HM Revenue and Customs v Greener Solutions Ltd

JurisdictionUK Non-devolved
CourtUpper Tribunal (Tax and Chancery Chamber)
Judgment Date18 Jan 2012
Neutral Citation[2012] UKUT 18 (TCC)

[2012] UKUT 18 (TCC).

Upper Tribunal (Tax and Chancery Chamber).

Warren J, President.

Revenue and Customs Commissioners
and
Greener Solutions Ltd

Christopher Foulkes (instructed by the Solicitor to HM Revenue and Customs) for the appellants.

Colin Wells (instructed by Aegis Tax LLP) for the respondent.

The following cases were referred to in the decision:

Bank of India v Morris UNKUNK[2005] EWCA Civ 693; [2005] 2 BCLC 328

Belmont Finance Corp Ltd v Williams Furniture Ltd ELR[1979] 1 Ch 250

Hampshire Land Co, Re ELR[1896] 2 Ch 743

JC Houghton & Co v Nothard Lowe & Wills Ltd ELR[1928] AC 1

Kittel v Belgium; Belgium v Recolta Recycling SPRL ECASECASVAT(Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161

Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd ELR[1915] AC 705

McNicholas Construction Co Ltd v C & E Commrs VAT[2000] BVC 365

Meridian Global Funds Management Asia v Securities Commission ELR[1995] 2 AC 500

Mobilx Ltd v R & C Commrs VAT[2010] BVC 638

Moore v I Bresler Ltd UNK[1944] 2 All ER 515

Optigen Ltd v C & E Commrs ECASECASECASVAT(Joined Cases C-354/03, C-355/03 and C-484/03) [2006] BVC 119; [2006] ECR I-483

Staatssecretaris van Financiën v X; Staatssecretaris van Financiën v fiscale eenheid Facet BV/Facet Trading BV ECASECAS(Cases C-536/08 and C-539/08) [2010] ECR I-3581

Stone & Rolls v Moore Stephens ELR[2009] 1 AC 1391

Supply of Ready Mixed Concrete (No. 2), Re ELR[1995] 1 AC 456

Tesco Supermarkets Ltd v Nattras ELR[1972] AC 153

Value added tax - Input tax - Missing trader intra-Community fraud - Knowledge - Whether individual's knowledge to be attributed to taxpayer company - HMRC's appeal allowed.

This was an appeal by HMRC against a decision of the First-tier Tribunal ([2010] UKFTT 412 (TC); [2011] TC 00682) that the taxpayer company neither knew nor should have known that a particular transaction was connected with missing trader intra-Community (MTIC) fraud.

The taxpayer had an established business exporting unwanted mobile phones. It had considered expanding into the new mobile phone market. The transaction in question involved the purchase of 3,800 phones in the UK and their resale to a Spanish company for delivery to France. The transaction was introduced to the taxpayer by an individual "M" who was described as a "deal consultant".

There was no issue that the transaction was connected with fraud. The fraud involved contra-trading by a company called Jag-Tec Ltd. The taxpayer was the exporter in a "clean chain" which involved Jag-Tec paying output tax on the acquisition of goods in the clean chain in order to disguise the fact of the repayment due in the "dirty chain". It was also ground that M and his company (MBG) had actual knowledge of the connection with fraud. They knew that the transaction was connected to fraud by Jag-Tec and the missing trader in the dirty chain.

HMRC refused to repay over £176,000 of input tax for the period 11/06 on the basis that the taxpayer's transaction was connected with MTIC fraud. HMRC took the view that M's knowledge should be attributed to the taxpayer in the context of a claim for repayment of input tax; alternatively, the directors and/or senior employees of the taxpayer should have known of the connection, so that the taxpayer had the requisite means of knowledge.

The First-tier Tribunal applied the test of knowledge set out in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161 and Mobilx v R & C Commrs [2010] BVC 638. However, it held that the exception in Re Hampshire Land [1896] 2 Ch 743 applied because on the facts the taxpayer was a victim of M's fraud. It concluded that where the recovery of input tax paid by the taxpayer to the vendor of the phones depended on the state of the taxpayer's knowledge, the knowledge of M who was trying to benefit by persuading the taxpayer to enter into a transaction that he knew was connected with fraud should not be attributed to it ([2010] UKFTT 412 (TC); [2011] TC 00682). HMRC appealed, arguing that M's knowledge should be attributed to the taxpayer and that the taxpayer should have known of the connection with fraud.

