JJ Wholesale Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 September 2012 |
| Neutral Citation | [2012] UKFTT 616 (TC) |
| Date | 19 September 2012 |
| Court | First-tier Tribunal (Tax Chamber) |
[2012] UKFTT 616 (TC)
Judge Michael Tildesley OBE, Shahwah Sadeque
The Appellant did not appear
Jonathan Kinnear QC and Howard Watkinson instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for HMRC
VAT - Input tax - HMRC denied input tax claims totalling £1,048,337.50 in respect of 12 transactions of mobile phones- Was there a VAT Loss? - Yes - Was the loss fraudulent? - Yes - Were the appellant's transactions connected with the fraud? - Yes - Did the appellant know or should have known that its transactions were connected to fraudulent evasion of VAT? - Yes the appellant knew - Appeal dismissed
1.The Appellant appeals HMRC's decision dated 20 November 2009 denying entitlement to the right to deduct input tax in the sum of £1,048,337.50 claimed on 12 transactions involving supplies of mobile phones during accounting periods 07/06 and 10/06.
2.HMRC contends that each of the Appellant's 12 transactions was connected with the fraudulent evasion of VAT and that the Appellant knew or should have known of that fact. The Appellant disagrees, arguing that there was no such connection and, if there was the Appellant did not know and could not have known that the said transactions were connected with the fraudulent evasion of VAT.
3.The Appellant was incorporated on 2 March 2003 and on 16 August 2005 changed its name to JJ Wholesale Ltd. At all times Mr Sukhvir Jaswal was the director and Mrs Baljit Jaswal the company secretary. The Tribunal is satisfied that Mr Jaswal was the controlling mind of the Appellant, and that his state of knowledge can be imputed onto the Appellant for the purposes of determining this Appeal…
4.The Tribunal is obliged to consider four questions in determining this Appeal, and answer them all in the affirmative if the Appellant is to be denied its right to repayment. The questions were approved in the High Court decision of Blue Sphere Global Ltd v R & C CommrsVAT[2009] BVC 580. The four questions are:
(2) Was there a VAT loss?
(3) If so was it occasioned by fraud?
(4) If so were the Appellant's transactions connected with such a fraudulent VAT loss?
(5) If so did the Appellant know or should it have known of such a connection?
5.HMRC has the burden of proving on the balance of probabilities its assertion that the disputed transactions were connected with the fraudulent evasion of VAT and the Appellant knew or should have known of their connection.
6.The Appellant in a notice dated 19 July 2011 accepted that HMRC had sufficiently evidenced the following:
(2) Fraudulent tax losses existed in all the Appellant's supply chains, except its contra trading chain.
(3) Fraudulent tax losses existed at the start of all the dirty supply chains relating to the contra trader.
(4) The stock purchased by the fraudulent companies was imported from other EU Member states and traded through a series of UK companies (as identified in HMRC's evidence), and was the same stock purchased by the Appellant and the contra trader.
7.The Appellant in the same notice identified the following matters in dispute:
(2) The contra-trader was fraudulent.
(3) The Appellant knew or should have known of the fraud in the supply chains for the contra-trader.
(4) The Appellant's transactions were connected to fraud having regard to the proper construction of the joint cases of Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559.
(5) The Appellant knew or should have known of the fraud in the direct tax loss chains.
8.eu-directive 2006/112 article 167 article 168Articles 167 and 168 of Council Directive 2006/112/EC provide:
167A right of deduction shall arise at the time the deductible tax becomes charged.
168.Insofar as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: The VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person.
9.Value Added Tax Act 1994 section 24Sections 24 to 26 of the VAT Act 1994 enact the right to deduct tax paid on goods and services used for the purposes of business into UK legislation. Thus a trader is entitled to the payment of input tax it claims.
10.The Court of Justice 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 established an exception to the right to deduct when the trader knew its transactions were connected to fraud. The Court stated:
51.In the light of the foregoing, it is apparent that 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 their right to deduct the input VAT (see, to that effect, C & E Commrs v Federation of Technological IndustriesECAS (Case C-384/04) [2007] BVC 582, para. 33.
52.It follows that, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, eu-directive 2006/112 article 17Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller, causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.
53.By contrast, the objective criteria which form the basis of the concepts of "supply of goods effected by a taxable person acting as such" and "economic activity" are not met where tax is evaded by the taxable person himself (see Halifax plc v C & E CommrsECAS (Case C-255/02) [2006] BVC 377, para. 59).
54.As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Gemeente Leusden v Staatssecretaris van FinanciënECASECAS (Joined Cases C-487/01 and C-7/02) [2006] BVC 740). Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Kefalas v GreeceECAS (Case C-367/96) [1998] ECR I-2843, [1998] EUECJ C-367/96 para. 20; Diamantis v GreeceECAS (Case C-373/97) [2000] EUECJ C-373/97, [2000] ECR I-1705, para. 33; and I/S Fini H v SkatteministerietECAS (Case C-32/03) [2007] BVC 415, para. 32).
55.Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (see, inter alia, Rompelman v Minister van FinanciënECAS (Case 268/83) (1985) 2 BVC 200157, para. 24; Intercommunale voor Zeewaterontzilting (INZO) v BelgiumECAS (Case C-110/94) [1996] BVC 326, para. 24; and Gabalfrisa SL v Agencia Estatal de Administración Tributaria (AEAT)ECASECAS (Joined Cases C-110/98 to C-147/98) [2002] BVC 333, para. 46). It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends (see I/S Fini H v SkatteministerietECAS (Case C-32/03) [2007] BVC 415, para. 34).
56.In the same way, 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 to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of "supply of goods effected by a taxable person acting as such" and "economic activity".
60.It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, eu-directive 2006/112 article 17Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void - by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller - causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.
61.By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse...
To continue reading
Request your trial
-
Rattan (t/a "Susvin2")
...NetworksTAX[2011] TC 00970, Active Infotech LtdTAX[2011] TC 01188, Davis & Dann Ltd (1080) LtdTAX[2012] TC 01752 and JJ Wholesale LtdTAX[2012] TC 02292. In addition, HMRC pointed out that a number of the other parties identified in these appeals have been found by other Tribunal decisions t......