My Secrets Ltd v R & C Commissioners

JurisdictionUK Non-devolved
Judgment Date24 May 2012
Date24 May 2012
CourtUpper Tribunal (Tax and Chancery Chamber)

Upper Tribunal (Tax and Chancery Chamber).

Briggs J.

My Secrets Ltd
and
Revenue and Customs Commissioners

Timothy Brown for the taxpayer.

Mark Bryant-Heron and George Rowell (instructed by the Solicitor to HM Revenue and Customs) for HMRC.

The following cases were referred to in the judgment:

Edwards v BairstowELRTAX [1956] AC 14; (1956) 36 TC 207

Georgiou (t/a Marios Chippery) v C & E CommrsVAT [1996] BVC 236

Megtian Ltd v R & C CommrsUNKVAT [2010] EWHC 18 (Ch); [2010] BVC 314

Mobilx Ltd v R & C CommrsUNKVAT [2010] EWCA Civ 517; [2010] BVC 638

R & C Commrs v S & I Electronics plcVAT [2012] UKUT 87 (TCC); [2012] BVC 1,629

Value added tax - Input tax - Missing trader intra-Community (MTIC) fraud - Mobile phone dealer - HMRC refusing taxpayer input tax credit on purchase of mobile phones - Whether taxpayer knew or ought to have known that transactions connected with fraud - Whether HMRC able to prove fraudulent evasion of VAT in relation to relevant transactions.

This was an appeal by the taxpayer company against a decision of the First-tier Tribunal ([2011] UKFTT 72 (TC); [2011] TC 00950) that it ought to have known that transactions in which it was involved were connected with the fraudulent evasion of VAT.

The taxpayer company was a dealer in mobile phones, but had originally registered for VAT as a textile wholesaler. It appealed against a decision of HMRC to deny input tax of £819,280 on the purchase of mobile phones in seven deals in the months of June and July 2006, which HMRC said were connected with the fraudulent evasion of VAT.

HMRC said that the taxpayer knew or should have known of the connection of its transactions with fraud. They contended that the evidence showed that the trading was contrived. The taxpayer was never left holding any stock and never made a loss. HMRC said that that was simply too good to be true and did not bear any relationship to a genuine commercial market.

The taxpayer submitted that not all of its deal chains were connected with fraud. It had acted in a bona fide manner and was not knowingly involved in transactions connected with fraud. In all the circumstances, it could not be said that it should have known that the only reason for its transactions was that they were connected to fraud.

The First-tier Tribunal allowed the taxpayer's appeal in relation to the July return on the ground that HMRC had failed to show that the member of the taxpayer's supply chain which had failed to account for VAT had acted fraudulently. The appeal in relation to the June 2006 VAT return was dismissed on the grounds that the transactions by reference to which the input tax was claimed were connected with fraud and that the taxpayer ought to have known that they were. Accordingly the appeal was allowed in respect of the July transactions, in which the taxpayer claimed input tax of £371,616, and dismissed in respect of the VAT of £450,187 claimed in June 2006. ([2011] UKFTT 72 (TC); [2011] TC 00950). The taxpayer appealed. There was no challenge to the tribunal's finding that the June transactions were connected with fraud. The sole ground of the appeal was that the tribunal was wrong to conclude that the taxpayer ought to have been aware of that.

Held, dismissing the appeal:

1.Since an appeal against the tribunal's decision was limited to matters of law, it was incumbent upon a taxpayer seeking to challenge an essentially factual finding to show that the challenged finding was not available to the tribunal on a review of the relevant evidence as a whole. (Edwards v Bairstow [1956] AC 14; 36 TC 207, R & C Commrs v S & I Electronics plc [2012] UKUT 87 (TCC); [2012] BVC 1629, Megtian Ltd v R & C Commrs [2010] EWHC 18 (Ch); [2010] BVC 314 and Georgiou v C & E Commrs [1996] BVC 236 considered.)

2.In the present case, the facts before the tribunal in aggregate, far from disclosing any error of law, indicated that the tribunal's decision was plainly correct. The tribunal's finding that the requisite due diligence in relation to the June transactions had been left undone as result of a failure in the taxpayer's internal management and that those transactions, viewed objectively, lacked commercial reality, were fully supported by the evidence.

3.Considered thought or enquiry by the exporter as to why its supplier was content to let it export, rather than to seek to export directly, was plainly an aspect of the reasonable due diligence expected of an exporter which wished to make an input tax VAT claim in connection with its acquisition of the goods. It did not follow that, regardless of any other due diligence, an exporter which did not make that enquiry would fail to qualify for its VAT reclaim. The question in every case was whether, having regard to the enquiries that might have been made by the exporter, such if any enquiries as were made satisfied the requirement (inherent in the scope of the right to reclaim) to take reasonable precautions. The tribunal had considered what might ordinarily be supposed to go through the mind of an honest and reasonable potential exporter in the taxpayer's position, when it was being, in effect, invited to take on the profitable role of intermediate seller in substantial transactions concerning mobile phones without any prior track record or proven ability to find customers. If a tribunal concluded that such questions probably did go through the exporter's mind, but that he deliberately refrained from making enquiry about them, it might lead to a conclusion that the exporter was a dishonest participant, deliberately refraining from finding to be true that which he already suspected. Where, as here, the tribunal had concluded that the two relevant individuals within the exporter did not even ask themselves those questions, the tribunal was entitled to conclude that they were honest but naïve, unreasonable and/or careless in their attitude towards participation in the relevant transactions. The tribunal's finding that the circumstances of the taxpayer's large transactions in a wholly new market could not have been regarded, without serious enquiry, as having arisen from genuine commercial causes, rather than by some form of behind the scenes orchestration, was wholly supported by the facts. (Mobilx Ltd v R & C Commrs ...

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