Mobilix Ltd ((in Administration)) v HM Revenue and Customs; Blue Sphere Global Ltd v Same; Calltel Telecom Ltd and Another v Same
| Jurisdiction | England & Wales |
| Judge | Mr Justice Floyd,THE CHANCELLOR OF THE HIGH COURT,The Chancellor,A,B |
| Judgment Date | 22 May 2009 |
| Neutral Citation | [2009] EWHC 1081 (Ch),[2009] EWHC 1150 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH 2007 APP 0599,Case No: CH/2009/APP/0066 |
| Date | 22 May 2009 |
[2009] EWHC 1081 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
Before: The Hon Mr Justice Floyd
Case No: CH 2007 APP 0599
Mr Roderick Cordara QC and Mr Jern-Fei Ng (instructed by Jeffrey Green Russell) for the Appellants
Mr Mark Cunningham QC Mr Philip Moser and Ms Fiona Banks (instructed by The Solicitor for HM Revenue and Customs) for the Respondents
Hearing dates: March 17 th, 18 th, 20 th and 23 rd 2009
Mr Justice Floyd:
This is an appeal from a decision of the VAT and Duties Tribunal (Colin Bishopp, Chairman and Cyril Shaw FCA) dated 20 th July 2007. The appeal is against decisions by HMRC to refuse repayment of input tax in respect of claims made for that purpose by the appellants Calltel Telecom Limited (“Calltel”) and Opto Telelinks (Europe) Limited (“Opto”) in the period January to March 2006. The ground on which the repayment of input tax was refused was that the Appellants knew or had the means of knowing that their dealings in the goods in question were connected with a fraud elsewhere in their chain of supply.
The Appellants are related companies under the common ownership of Mohammad Safdar Gohir.
The appeals are concerned with Missing Trader Intra Community (“MTIC”) fraud. The nature of this type of fraud has been described in a number of judgments, see for example the judgment of Lewison J in Livewire & Olympia [2009] EWHC 15 (Ch) at [1]. In its simplest form, the fraud involves a trader who imports goods into the UK and then sells them on within the UK whilst dishonestly failing to account for the output tax on the onward sale. A fraud on the revenue is complete at that point. In more complex forms of the fraud, other traders are involved as well. For example in a “carousel” fraud, the goods are passed through a number of intermediate traders, so-called “buffers”, re-exported and may make further circuits through the UK. Carousel trading is not alleged in this case. The present case is mainly concerned with chains of transactions starting with an importation by a defaulter, followed by a set of intermediate transactions through buffers, followed by a sale to, and export by one of the Appellants.
“Contra-trading” is a device designed to mask or conceal the sort of MTIC fraud I have thus far described. It is also explained in Livewire and Olympia at [1] (iii). This case also involves an allegation of contra-trading.
Once goods the subject of an ordinary MTIC fraud are on the market in the UK they may come into the hands of innocent traders who have the right to offset the input tax which they pay on their purchases from the output tax on their sales. After setting off the input tax against the output tax such traders account for any balance to HMRC. As the Tribunal in the present case clearly recognised, innocent traders have an unanswerable right to do this. However, if the trader knows or has the means of knowing that its transactions are involved with the fraud of others it can lose its right to deduct the input tax which it has paid. The leading case in this field is the decision of the ECJ in Joined Cases C-439/04 and C-440/04 Axel Kittel v Belgium; Belgium v Recolta Recycling [2006] ECR 1-6161; [2008] STC 1537 (hereafter “ Kittel”). At [51]-[61], the Court states that
“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, Case C-384/04 Federation of Technological Industries and Others [2006] ECR I-0000, paragraph 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, Article 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 and Others, paragraph 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 Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I-5337, paragraph 76). Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C-367/96 Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C-373/97 Diamantis [2000] ECR I-1705, paragraph 33; and Case C-32/03 Fini H [2005] ECR I-1599, paragraph 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, paragraph 24; Case C-110/94 INZO [1996] ECR I-857, paragraph 24; and Gabalfrisa, paragraph 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 Fini H, paragraph 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, Article 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 that taxable person entitlement to the right to deduct.”
Kittel was only one (and not the last) in a series of cases concerning VAT fraud considered by the Court of Justice. In Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd v Customs and Excise Commissioners (Joined cases C-354/03, C-355/03 and C-484/03), [2006] STC 419 an attempt was made to refuse repayment of input tax to traders in a chain of transactions in which, unknown to them, the goods had been traded in without accounting for VAT. It was argued that the transactions in question did not qualify for repayment, notwithstanding the innocence of the re-claiming trader. The Court rejected this view:
“47. As the Advocate General observed in para 27 of his opinion, each transaction must therefore be regarded on its own merits and the character of a particular transaction in the chain cannot be altered by earlier or subsequent events. …
51. It follows that transactions such as those at issue in the main proceedings, which are not themselves vitiated by VAT fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of arts 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge.
52. Nor can the right to...
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