Mobilx Ltd v HM Comissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Floyd |
| Judgment Date | 03 February 2009 |
| Neutral Citation | [2009] EWHC 133 (Ch) |
| Docket Number | Case No: CH12008/APP/0469 |
| Court | Chancery Division |
| Date | 03 February 2009 |
[2009] EWHC 133 (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: CH12008/APP/0469
Mr Philip Jones QC and Ms Ruth Holtham (instructed by Dickinson Dees) for the Appellant
Mr Mark Cunningham QC and Mr Philip Moser (instructed by the Solicitor and general Counsel for HMRC) for the Respondents
Hearing dates: January 13 th and 14th
Mr Justice Floyd :
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. The appeal is against the Tribunal's order made on 20 th 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.
MTIC fraud
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.
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.
The law
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 paragraph 51, the Court states that
“traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud … must be able to rely on the legality of these transactions …”
At paragraph 61, the Court states
“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.”
Of course, an otherwise innocent trader can only do so much to ascertain whether its supply line is “clean” or “dirty” (to use the expressions used in MTIC fraud cases). It can make enquiries of its immediate supplier, including enquiries as to the diligence with which its immediate supplier checks, in turn, on its supplier. Beyond that, the immediate supplier cannot as a matter of commercial reality be expected to reveal the identity of its own suppliers without risking being cut out of the business.
In the light of the difficulties of making enquiries beyond the immediate supplier, there is a danger in reading paragraph 51 of Kittel in a narrow sense and as suggesting that provided proper checks are carried out by the trader on a supplier, then the trader's claims to repayment of VAT are not capable of challenge. That is not, in my judgment, a correct view. Suspicious indications obtained by a trader from carrying out due diligence checks on its supplier are one, but not the only basis from which it may properly be inferred that a trader knew or should have known of its implication in VAT fraud. The test to be applied is that set out in paragraph 61 of the Judgment, and indeed in the Court's final determination at the end of the judgment. Paragraph 51 needs to be understood in the sense that “all reasonable precautions” may, in some cases, involve ceasing to trade in specified goods in a particular market, at least in the particular manner in which the trader undertakes that trade. Such a situation may conceivably arise where, from other indications available to the trader, the trader knew or should have known that it is more likely than not that, despite all due diligence checking, any further goods traded in the same way will be implicated in VAT fraud.
Since the hearing in the present case, Lewison J has handed down judgment in two appeals concerned with MTIC fraud: Commissioners for HMRC v Livewire and Olympia [2009] EWHC 15 (Ch). I allowed both sides to supply written submissions on any points arising from that judgment. Both sides drew attention to paragraphs 123 where Lewison J is dealing with the Tribunal's reliance by way of analogy on Section 214 of the Insolvency Act 1986 (the section which refers to the knowledge that a diligent person having both the knowledge which the director may reasonably be expected to have and the knowledge that he actually has). He said this:
“123. It is common ground that the supposed analogy with section 214 of the Insolvency Act 1986 is at best unhelpful and at worst positively misleading. First, section 214 requires the court to take into account both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company and also (b) the general knowledge, skill and experience that that director has. In other words (b) is knowledge over and above the minimum to be expected of an ordinarily competent director. It does not allow a lower standard to be adopted. Second, the Kittel test applies to the taxable person. The taxable person was Olympia (the company). The question therefore for the Tribunal was not what a director of Olympia knew or ought to have known, but what the company itself knew or ought to have known. The knowledge of a director of the company may, to be sure, be attributed to a company, but there may be other knowledge (for example that of a senior employee) which, on the facts ought also to be attributed to the company: Meridian Global Funds Management Asia Ltd v Securities Commission [1985] AC 500. Accordingly, in applying the test of what ought to have been known by a director with the knowledge, skill and experience of the particular director concerned the Tribunal, in my judgment, fell into a legal error. To the extent that a domestic analogy is appropriate, the Tribunal applied a lower standard than that which would have been appropriate to support a finding of constructive knowledge.
Guidance issued by HMRC
HMRC (in fact their predecessors HMCE) published a detailed guidance note, Notice 726, in August 2003 concerning the checks which it recommended traders to carry out. It is concerned principally with the notion of joint and several liability 1, but both parties agree that the guidance is equally applicable to the avoiding of challenges to repayment of VAT as in the present case. Mobilx and its advisors were generally aware of the guidance in the Notice.
The document contains chilling warnings about the prevalence of MTIC fraud in the mobile telephone and computer equipment (including CPU) markets. In several places the document makes it clear that the obligation on the trader is to ensure the integrity of his “supply chain”. At paragraph 4.5 the Notice recognises the difficulty of checking on the supplier's supplier, but says nevertheless that
“we would expect you to make a judgment on the integrity of your supply chain”.
Paragraph 4.6 of the Notice makes it clear that HMRC are not specifying exactly what checks should be undertaken. Wisely, it points out that
“A definitive checklist would merely enable fraudsters to ensure they can satisfy such a list”.
Paragraph 4.9 includes the following reassurance that it is not intended to interrupt lawful trade:
“… If you have genuinely done everything you can to check the integrity of the supply chain, can demonstrate you have done so, have taken heed of any indications that VAT may go unpaid and have no other reason to suspect VAT would go unpaid, the joint and several liability provision will not be applied.”
The scope of an appeal from the VAT and Duties Tribunal
Section 11 (1) of the Tribunals and Inquiries Act 1992 provides that an appeal lies to the High Court if a party “… is dissatisfied in point of law” with a decision of the VAT and Duties Tribunal.
In Georgiou v. Customs and Excise Commissioners [1996] STC 463 CA at 476, Evans LJ refers to excerpts from the speeches of Viscount Simonds and Lord Radcliffe in Edwards v. Bairstow [1956] AC 14, 14–15) and observes (at 476 f-g) that
“ .. .it is all too easy for a so-called question of law to become no more than a disguised attack on findings of fact which must be accepted by the courts. As this case demonstrates, it is all too easy for the appeals procedure to the High Court to be abused in this way. Secondly,...
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