Megantic Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 March 2015 |
| Date | 17 March 2015 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge John Walters QC, Mr Michael Sharp FCA
Michael Patchett-Joyce, Counsel, instructed by Litigaid Law, appeared for the Appellant
Jonathan Kinnear QC and Nicholas Chapman, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax – MTIC – Whether connection to fraud established via direct tax loss chains and contra-trading chains – Yes – Whether the appellant knew or should have known of the connection – Yes – Whether alternatively input tax on supplies to the appellant in relation to which the consideration remained unpaid after 6 months should be disallowed pursuant to Value Added Tax Act 1994 (“VATA 1994”), s. 26A – Yes – Appeal dismissed.
[1] Megantic Services Limited (“Megantic”), the appellant in this appeal, appeals against the decision of the Respondents (“HMRC”) to deny to Megantic the right to deduct input tax (or, as Mr Patchett-Joyce, Counsel for Megantic would have it, the benefit of that right) in the sum of £28,096,892.36. The decision (communicated to Megantic by a letter dated 21 May 2007 sent by Roger Mercott, Higher Officer, National Compliance SCT, Staines, Middlesex) related to £18,037,621.53 claimed as a deduction in Megantic's VAT return for the monthly VAT period 05/06 – i.e. May 2006 – and £10,059,270.83 claimed as a deduction in Megantic's VAT return for the monthly period 06/06 – i.e. June 2006.
[2] The input tax with which the appeal is concerned is VAT claimed to be deducted by Megantic in respect of “broker” deals – that is, purchases from UK traders where the goods which were the subject of the purchases (primarily mobile telephones and computer processing units (“CPUs”)) had been supplied by Megantic to traders based outside the UK in supplies, which were zero-rated for that reason, and thus, prima facie gave rise to the right (or the benefit of the right) of deduction in respect of the VAT included in the price paid by Megantic to its (UK) suppliers. There were 157 of these “broker” deals in the May 2006 period and 97 of them in the June 2006 period – 254 in total.
[3] HMRC's primary case is that each of these 254 “broker” deal purchase transactions has been traced back to a loss of VAT which is attributable to fraud and that Megantic (or responsible persons acting on behalf of Megantic) knew or alternatively should have known of this fact when the purchases were transacted. They rely on Kittel v Belgium; Belgium v Recolta Recycling SPRL ECASECASVAT(Joined Cases C-439/04 and C-440/04) [2008] BVC 559 (collectively referred to herein as “Kittel”), in which the Court of Justice of the European Union (“CJEU”) laid down the principle that taxable persons who knew or should have known that the purchases, in relation to which their input tax arose, were connected with fraudulent evasion of VAT, may be deprived of a deduction (or the benefit of a deduction) of the input tax in question (“the Kittel principle”). HMRC advance an alternative argument in relation to purchases in respect of which Megantic had not paid its supplier, submitting that the input tax referable to such purchases is not creditable because section 26A Value Added Tax Act 1994 (“VATA”) applies to that effect.
[4] Of the 254 “broker” deal purchase transactions referred to, HMRC claim to have traced 246 transactions back to a loss of VAT which is attributable to fraud through a connection involving two or more chains of supply (“contra-trading connections”) which they allege were, or were part of, an orchestrated contra-trading scheme, the sole purpose of which was to cheat the revenue. They say that the scheme was a combination of fraudulent evasions of VAT, fraudulent offsettings of input tax claims against output tax liabilities by contra-traders, and claims for repayment of VAT by “brokers” (Megantic in the context of this appeal). They submit that it is at the point of claim for repayment of VAT that the tax loss “crystallises” (cfR (on the application of Just Fabulous (UK) Ltd) v R & C Commrs VAT[2007] BVC 490 per Burton J at [7]).
[5] The remaining 8 “broker” deal purchase transactions (all of which involved CPUs and 6 of which occurred in May 2006 and 2 of which occurred in June 2006) can, on HMRC's case, be traced back directly (i.e. in the same chain of supply) to one of 8 fraudulently defaulting traders (being entities known as Bullfinch, Data Solutions, “a trader purporting to be Okeda”, Resolutions UK, World of Power, 3D Animations, Searchline and Focus Racing, in relation to which we received evidence from Officers Fyffe, Marescaux, Needs, Simmons, Cordwell, Johnson, Lee and Sharrock respectively).
