Infinity Distribution Ltd ((in Administration)) v R & Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 December 2019 |
| Neutral Citation | [2019] UKUT 405 (TCC) |
| Date | 30 December 2019 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2019] UKUT 405 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Honourable Mr Justice Marcus Smith, Judge Thomas Scott
Ian Bridge, instructed by Keystone Law, appeared for Infinity Distribution Limited
Jonathan Kinnear QC and Howard Watkinson, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for HMRC
Value added tax – (1) HMRC barred from appeal against denial of input tax credit on purchases – Proof of underlying supply required – EC Directive 77/388, art. 17 and 18 – VATA 1994, s. 24 – Barring order set aside – (2) Dismissed application to bar HMRC from appeal against denial of zero rating – Evidence of export required – VATA 1994, s. 30, para. 8 – R (on the application of Teleos plc) v C & E Commrs (Case C-409/04) [2008] BVC 705 – Appeal dismissed.
The Upper-tier Tribunal (UT) considered an appeal by HMRC against the first element of an FTT decision barring their taking any further part in proceedings relating to invalid invoices and an appeal by Infinity Distribution Ltd (Infinity) against the second element of the same FTT decision dismissing their application to bar HMRC from taking any further part in proceedings relating to evidence of export. Both elements were found in favour of HMRC.
The UT considered two separate elements of an earlier FTT decision – the “Invalid Invoice Appeal” and the “Zero-Rating Appeal”
In 2006 Infinity had been refused the right to deduct input tax on various invoices for the supplies to them of two types of mobile phones. The specific types of mobile phone identified on the invoices could not have existed – no or no sufficient number of them had been manufactured at the relevant time. However, HMRC had explicitly disavowed any allegation of fraud against Infinity who therefore successfully applied to the FTT for an order to bar them from taking any further part in this element of the appeal.
The UT dismissed a preliminary objection to one of the grounds of HMRC's appeal. Infinity argued it was not open to HMRC to contend there was no taxable supply underlying the invoices. The UT, however, agreed with HMRC this was not a new argument. It was clear that part of their case for refusing the input tax credit was that the supplies in question had not been shown to have taken place.
VATA 1994, s. 24 defines input tax as VAT on the supply to a taxable person of any goods or services used for the purpose of his business. Value Added Tax Regulations 1995, reg. 14(1) required that a VAT invoice should state a description sufficient to identify the goods or services supplied.
The FTT had held that the fact invoices may incorrectly describe the goods supplied was not a bar to deducting the relevant input tax if Infinity did not have actual or constructive knowledge of the fraud. The UT disagreed stating there was nothing in the scheme of the legislation to suggest a mere formalistic compliance with the requirements of invoices was sufficient to justify a deduction if, in reality, the situation was completely different. The FTT had been incorrect in accepting the proposition, on behalf of Infinity, that even where there is no taxable supply the taxpayer may deduct input tax unless it can be shown they knew or should have known there was no taxable supply. There could be no right to a deduction of input tax without a supply. HMRC's appeal in relation to this element of the FTT decision was allowed.
It was also Infinity's contention, in front of the FTT, the effect of R (on the application of Teleos plc) v C & E Commrs (Case C-409/04) [2008] BVC 705 was that, unless Infinity could be shown to have actual or constructive knowledge of fraud, they were entitled to zero rate the relevant supplies regardless of whether the goods actually left the UK or whether the relevant export documents were false. It was, they said, the same principle as in Kittel v Belgium (Case C-439/04) [2008] BVC 559 and the burden of proof was on HMRC to prove knowledge of fraud before the benefit of zero rating could be withdrawn.
The UT considered the FTT were wrong to have accepted that contention. Following an examination of the relevant caselaw, the UT noted the ECJ had concluded in relation to intra-Community supplies that, since it was no longer possible for taxable persons to rely on documents issued by the customs authorities, evidence must be provided by other means. Teleos established that a supplier could retain the benefits of zero rating, even when it was subsequently discovered all of the relevant requirements had not been met, but only if the supplier could demonstrate they had taken every reasonable measure to ensure the supply did not lead to his participating in tax evasion. The burden of proof therefore rested on the supplier not the taxing authority.
