K Corporation Lifestyle Ltd and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 July 2013 |
| Neutral Citation | [2013] UKFTT 395 (TC) |
| Date | 22 July 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 395 (TC)
Judge Alison McKenna, Lynneth Salisbury.
Andrew Young of counsel instructed by LexLaw Solicitors appeared for the First Appellant
Mr Holland of Dass Solicitors appeared for the Second Appellant
John McLinden QC and Paul O'Doherty of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - whether appellants' transactions were connected to MTIC fraud - yes - whether appellants knew or should have known of connection - yes - appeals dismissed.
[1]These appeals concern fourteen transactions ("the deals") involving the ultimate export of mobile phone handsets to EC member states. In relation to thirteen of the deals, the First Appellant ("K Corp") reclaimed input tax. In relation to the final deal, the Second Appellant ("Hendon") reclaimed input tax. In all but one of the deals, the parties traded with each other. HMRC refused both Appellants' claims for input tax credit on the basis that the deals were connected with the fraudulent evasion of VAT and that both the Appellants, through their directors, knew or should have known this.
[2]HMRC's decision to refuse the First Appellant's claim was contained in its letter dated 14 December 2007, which is appealed by virtue of an amended Notice of Appeal dated 21 December 2007. The refused claim was for input tax credit amounting to £1, 438,621.80 for the VAT periods 02/06 to 06/06.
[3]HMRC's decision to refuse the Second Appellant's claim was contained in a letter dated 27 March 2008, which is appealed by Notice of Appeal dated 29 April 2008. The refused claim was for input tax credit amounting to £295,386.87 in VAT period 07/06.
[4]These appeals were directed to be heard together at a hearing commencing on October 2012. The hearing originally had a time estimate of 15 days as the Appellants' representatives had unfortunately not complied with the Tribunal's earlier direction to notify HMRC which witnesses were required to attend for cross examination. However, as a result of some very late concessions by the First Appellant, it was possible to reduce the number of witnesses so that the live evidence was completed in 9 days. The Tribunal re-convened for an additional half day in December 2012 to hear oral closing submissions. Written closing submissions were provided to the Tribunal (in accordance with its directions) in advance of the oral submissions by the Second Appellant and the Respondent, but the First Appellant's submissions were provided at the final hearing only.
[5]The two Appellants were originally represented by the same solicitors, but on 17 February 2011 the First Appellant filed a notice with the Tribunal to confirm that it had instructed different solicitors. Throughout the hearing of this appeal, the representatives for both Appellants complained that they did not each have a complete set of the papers and could not afford to pay for the photocopying of the extensive bundle. This situation appeared to have arisen out of the arrangements for hand-over of the papers made between the two firms of solicitors and the Tribunal was satisfied that HMRC had not sought to deprive either Appellant of the papers. The Tribunal is grateful to HMRC for making additional copies of documents available to the Appellants at public expense in order to ensure that the hearing was fair and could run smoothly. We also note that HMRC paid for the proceedings to be transcribed as both Appellants said they were unable to afford to contribute to this additional cost. The Tribunal has been greatly assisted by the availability of the transcript, especially as it allowed the Appellants' representatives to attend only on those days when witnesses relevant to their own case were called, but nevertheless to read the evidence heard in their absence when it was e mailed to them at the end of each day.
[6]HMRC has indicated in its Statements of Case its intention to seek its costs from the Appellants if the appeals are dismissed. We have not yet received submissions as to the applicable costs regime for these appeals. We are content to receive any submissions or applications in relation to costs in writing following the promulgation of this decision.
[7]Most of the factual evidence was undisputed in these appeals. The Tribunal had before it a substantial bundle of agreed documentary evidence relating to the deals. The hearing bundle comprised some 24 lever arch files. Some of the documents had been supplied to HMRC by the Appellant companies and some of it was produced by HMRC arising from its own investigations. HMRC's case was, in summary, that the deals were each contrived, and in support of this contention it relied inter alia upon evidence of the Appellants' consistent profit margins, of their banking arrangements, of the circularity of funds and of goods in some of the transaction chains, the use of a shared internet server by different parties in the transaction, and the disproportionate market share of certain types of phone involved in certain trades. It also relied upon a number of particular factors in relation to deals three and eight (see [9] below).
