Ilford Cellular Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 August 2013 |
| Neutral Citation | [2013] UKFTT 435 (TC) |
| Date | 14 August 2013 |
| Court | First-tier Tribunal (Tax Chamber) |
[2013] UKFTT 435 (TC)
Judge John Brooks, Harvey Adams FCA.
Liban Ahmed of Controlled Tax Management Limited appeared for the Appellant
David Bedenham, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
VAT - Appellant's transactions connected to MTIC fraud - Whether appellant should have known of connection - Yes - Appeal dismissed.
[1]Ilford Cellular Limited ("ICL") appeals against a decision of HM Revenue and Customs ("HMRC") to deny its claim to deduct input tax in the sum of £750,925 incurred in relation to three transactions during its monthly VAT period ending 31 March 2005 (03/06), one transaction in is VAT period ending 31 July 2006 (07/06) and two transactions in its VAT period ending 31 August 2006. HMRC contend that these six transactions were connected to Missing Trader Intra-Community ("MTIC") fraud and that ICL, through its director Sajid Umarji, should have known of that connection.
[2]ICL was represented by Liban Ahmed of Controlled Tax Management Limited and David Bedenham of counsel appeared for HMRC. Although throughout this decision we have referred to the respondents as HMRC this should also be read, where appropriate, as a reference to HM Customs and Excise.
[3]HMRC had originally, in a letter dated 3 December 2010, denied ICL recovery of its input tax in relation to 49 transactions or deals undertaken over its 03/06, 07/06, 08/06 and 09/06 VAT periods. However, following its appeal to the Tribunal on 10 January 2011, HMRC wrote to ICL, on 20 May 2011, in the following terms:
Dear Mr Umarji,
As a result of work undertaken by HMRC in preparing for the defence of the appeal, the Commissioners have decided to withdraw the decision to deny input tax in relation to 43 deals listed in the first annex to this letter. In relation to the remaining deals (6 in total and listed in the second annex to this letter) the Commissioners will continue to defend the denials.
The Commissioners remain satisfied that you should have known that these transactions were connected with the fraudulent evasion of VAT and accordingly your right to deduct input tax was denied.
Arrangements are currently being made to refund the amounts due as a result of this amendment to deny, subject to the off-setting of any existing amounts due to HMRC from you.
I will write to you again as soon as possible to confirm these arrangements.
Yours sincerely,
Dean Watson
Higher Officer, HM Revenue and Customs
The first annex to this letter is included as an appendix to this decision. However, it is not necessary for us to append the second annex to the decision as we have set out the six deals in which input tax was denied in some detail below.
[4]Mr Ahmed invited us to have regard to all 49 transactions submitting that the 43 transactions in which input tax has been repaid were "identical" to those in which it was denied.
[5]In support of his invitation to consider all 49 deals, Mr Ahmed referred us, in his closing submissions, to the following passage from the judgment of Christopher Clarke J in Red 12 Trading Ltd v R & C CommrsVAT[2010] BVC 166, which we note was cited and adopted by Moses LJ giving the judgment of the Court of Appeal in Mobilx Ltd (in Administration) v R & C CommrsVAT[2010] BVC 638, at [83]:
[109]Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and "similar fact" evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.
[110]To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands.
[111]Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.
[6]He contended that we should not simply look at what happened in the six transactions with which this appeal is concerned but look at the trading practices of ICL as a whole, taking all circumstances into account. On doing so, he argued, it is clear that, by making the repayment of input tax, HMRC accepted that ICL neither knew nor should have known of the connection to a fraudulent tax loss in these deals.
[7]Mr Ahmed submitted it is "simply incomprehensible" that the six remaining transactions under appeal should be treated any differently.
[8]However, as Mr Bedenham emphasised no formal concession has been made by HMRC in relation to the transactions for which input tax was repaid.
[9]He contends, and we accept, that the reasons for re-paying the input tax relating to the 43 transactions are irrelevant to the decision in this appeal and that our task is to consider whether, in relation to the six transactions, HMRC have established ICL should have known that they were connected to fraud. However, he accepts that we should take account of all transactions and that while these are obviously not identical in terms of quantities of mobile phones traded, the financial value of deals and the type of phone involved, there are similarities between the deals in which input tax was repaid and those in which it was denied, eg it is not disputed that all but one of the 49 deals was connected to a fraudulent loss of tax, that in five of the repaid deals the ICL had the same supplier as it did in two of the denied deals and that the same customer appears in seven deals in which repayment was made as it did in two of deals in which it was denied.
[10]As MTIC fraud has been described in many times, not only by this Tribunal but also the appellate Courts and Tribunals (eg by Roth J at [1]-[3] of POWA (Jersey) Ltd v R & C CommrsVAT[2012] BVC 1596), it is not necessary for us to explain either its operation or variations, such as contra-trading, in this decision. In the present case the first four transactions are alleged to have been "typical" or "basic" MTIC fraud and the fifth and sixth "contra-trading".
[11]It is not disputed that the burden of proof in this appeal is on HMRC and that the civil standard of proof, the balance of probabilities, applies.
[12]There is also agreement on the applicable law, namely eu-directive 2006/112 article 167 article 168articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 which has been implemented into UK domestic law by Value Added Tax Act 1994 section 24ss 24-26 Value Added Tax Act 1994 and regulation 29 of The VAT Regulations 1995 under which an exporter is, in principle, entitled to claim a deduction of input tax. An exception to this right was identified by the European Court of Justice ("ECJ"), in the joint cases of Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 where the Court stated:
[51]… traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing the right to deduct the input VAT.
…
[56]… 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 do so even where the transaction in question meets the objective criteria which form the basis of the concept of "supply of goods effected by...
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