Accordingly, the UT confirmed the decision of the FTT not to bar HMRC from participating in the zero-rating appeal, albeit on a different basis, and dismissed Infinity's appeal in this regard.
There is now a significant body of caselaw around these so-called carousel frauds. This decision provides a useful analysis of several of them, how they relate to one another and how they should properly be interpreted. Perhaps unusually, it considers the positions in relation to both, the deduction of input tax and, the application of zero rating.
[1] In 2006, the Commissioners for Her Majesty's Revenue and Customs (the “Commissioners”) notified Infinity Distribution Limited (“Infinity”), a company now in administration, that Infinity had been refused the right to deduct input tax on various invoices for the supplies to Infinity of two types of mobile phone (the “Invoices”).
[2] The Commissioners took the view that the Invoices were not valid invoices because they failed to comply with regulation 14(1)(g) and (h) of the Value Added Tax Regulations 1995 (the “VAT Regulations”).
[3] In the course of this decision, we will have occasion to refer to various legislative provisions. For convenience, they are set out in Annex 1 hereto, as they were in force for the periods relevant to this appeal. So far as material, regulation 14(1) of the VAT Regulations requires that a VAT invoice provide the following particulars (amongst others):
(1) A description sufficient to identify the goods or services supplied: Regulation 14(1)(g).
(2) For each description, the quantity of goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency: Regulation 14(1)(h).1
[4] The basis for the Commissioners' decision was that, although each Invoice identified specific types of mobile phone, no such supplies could in fact have been made to Infinity, because, at the relevant times, no or else an insufficient number of such phones had been manufactured and released. In short, the phones did not (according to the Commissioners) exist for them to be supplied. The Commissioners subsequently determined that there were no grounds on which they could exercise their discretion to allow the input tax deductions.
[5] Later in 2006, the Commissioners notified Infinity that its claims to zero-rating on its own supplies of various mobile phones to other Member States of the European Union had been refused. The Commissioners' position was that there was no information which proved that these goods had been physically removed or exported from the United Kingdom; that the information supplied by Infinity was inadequate; and that the supplies therefore failed to satisfy the relevant conditions for zero-rating. The Commissioners took particular account of Infinity's use of Magic Transport BV (“Magic Transport”) to ship the supplies. Magic Transport was known to be a fraudulent freight forwarder. The Commissioners did not consider that Infinity had acted in good faith and had taken every reasonable measure to ensure that its supply did not lead to participation in tax evasion, and so the Commissioners determined that Infinity's claims to zero-rating on its own supplies must be refused.
[6] Infinity appealed against both decisions of the Commissioners. We shall refer to Infinity's appeal against the Commissioners' decision that the Invoices were not valid invoices2 as the “Invalid Invoice Appeal”. We shall refer to Infinity's appeal against the Commissioners' refusal to permit zero-rating on certain exports by it of mobile phones3 as the “Zero-Rating Appeal”.
[7] Neither the Invalid Invoice Appeal nor the Zero-Rating Appeal has yet reached a substantive hearing before the First-tier Tribunal (Tax Chamber) (the “FTT”). The procedural history is relevant to an understanding of the nature of this appeal to us:
- In 2012, the FTT gave case management directions in both appeals. These included directions to strike out certain witness evidence adduced by the Commissioners, which evidence went to both appeals.
- The Commissioners appealed that decision. Their appeal was heard by the Upper Tribunal (Peter Smith J) in 2015. The appeal was dismissed.44[2015] BVC 515.
- The Commissioners appealed the decision of Peter Smith J to the Court of Appeal. That appeal was heard in October 2016 (Arden, Underhill and Briggs LJJ).55[2016] BVC 40.
- The essence of the dispute between the Commissioners and Infinity was a question of what each party had to establish – in terms of fact – in order to determine each appeal. The Commissioners had explicitly disavowed any allegation of fraud against, or knowledge of fraud on the part of, Infinity. Nevertheless, the Commissioners contended that they should prevail in the case of each appeal. Infinity contended that the Commissioners were, in substance, but improperly and by the back door, alleging fraud; and that the Commissioners must either plead fraud or knowledge of fraud explicitly or else have the appeals determined against...
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