Held, allowing HMRC's appeal:

1.The Hampshire Land principle was of general application and applied to prevent the knowledge of the agent in breach of his duty to the company being attributed to the company where the company was a victim of his fraud. The FTT had erred in its application of that principle to the facts. On the facts found by the FTT and applying the correct principles, it was not open to it to reach the conclusion it did. In doing so, it failed to apply its own earlier conclusion that, in judging whether a company was to be regarded as the victim of the acts of a person, one had to consider the effect of the acts themselves, and not what the position would be if those acts eventually proved to be ineffective. Given the findings of fact concerning M's role in the transaction, his knowledge of the fraud was to be attributed to the taxpayer and the Hampshire Land principle was not engaged since the fraud was not aimed at the taxpayer. M intended that the connection of the transaction with fraud would not be discovered since, if it were, he would receive nothing. The only victim of the fraud was intended to be the Revenue: if his fraud succeeded, both he and the taxpayer would profit. In contrast, it would only be if M's acts proved ineffective that the taxpayer would be deprived of input tax. A major purpose of the Kittel principle was to combat fraud. The FTT's decision would make a serious in-road into that principle: in cases where there were innocent shareholders or directors who had been deceived by a fraudulent employee or director, the company might be able to escape liability notwithstanding that it was able to profit considerably from the transactions conducted on its behalf. The FTT's decision could not stand. (McNicholas Construction Co Ltd v C & E Commrs [2000] BVC 365, Bank of India v Morris [2005] EWCA Civ 693; [2005] 2 BCLC 328 and Stone & Rolls v Moore Stephens [2009] 1 AC 1391 applied.)

2.In the light of the decision that the taxpayer was fixed with the knowledge of M and thus of the fraud, it was unnecessary for the Upper Tribunal to decide whether HMRC had established that a reasonable trader in the position of the taxpayer should have known that the only reasonable explanation for the circumstances in which the transaction took place was that it was connected with fraudulent evasion of VAT. Overall it appeared that the FTT did not adopt the correct approach to assessing whether the taxpayer ought to have known that the transaction was connected with fraud. There had been an error of law on the part of the FTT which it would have been open to the Upper Tribunal to correct.

DECISION
Introduction

1.This is an appeal by the Appellants (" HMRC") from a decision of the First-tier Tribunal, Judge Avery Jones and T Marsh ("the Tribunal"), released on 26 August 2010 ("the Decision"; ([2010] UKFTT 412 (TC); [2011] TC 00682). Before the Tribunal, the Respondent ("GSL") appealed against a decision of HMRC not to repay something over £176,000 input tax for the period 11/06 on the basis that GSL's transactions in mobile phones were connected to MTIC fraud. The Tribunal allowed the appeal, holding that GSL neither knew nor should have known that a particular transaction was connected with MTIC fraud. This transaction is described in paragraph 5d below and I shall refer to it as "the Transaction".

2.There was no issue between the parties before the Tribunal, and there is no issue before me, that the Transaction was connected with fraud. The fraud involved contra-trading by a company called Jag-Tec Ltd; and, as the Tribunal put it, "GLS was the exporter in a "clean chain" which involved Jag-Tec paying output tax on the acquisition of goods in the clean chain in order to disguise the fact of the repayment due in the "dirty chain"."

3.It is common ground before me that the individual who played the major role in relation to the Transaction on the part of GSL, Mr Oliver Murray, had actual knowledge of the connection with fraud. As the Tribunal recorded, it was conceded by GSL that Mr Murray and MBG Associates Limited ("MBG"), a company of which he was the sole director, knew that the Transaction was connected to fraud by Jag-Tec and the missing trader in the dirty chain.

4.HMRC argued before the Tribunal that Mr Murray's knowledge should be attributed to GSL in the context of the claim for repayment of input tax, alternatively, that the directors and/or senior employees of GSL should have known of the connection, so that GSL had the requisite means of knowledge. The Tribunal rejected HMRC's argument. HMRC appeal on the grounds that the Tribunal were wrong to do so: either GSL did know of that connection, alternatively, if it did not actually know, it should have known of that connection. The first issue in this appeal, therefore, is whether Mr Murray's actual knowledge is to be imputed to GSL. If it is, then HMRC's appeal must succeed. If it is not, then the second issue is whether the connection with fraud is something of which GSL should have known.

Mr Murray and the Transaction

5.The Tribunal heard evidence not only about Mr Murray's knowledge of the connection with fraud but also of his involvement in the Transaction on behalf of GSL. It is necessary to put his involvement in context. For the purposes of the first ground of appeal, it is sufficient to note the following which I take from [3] of the Decision:

  1. (a) GSL's business consists of making arrangements with companies like Tesco to collect unwanted mobile phones in their stores for which the customer receives club card points, a charity nominated by Tesco receives a donation and the Appellant gets the phone. The phone is sold to Dubai or Hong Kong where it is ultimately sold on...

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