Mobilx Ltd ((in Administration)) v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 03 February 2009 |
| Date | 03 February 2009 |
| Court | Chancery Division |
Chancery Division.
Floyd J.
Philip Jones QC and Ruth Holtham (instructed by Dickinson Dees) for the appellant.
Mark Cunningham QC and Philip Moser (instructed by the Solicitor for HM Revenue and Customs) for the respondents.
The following cases were referred to in the judgment:
Dragon Futures LtdVAT No. 19,831; [2007] BVC 4,031
Edwards v BairstowTAXELR (1956) 36 TC 207; [1956] AC 14
Georgiou (t/a Marios Chippery) v C & E CommrsTAX [1996] BTC 5,196
Kittel v Belgium; Belgium v Recolta RecyclingECASECASTAX(Joined Cases C-439/04 and C-440/04) [2008] BTC 5,439; [2006] ECR I-6161
Markem Corp v Zipher LtdUNK [2005] EWCA Civ 267
R & C Commrs v Dempster (t/a Boulevard)UNKTAX [2008] EWHC 63 (Ch); [2008] BTC 5,150
R & C Commrs v Livewire Telecom Ltd; R & C Commrs v Olympia Technology LtdUNKTAX [2009] EWHC 15 (Ch); [2009] BTC 5,173
Value added tax - Missing trader intra-Community (MITC) fraud - Input tax - Right to deduct - Fraud - Dealer in mobile phones and computer chips - HMRC contending that all chains of transactions in three-month period could be traced back to fraudulent tax loss - Taxpayer conceding tax losses occurred but denying knowledge or means of knowledge - Whether warnings and information given by HMRC should have caused taxpayer to recognise that none of its trade untainted - Taxpayer's appeal dismissed.
This was an appeal by the taxpayer against a decision of the VAT and Duties Tribunal ([2008] BVC 4,078) that it had forfeited its right to input tax deduction since, in all the circumstances, it should have known that all its transactions were more likely than not to be implicated in MTIC fraud.
The taxpayer was engaged in the wholesale distribution and export of mobile phones and computer chips (CPUs). Its business was investigated by Revenue and Customs (HMRC) in connection with alleged missing trader intra-Community (MTIC) fraud. A dispute, involving three joined appeals, arose concerning the refusal by HMRC to repay VAT claims by the taxpayer amounting to £7.3m relating to the purchase of computer chips (CPUs) during a period of three months. HMRC stated that all of the goods had been the subject of earlier transactions, the purpose of which was the fraudulent evasion of VAT. They contended that the taxpayer had the means of knowing that purpose and that it consequently lost the right to input tax credit.
HMRC's action in blocking the input tax claims led to the taxpayer ceasing to trade and being placed into administration. The taxpayer conceded that, on the balance of probabilities, traders which preceded it in the chains of supply had failed to account for the output tax due on their supplies and had dishonestly evaded VAT. However, it claimed to be an innocent trader engaged in what it believed to be legitimate transactions and maintained that it had done everything which could be reasonably asked of it to ensure it was not dealing in tainted goods.
The VAT and Duties Tribunal dismissed the taxpayer's appeal against the refusal of input tax credit (Decision No. 20,687; [2008] BVC 4,078). It found that there were three factors of importance: first, that, despite the declared intention of dealing in second-hand phones, the taxpayer began trading in CPUs immediately. The second factor was the extent to which the directors benefited personally from the taxpayer's trade. The third, and decisive, factor was the directors' response to the fact that every traced transaction led back to a defaulter. It should have been apparent to the taxpayer that its transactions were more likely than not to be connected with fraud. Accordingly, the taxpayer had forfeited its right to input tax deduction. The taxpayer appealed arguing that the tribunal had applied the incorrect test in law; and that the tribunal was not entitled to reach the conclusion that the taxpayer knew or should have known that if it continued to deal in CPUs its transactions were more likely than not to be tainted with fraud.
Held, dismissing the appeal:
1. Where it was ascertained, having regard to objective factors, that the supply was 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 was for the national court to refuse that taxable person entitlement to the right to deduct. The tribunal had applied that test and its approach was not open to serious criticism. (Kittel v Belgium; Belgium v Recolta Recycling (Joined Cases C-439/04 and C-440/04) [2008] BTC 5,439; [2006] ECR I-6161 considered.)
