Matrix Europe Ltd ((in Liquidation))
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 November 2011 |
| Neutral Citation | [2011] UKFTT 792 (TC) |
| Date | 29 November 2011 |
| Court | First-tier Tribunal (Tax Chamber) |
[2011] UKFTT 792 (TC)
Richard Barlow (Tribunal Judge) (Chairman); Alban Holden
Michael Patchett-Joyce instructed by Dass & Co solicitors for the Appellant
James Puzey and Claire Dillon instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Input tax - MTIC fraud - Whether the appellant knew or ought to have known that its transactions were connected to fraud - The appeal was against decisions of the commissioners to deny input tax credit of £1,797,830 for the period April 2006 and £1,756,773 and £186,560 for the period May 2006 - The case was a missing trader intra-Community fraud case and the appellant's transactions were what was known as clean chain broker transactions in respect of which input tax was denied on the basis that those transactions were connected with fraudulent transactions through a contra-trader - The commissioners alleged that the appellant either knew or should have known of that connection - The appellant disputed that its transactions were connected to any fraudulent deals, but the tribunal found that input tax claimed by the appellant was connected with fraudulent defaults through contra-traders, as alleged by the commissioners - Its findings that all the contra-traders and defaulters were dishonest led to the conclusions that: the appellant's transactions had the effect of disguising the dishonest transactions by offsetting the input tax; they had the effect of helping the contra-traders to appear to have legitimate businesses; and they provided funds in support of the contra-traders' activities which in part assisted them in carrying out the dirty chain transactions - The remaining question for the tribunal was whether the appellant knew or should have known that its transactions were connected with the fraudulent transactions - Held, that there was insufficient evidence to prove that the appellant knew all the details of the connections between its transactions and the fraudulent transactions - However, the cumulative evidence showed that the appellant did know its transactions were connected with fraud - The appellant's director was evasive and his evidence was unsatisfactory and incredible in a number of respects - The tribunal rejected his evidence that he had been too busy to make notes of vital telephone conversations with counterparties in which terms of business relating to goods worth millions of pounds had been agreed - In the tribunal's opinion, the director lied about that because he knew that the transactions were contrived and that they would proceed however informal the arrangements between the parties were - Even if the appellant was not party to all the details of the fraud, its contrivance was enough to show that it knew the transactions were connected with fraud - Moreover, the terms of payment were that the appellant would only have to pay its suppliers when it was paid by its own customers, with no time limit and no provision for interest in the event of delay - It must have been obvious to the appellant that the transactions could not have been genuine - The willingness of the appellant to deal with its customers on terms very favourable to them was equally proof that it knew the transactions were contrived and connected with fraud - It was not, therefore, entitled to credit for the input tax in question - Appeal dismissed.
1.This is the appeal of Matrix Europe Limited, in liquidation, against the decisions of the respondents to deny the appellant credit for and recovery of input tax in respect of £1,797,830 for the monthly period of April 2006 and £1,756,773.38 and £186,560 for the monthly period of May 2006. We will refer to all tax periods in the form 04/06, by way of example, to refer to a period ending April 2006.
2.Had the respondents agreed to credit the appellant with the sums in dispute, it would have received large repayments for both periods as the outputs to which the disputed input tax relates were zero rated dispatches to EU countries or exports to Canada.
3.By way of introduction only, we mention that the appeal is what is called, in the jargon that has become well known through other appeals, an MTIC case and the appellant's transactions are what are known as clean chain broker transactions in which recovery of input tax is denied on the basis that those transactions are connected with fraudulent transactions through a contra-trader and the appellant either knew or should have known of that connection. In using the terms clean and dirty chains and broker, contra-trader or defaulter we do so only for convenience and, as has been pointed out before by the Tribunal (see the decision in Totel Distribution Ltd), use of those terms, although now well understood, cannot be allowed to prejudge or influence the Tribunal's decision one way or the other as to the correct legal and factual position.
4.We propose to deal with the decision by first setting out the legal issues raised in this appeal and then dealing with the factual issues. The factual issues will address three principal questions requiring findings of fact which we summarise in the following way. Have the respondents proved there were relevant fraudulent defaults? Have the respondents proved that there was a connection, in the relevant sense, between the appellant's transactions and those fraudulent defaults? (The respondents contend the connection was through contra-traders). If so, have the respondents proved that the appellant knew or should have known of the connection which was such as to have entitled them to deny a credit for input tax under the applicable legal principles?