[8]HMRC contended that the characteristics of the deals provided evidence of contrivance or orchestration which, viewed together with the Appellant companies' directors' undisputed knowledge of the risk of MTIC fraud, provided objective evidence on which the Tribunal could properly find that the Appellants had knowledge or the means of knowledge of the fact that they were involved in fraudulent transactions, so as to satisfy the Kittel test.
[9]In deal three, there was a chance inspection by Customs officials of a shipment of mobile phones at Dover on 20 February 2006. This revealed a short shipment (1432 phones were present as opposed to the 2000 phones referred to in the shipping documentation). HMRC's case was that it had simply not mattered to the parties that there was a short shipment because this was not an arms' length transaction. It relied on the evidence of their conduct in relation to the short-shipment. HMRC also contended that deal eight was contrived in order to make up the value of the short-fall in deal three and further suggested that the replacement phones in deal eight may not have existed at all so that an invalid invoice had been produced and the VAT input claim for deal eight could be denied on that basis. Our conclusions as to HMRC's "alternative basis" for refusing the input tax are at [164] below.
[10]The nature of K Corp's case was still unclear at the commencement of the hearing. In advance of the oral evidence given by its director Mr Deepak Kandanchani, both other parties and the Tribunal had (not unreasonably) relied upon the case as set out in pleadings filed on K Corp's behalf and on the contents of Mr Kandanchani's sworn witness statement. However, the late concessions referred to at [4] above had already altered the First Appellant's case before Mr Kandanchani went into the witness box. Subsequently, during his oral testimony, several key components of the case as previously understood were altered and Mr Kandanchani's oral evidence departed materially from that in his earlier witness statement. During Mr Kandanchani's evidence he also produced for the Tribunal fresh documentary evidence, previously unseen even by his own solicitors and counsel.
[11]By the time of Mr Young's closing submissions, K Corp's case in summary was that it accepted that the transactions had caused a VAT loss occasioned by fraud, but that Mr Kandanchani of behalf of K Corp did not have knowledge or the means of knowledge of this state of affairs.
[12]There was only one deal in which Hendon was alleged to be the "broker" (deal fourteen). Mr Holland submitted firstly that the Tribunal could not be satisfied, in relation to this particular deal, that the VAT loss was occasioned by fraud because there was evidence that it had been caused by the insolvency of a trader higher up the chain. He further submitted that, if the Tribunal were satisfied that the VAT loss had been occasioned by fraud, then it was accepted that the fraud was connected to Hendon. However, it was not accepted that Mr Hussain, on behalf of Hendon, had knowledge or the means of knowledge that the company was involved in a fraudulent transaction.
[13]The issues for the Tribunal in cases of alleged MTIC fraud are generally: (i) was there a VAT loss; (ii) if so, was it occasioned by fraud; (iii) if so, were the relevant Appellant's transactions connected with such a fraudulent VAT loss; and (iv) if so, did the relevant Appellant know or should he have known of such a connection.
[14]In this case, it was clear by the time the hearing commenced (although unfortunately not previously) that the First Appellant's appeal was concerned with issue (iv) only, because issues (i) to (iii) were accepted by it (on advice) in relation to all thirteen transactions in which it was the "broker".
[15]The Second Appellant's case had always been that it disputed elements (ii) and (iv) in respect of the single transaction in which it allegedly acted as a "broker".
[16]These then are the central issues for the Tribunal to decide.
[17]It was agreed by the parties and the Tribunal that HMRC bore the burden of proof of showing that the Appellants had knowledge or the means of knowledge that they were involved in fraudulent transactions. It was similarly agreed that the relevant standard of proof to be applied in this matter is the civil standard of the proof on the balance of probabilities.
[18]HMRC's case relies on the exception to the right to reclaim VAT input tax, as identified by the ECJ in its Judgment of 6 July 2006 in Kittel v Belgium; Belgium v Recolta...
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