[6] Mr Kinnear QC, for HMRC, made clear to us that HMRC had not attempted to allocate specific tax loss deals (that is purchases of goods in a chain of purchases and sales (supplies) leading back to a fraudulent defaulter) carried out by a contra-trader, who appeared in a chain of supply in relation to which Megantic was the broker (“a first-line contra-trader”), to any specific deal carried out by Megantic, still less had they attempted to allocate specific tax loss deals carried out by a contra-trader, who appeared in a chain of supply in relation to which a first-line contra-trader was the broker (“a second-line contra-trader”), to any specific deal carried out by Megantic.
[7] What he said was that HMRC's case is that first-line contra-traders effectively built up a pool of tax loss in two ways: first by dealing in chains which trace directly back to a fraudulent evasion of VAT by another trader, and secondly by dealing in chains which trace back to another contra-trader (a second-line contra trader) which itself had dealt in chains which trace back directly to a fraudulent evasion of VAT by another trader. The pool of tax loss attributed by HMRC to a first-line contra-trader is the tax loss attributable to the chains tracing back directly from the first-line contra-trader to the fraudulent evasion of VAT by another trader, and also the tax loss attributable to the pool of tax loss accumulated (in the same way) by the second-line contra-trader which features in a chain traced back to it from the first-line contra-trader.
[8] HMRC say that where they identify that Megantic has been a broker in a chain which traces back directly to such a first-line contra-trader, then Megantic's purchase in that chain can be said to be connected, for the purposes of the Kittel principle, to the tax loss so attributed by HMRC to that first-line contra-trader.
[9] The 246 transactions which HMRC claim to have traced back to loss of VAT attributable to fraud through contra-trading connections break down to (a) 151 deals in May 2006, all involving mobile phones, and each of which they say traces back to one of 6 contra traders (David Jacobs UK Limited (“David Jacobs”) – 40 deals; Digital Satellite Limited trading as Powerstrip (“Powerstrip”) – 30 deals; Svenson Commodities Limited, sometimes using the trading name Svenson UK (Svenson Commodities') – 42 deals; Selectwelcome Limited (“Selectwelcome”) – 21 deals; Svenson Worldwide Limited (“Svenson Worldwide”) – 12 deals; or TC Catering Supplies Limited (“TCCS”) – 6 deals); and (b) 95 deals in June 2006, all involving mobile phones, and each of which they say traces back to one of 5 contra traders (David Jacobs – 15 deals; Powerstrip – 18 deals; Svenson Commodities – 12 deals; Selectwelcome – 18 deals; or TCCS – 32 deals).
[10] We received evidence relating to David Jacobs, Powerstrip, Svenson Commodities, Selectwelcome, Svenson Worldwide and TCCS from Officers Davies, Ruler, Williams, Gingell, Rowlands, Lane and Conroy respectively (Officers Lane and Conroy gave evidence relating to TCCS). On HMRC's case, these entities in the context of this appeal are first-line contra-traders.
[11] It is HMRC's case that of the first-line contra-traders, 3 of them, David Jacobs, Powerstrip and Svenson Commodities, acquired goods in deals which were traced back to one of 6 second-line contra-traders, being entities called 385 North, Blackstar, Digikom, Export Tech, Pan Euro and Rioni. Those alleged second-line contra-traders had themselves acquired goods in deals which were traced back, on HMRC's case, to fraudulently defaulting traders.
[12] We received evidence relating to the alleged second-line contra-traders 385 North, Blackstar, Digikom, Export Tech, Pan Euro Ventures and Rioni from Officers Jenner, Sadler, Downer, Berry, Outram and Lewis respectively (Officers Sadler and Downer both gave evidence in respect of both Blackstar and Digikom).
[13] HMRC also sought to deny to Megantic, by a letter dated 9 March 2007, sent to Megantic by Officer Mercott, the right to deduct input tax in respect of “broker” deals transacted in its monthly VAT period 04/06 – i.e. April 2006. The input tax concerned amounted to £9,460,431.75 and related to 99 deals transacted in that month. Megantic appealed this decision also, and their appeal was allowed, by way of directions dated 23 June 2008, following HMRC's failure to serve evidence as directed.
[14] Notwithstanding the fact that Megantic's appeal related to its VAT period 04/06 has been allowed, HMRC continue to rely for the purposes of the appeal before us on evidence relating to the deals carried out in Megantic's VAT period 04/06 which, they submit, is relevant to showing Megantic's pattern of trade and shows that all of Megantic's deals over the 3-month period of trading (April to June 2006 inclusive) can be traced back to fraudulent evasion of VAT. This, they say, is compelling evidence of Megantic's state of knowledge during its VAT periods in issue in this appeal. The 99 deals carried out in April 2006 break down (according to HMRC) into 1 deal tracing back directly to the fraudulent defaulting trader “purporting to be KEP 2004” and 98 deals tracing back to loss of VAT attributable to fraud...
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