2. The tribunal was not entitled to rely on the first and second factors, namely lack of candour and the taxpayer's profits. However there was no error in the manner in which the tribunal approached the third factor. The question in the end for the tribunal was what the taxpayer should have known on the basis of the information supplied to it. The tribunal was entitled to find from the evidence before it that the taxpayer should have known that on the balance of probabilities all its transactions were leading back to defaulting traders.
3. In the circumstances the court was entitled to come to its own conclusion on the evidence which was before the tribunal. Even if the first two factors were ignored, the evidence before the tribunal did establish on the balance of probabilities that the taxpayer should have realised based on objective factors that its transactions were connected with fraud. The tribunal was entitled to come to the conclusion that the taxpayer should have realised that all of its chains were likely to lead back to defaulting traders, unless it ceased trading or significantly changed its manner of doing trade. The evidence clearly established that both the mobile phone and the CPU businesses were ones in which MTIC fraud was rife. There was ample evidence on which to conclude that the taxpayer was well aware that the business it was in was one where it was easy to become involved in MTIC fraud. Against that background, the fact that all its transactions were leading back to defaulters should have alerted a competent company to the fact that its trade was the result of fraud. The information available to the taxpayer of which it was aware, included information that traders were expected to verify the integrity of their supply chains. Due diligence on one's immediate buffer supplier might be all that one could do. But if, despite due diligence on the immediate supplier, chains were being identified as dirty, more drastic action was required. A reasonable and proportionate response was either radically to alter the method of trading or get out of it altogether, which the taxpayer failed to do. There was ample evidence to show that the way in which the taxpayer was carrying on its trade was not protecting it from becoming implicated in dirty chains. Checks on suppliers were not doing the trick. So the fraud was not just present in the business as a whole: it was affecting the very supply chains the taxpayer was actually using. The taxpayer had to exercise independent judgment. There had to come a time when a trader, told that every one of his purchases followed a tainted chain, was compelled to recognise that without a significant change in his trading methods every one of his future purchases was more likely than not also to follow a tainted chain. The trader was not entitled to wait for HMRC to tell him to cease to trade. HMRC's advice was not intended to create a shield for fraud. Putting all those matters together, the court had reached the same conclusion as the tribunal. The taxpayer should have known that all its transactions were more likely than not to be implicated in MTIC fraud.
Floyd J:
[1] This is an appeal from a decision of the VAT and Duties Tribunal in the persons of Mr Colin Bishopp as Chairman and Mr Praful Davda FCA ([2008] BVC 4,078). The appeal is against the Tribunal's order made on 20 May 2008 whereby it dismissed the appeals of Mobilx against HMRC's refusal to repay input tax claimed by Mobilx in its returns for April, May and June 2006.
[2] The case is concerned with missing trader intra-Community ("MTIC") fraud. For present purposes, this type of fraud involves the importation of goods by trader A from another member state of the EU. Trader A sells the imported goods to trader B. Trader A, the importer, fails to account for the VAT due on the sale to trader B. He does so either by disappearing or by "hijacking" another innocent person's VAT registration. A number of sales within the importer's state then take place: for example from trader B to trader C, C to D, D to E and E to F. These intervening traders, B, C, D and E are called "buffers". Trader F, the so-called "broker", then exports the goods, usually to another member state. Trader F is entitled to zero-rate this sale. In the normal course Trader F would be entitled to claim back the VAT it has paid to trader E. In net terms, because the buffer transactions are approximately neutral in VAT terms, the result of trader A's default is that HMRC are repaying VAT that they have never received.
[3] Often fraud of this kind is perpetrated by rings, in which those orchestrating the importation and export are connected. Once the goods are placed into circulation by the fraudulent or disappearing importer, however, it is possible for them to come into the hands of innocent traders. Those who deal in goods and reclaim VAT without any knowledge, actual or constructive, that earlier in the chain there has been a default in the payment of VAT are entitled to repayment. But those who deal in goods when they knew or should have known of VAT fraud at an earlier stage are not entitled to repayment.
[4] The leading case in this field is the decision of the ECJ in Kittel v Belgium; Belgium v Recolta RecyclingECASECAS (Joined Cases C-439/04 and...
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