facts
Total is a company incorporated in Spain which has a bank account in the United Kingdom. The Commissioners claim that Total is liable to them in damages at common law for conspiracy in sums equivalent to amounts of VAT which the Commissioners say they have lost as a result of thirteen carousel frauds which were participated in by Total. There are alleged to have been thirteen such conspiracies over five months from May to October 2002.
In its simplest form a carousel fraud begins with the sale of taxable goods by a trader registered for VAT in one member state, A, to a VAT-registered trader in another member state, B. Under article 28c(A)(a) of European Council Directive 77/388/EEC of 17 May 1977 (OJ L 145, 13 June 1977) on the harmonisation of the laws of the member states relating to turnover taxes (the Sixth Directive), the supply of goods to a trader in another member state is exempted from VAT. In the words of section 30 of the Value Added Tax Act 1994 (" VATA 1994"), it is zero-rated. B then sells the goods to another VAT-registered trader, C, in its own member state, charging and receiving VAT on the consideration. It fails to account for that VAT to the taxing authorities and disappears. It becomes a missing trader. But before doing so it provides a tax invoice to C, which claims and receives the VAT that it has paid to B as input tax. C, the middleman or broker, then sells the goods to a registered trader in another member state. In the simplest form, this is A. This sale is zero-rated, so there is no output tax to set off against the input tax which C has received. B's disappearance has resulted in a profit to the conspirators which is equivalent to the amount of the input tax received by C. It is the circularity of the transaction that gives rise to the description of the fraud as a carousel.
The fraud is the product of a dishonest application of the system of value added tax. C has a claim for input tax arising from its transaction with the missing trader, B, which it is entitled to recover under article 17(2)(d) of the Sixth Directive. Its sale to A is zero-rated in its own member state. So it is not required to account to the taxing authorities for any output tax on that sale. The result of the fraud is that the missing trader, B, has received the VAT from C. But it has not accounted for that VAT as output tax to the taxing authorities. They must nevertheless pay the VAT, or give credit for it, to C when it is claimed as input tax. The goods are no more than a token to give the transaction the semblance of reality. A has no genuine business motive in buying back what it has sold. Typically the goods are high volume articles such as computer chips or mobile telephones.
As the Court of Appeal observed in para 3 of its judgment, this type of fraud is not confined to the United Kingdom. It is common in other countries within the EU. It has been described as a sophisticated attack on the VAT system. It was estimated to have cost in excess of £1bn in the year 2004/2005 to the United Kingdom by way of lost revenue. The Commissioners refer in their written case to estimates that show that this figure was exceeded substantially in the succeeding financial years. There is no doubt that this is a pernicious stratagem, and that member states are justified in making use of every means at their disposal within the scope of the Sixth Directive to eradicate it.
It is sufficient for the purposes of this case to summarise the details of the first of the thirteen conspiracies alleged in the Statement of Claim. It has been treated as representative of all of them. On or about 15 October 2002 Total sold 3,780 Nokia mobile phones to Redlaw Ltd, a company incorporated in England and Wales, for £1,672,224.75. On the same day Redlaw sold the mobile phones to Lockparts Ltd for £1,423,170 plus £249,054.75 as VAT, amounting in total to £1,672,224.75. On the same day Lockparts sold them to GAK Ltd, for £1,428,840 plus £250,047 as VAT, amounting in total to £1,678,887. Both Redlaw and Lockparts thereafter ceased to trade and did not pay the VAT due on these transactions. On the same day GAK sold the mobile telephones to The Accessory People plc, for £1,436,400 plus £251,370 as VAT, amounting in total to £1,687,770. On the same day The Accessory People sold them to Alldech Ltd, the broker, for £1,447,740 plus £253,345.50 as VAT, amounting in total to £1,701,094.50. In due course GAK and The Accessory People paid VAT on the transactions which they had entered into. Finally, on the same day Alldech sold the mobile telephones to Total for £1,508,220. That sale, being a sale out of the United Kingdom, was zero-rated. Alldech claimed and was paid a refund of input tax from the Commissioners which included the sum of £253,345.50 of VAT which it had paid to The Accessory People.
Reduced to its essentials, the position is that Redlaw, the first missing trader, was liable to pay VAT of £249,054.75 on its taxable supply which it failed to pay to the Commissioners. The intermediaries in the chain, other than Lockparts, did properly account for and pay VAT on the supplies. Alldech, the broker, did actually pay VAT of £253,345.50 on the supply it received from The Accessory People. Alldech then claimed and received a VAT credit for £253,345 in respect of the zero-rated supply out of the United Kingdom to Total. If Redlaw, the first missing trader, had paid the VAT due from it of £249,054.75 the result would have been that substantially all the VAT due on these transactions would have been paid or accounted for. The difference between the amounts paid and due at each end of the chain is accounted for by the fact that VAT of £992.25 due by Lockparts, the second missing trader, was not paid to the Commissioners.
The total number of mobile phones involved in the thirteen conspiracies was 30,704. They were sold by Total to the various missing traders for a total of £12,299,117.40 and re-purchased by Total from the various brokers for a total of £11,663,423. The total amount of VAT due but unpaid on the sales by the missing traders is £1,921,331.12. The total amount of the VAT refund claimed by the brokers and allowed by the Commissioners is £1,958,714.95. That is the sum claimed in this action.
The cause of action relied on by the Commissioners is the tort known as unlawful means conspiracy. The unlawful means on which they rely in their re-re-amended Particulars of Claim are (a) the commission by Redlaw and/or Alldech of the common law offence of cheating the revenue and (b) the making by Alldech of a fraudulent misrepresentation that the transactions had a genuine economic purpose and that VAT was chargeable and/or recoverable on them by the submission to the Commissioners of a VAT return in the relevant form claiming that it was entitled to a VAT credit. The claim relating to four of the alleged conspiracies was issued on 2 July 2003. On the same day Fulford J granted a freezing injunction against Total, the amount of which was increased on several subsequent occasions as other alleged conspiracies were added to the claim. On 10 January 2005 Hodge J held that the Commissioners had a cause of action in conspiracy where the unlawful means alleged was the common law offence of cheating the public revenue. On 31 January 2007 the Court of Appeal allowed Total's appeal against that order. The Commissioners were granted permission to appeal to this House and Total were granted permission to cross-appeal. The freezing injunction was continued pending the determination of the appeal and the cross-appeal.
The statutory scheme
Value added tax is a creature of statute. More precisely, it is the product of a series of EC Directives, of which the Sixth Directive was the most recent. (The Sixth Directive was repealed and replaced by Council Directive 2006/112/EC of 28 November 2006. But it was still in force at the time when the transactions that...
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