Mullen and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 21 February 2017 |
| Neutral Citation | [2017] UKFTT 205 (TC) |
| Date | 21 February 2017 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Christopher McNall, Miss Patricia Gordon
Mr Danny McNamee of McNamee McDonnell Solicitors, appeared for the appellants
Ms Joanna Vicary (18–22 April 2016), Counsel, and Mr Joseph Millington (25 July 2016 only), Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Car dealers in Northern Ireland.
First Issue – Denial of input tax – Was there a tax loss? – Yes – Did that loss result from fraudulent evasion? – Yes – Were the transactions subject to the appeal connected with that evasion? – Yes – Did the appellants know or should they have known that the transactions were connected with fraud? – Yes – Appeal on the First Issue dismissed.
Second Issue – Denial of input tax on basis of alleged non-compliant invoice – Did invoice comply with Value Added Tax Regulations 1995 (SI 1995/2518), reg. 14? – No – Did HMRC unreasonably refuse to consider alternative evidence of the charge to VAT? – No – Appeal on the Second Issue dismissed.
[1] By an undated Notice of Appeal the Appellants challenge HMRC's decision dated 19 September 2014 (upheld on review on 22 October 2014) to deny the following amounts of input tax claimed and to amend the appellants' VAT returns accordingly:
(1) |
09/12 |
£56,336.67 |
(2) |
10/12 |
£28,659.50 |
(3) |
2/13 |
£6,750 |
[2] The denied claim for input tax related to 18 individually identified transactions (the Transactions).
[3] The reason given by HMRC for its decision was that HMRC, having conducted an extended verification of the Transactions, had concluded that the Transactions were connected with a scheme to defraud HMRC and that the Appellants knew or ought reasonably to have known that this was so.
[4] In addition to the above, HMRC also decided to deny input tax on one particular purchase of a vehicle during the period 09/12, in the sum of £1,433.33, on the basis that the invoice relied upon, dated 20 September 2012, was invalid. That decision is also challenged.
[5] At one stage, it was contemplated that the present Appeal might be heard at the same time as another Appeal by the same Appellants (TC/2015/00501). However, that course of action was not adopted, principally due to reasons of available time. It suffices to note that TC/2015/00501 was heard by a different composition of the same Tribunal, albeit presided over by the same Judge. But for the avoidance of doubt, the present Appeal has been treated entirely on its own merits. The Tribunal's findings in the other Appeal have not played any part in this one; and vice versa.
[6] This appeal was listed to be heard over five sitting days. Although the Appellants had expressed the view that the appeal could be heard relatively quickly and indeed perhaps in as little time as a single day, the appeal was in fact heard over six sitting days. The first five days were occupied with opening submissions and the taking of evidence. The sixth sitting day, which took place some time later, due to listing difficulties, was for the hearing of final oral submissions, principally at the (proper) insistence of Mr McNamee.
[7] However, when those oral submissions came to be heard (at a hearing which the present Judge ordered must go ahead notwithstanding the unavailability, due to absence on annual leave, of Ms Vicary, Counsel for HMRC who had appeared at the trial) the Appellants, through Mr McNamee, sought to argue that certain concessions said by HMRC to have been made on the Appellants' behalf during the course of the hearing had not in fact been made. Given (i) that HMRC's written closing had been composed on the basis that concessions had been made and that the issues had thereby fallen away, and (ii) Ms Vicary (as Mr McNamee knew) was not going to be present to speak to her written closing, further written submissions were invited.
[8] The proceedings were subject to daily transcription, organised by HMRC. Complete copies of those transcriptions were provided to the Tribunal, to assist in its deliberations, and were also provided to the Appellants' representatives.
[9] We were also assisted by a file of Illustrative Documents which had been prepared by Ms Vicary. Those documents were largely graphical representations of the Transactions – in the nature of deal sheets – and also summaries of the documents which were otherwise located, not always in entirely sensible order, through the voluminous files. We were urged by Mr McNamee not to treat the Illustrative Documents as evidence and we have not done so. We have simply treated them as documents of a conventional kind: as signposts and summaries produced to assist not only the Tribunal but also the Appellants to navigate the factual complexities of this appeal.
[10] The right to deduct input tax is derived from articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 which has been implemented into UK domestic law by sections 24–26 Value Added Tax Act 1994 and regulation 29 of The VAT Regulations 1995 (SI 1995/2518).
[11] In brief terms, if a trader has incurred input tax which is properly allowable, he is entitled to set it against his output tax liability (or to receive a repayment if the input tax credit due to him exceeds that liability). Evidence is required in support of a claim: see article 18 of the Sixth Directive and regulation 29(2) of the 1995 Regulations. Traders are required, amongst other things, to hold or provide any document required by regulation 13 of the 1995 Regulations or such other evidence to support the claim as HMRC may direct.
[12] An exception to the above entitlement was identified by the European Court of Justice in the joined cases Kittel v Belgium; Belgium v Recolta Recycling SPRL ECASECASVAT(Joined Cases C-439/04 and C-440/04) [2008] BVC 559. In a judgment on references for a preliminary ruling, the ECJ articulated the legal basis and circumstances in which the right to deduct may be lawfully denied by the taxation authorities:
[51] […] 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 the right to deduct the input VAT […]
[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 […]
[54] As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive … Community law cannot be relied on for abusive or fraudulent ends […]
[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 … 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 […]
[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.
[…]
[61] … 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.
[13] These principles – often referred to, in shorthand, as the Kittel principles – were amplified and clarified, in a domestic context, by the Court of Appeal in Mobilx Ltd (in administration) v R & C Commrs VAT[2010] BVC 638. Moses LJ (with whom Carnwath LJ, as he then was, and Sir John Chadwick agreed) remarked:
[30] … the Court made clear that the reason why fraud vitiates a transaction is not because it makes the transaction unlawful but rather...
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