5.In Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 the ECJ held that on the one hand, at [60], where a recipient of a supply buys goods and "did not and could not know that the transaction concerned was connected with fraud" then the Member State in which the recipient is registered for VAT cannot provide, by its domestic law, that such a transaction is void and cannot provide that input tax is not claimable on the transaction. On the other hand, at [61], the ECJ held that "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 that person entitlement to the right to deduct".
6.At [51] the ECJ had also held that a trader who has taken every precaution to ensure that his transaction is not connected with fraud, must be allowed to claim input tax. At [52] the Court held that a person who "did not and could not" know that his transaction was connected with fraud would be entitled to claim input tax despite a connection between his transaction and a VAT fraud.
7.The Court did not explain specifically what it meant by "should have known" but [51] and [52] of the judgment suggest that a trader should take, at least, reasonable precautions to avoid being involved in a transaction connected with fraud. Taken literally "every precaution" and "could not know" might suggest that the test is a very strict one. But bearing in mind [56] to [58] of the judgment we do not read it in that way. The Court used the word "should" for the first time in paragraph [56] and explained the rationale of the rule it then set out at [61]. It said that the rationale was that a person who either knew or should have known of the connection with fraud is to be "regarded as a participant" and that he "aids the perpetrators"; which appears to suggest a degree of blame that would not have attached to a person simply for overlooking a precaution that he might have taken or who could have known of a connection but only in some obscure way.
8.The Court also explained the underlying rationale of the rule in terms of its being for the better prevention of fraud.
9.In light of an argument Mr Patchett-Joyce put to us concerning whether the right to deduct input tax never arises or is lost in cases where a transaction is connected with fraud, which we deal with below, we also note that at [60] the Court referred to the fact that the national law of Belgium, which was in issue, caused the taxpayer to lose the right to deduct input tax and then at [61] it used the neutral phrase that the national court should "refuse entitlement" to deduct without further elaboration. Advocate General Ruiz-Jarabo Colomer had also referred to the loss of a right to deduct at [62] of his opinion.
10.It is well established that the right to deduct input tax is exercisable immediately when a transaction occurs and the ECJ emphasised this in Kittel. One consequence of that is that the applicable circumstances known to the appellant at the time of a transaction and the actions taken by the appellant at or before the transaction occurred are the relevant facts and that information acquired by the appellant subsequently will be irrelevant. Actions taken by the appellant after a transaction will also be irrelevant as such but, of course, they may shed light on what the appellant knew at the time if, for example, they appear to amount to attempts to cover up the true circumstances applying at the time of the transaction.
11.In its judgment in Mobilx Ltd (in Administration) v R & C Commrs; R & C Commrsv Blue Sphere Global Ltd; Calltel Telecom Ltd & Anor v R & C Commrs UNK[2010] EWCA Civ 517 [2010] BVC 638 the Court of Appeal considered in detail the issues raised in cases of this sort and Moses LJ elaborated on the meaning of the "should have known" concept. He held that it is not enough for HMRC to prove that the circumstances were such that it was more likely than not that a transaction in question was connected with fraud and that what they must prove is that the...
To continue reading
Request your trial
-
Daryanani and Others (t/a Teletape)
...a case at first instance. 14.I was referred to non-binding decisions of the FTT on this same issue.Matrix Europe Ltd (In Liquidation) [2011] TC 01628 15.This decision of Judge Barlow in the FTT was issued in November 2011. There was an application by the appellants to stay the issue of the ......
-
Gandalf IT Ltd ((in Administration)) and Others
...included Mahagében and Dávid. These decisions were Unistar Group Ltd v R & C Commrs MAN/07/1441, Matrix Europe Ltd (In Liquidation)TAX[2011] TC 01628, Chandanmal (t/a C Narain Bros)TAX[2012] TC 01883, Daryanani (t/a Teletape)TAX[2012] TC 02005, and Enta Technologies Ltd v R & C Commrs TC/20......