NG International Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 September 2010 |
| Neutral Citation | [2010] UKFTT 417 (TC) |
| Date | 03 September 2010 |
| Court | First-tier Tribunal (Tax Chamber) |
[2011] TC 00687
[2010] UKFTT 417 (TC)
Kevin Poole (Tribunal Judge); Alban Holden
Lawrence Power of counsel, instructed by JH Law Solicitors for the Appellant
Jonathan Cannan of counsel, instructed by the General Counsel and Solicitor to Her Majesty's Revenue and Customs for the Respondents
Input tax - MTIC fraud - Mobile phones - Whether appellant knew or should have known of existence of fraud - The appellant challenged a decision of the commissioners to refuse VAT repayment claims of £1,456,401, representing input tax on the purchase of mobile phones in the UK for zero-rated onward sale to overseas customers - The commissioners refused to allow the claims on the ground that the appellant's transactions were part of an orchestrated VAT fraud, since an earlier supplier in the supply chains always intended that the VAT due on the sale of the phones within the UK would not be paid - In the commissioners' view, there was a connection between the fraudulently unpaid VAT and the appellant's transactions and the appellant should have known of the fraud - The tribunal was satisfied that there was fraudulent evasion of VAT in connection with each of the appellant's purchases - The remaining question was whether the appellant knew or should have known that by its purchases it was participating in a transaction which was connected with fraud - Held, that there was no clear evidence that the appellant or its director was a knowing participant in the fraud - However, even in the absence of actual knowledge, the features of the transactions and the surrounding circumstances were such that the appellant should have known that its purchases were connected to the fraudulent evasion of VAT - Accordingly, the commissioners' decision to deny input tax credit on all its purchases of mobile phones for overseas sale for the periods in question was correct - However, in respect of period 06/06, additional input tax of £4,813 not related to purchases for overseas sale was denied without good reason - Appeal dismissed subject to repayment of this amount.
1. This appeal is of a type usually referred to as "MTIC" (missing trader intra-community fraud).
2. The appellant company, NG International Limited ("NG"), a dealer in mobile phones, appeals against a decision of the Respondents ("HMRC") to refuse VAT repayment claims by NG of £766,572.10 in respect of the month ended 31 March 2006 and £689,829.171 in respect of the three months ended 30 June 2006. The total amount of VAT repayment claimed by NG is therefore £1,456,401.27. This sum largely (but not exclusively) represents the input VAT suffered by NG on its purchases of mobile phones for zero-rated onward sale by it to customers overseas (both within and outside the EU).
3. HMRC claim to be entitled to refuse payment of the disputed amount because the transactions of NG are, in their view, part of an orchestrated VAT fraud. They say that an earlier supplier (often, but not always demonstrably, the original UK importer/acquirer) of the mobile phones always intended that the VAT due on the sale of those phones within the UK would not be paid, and that VAT has indeed gone unpaid. They say that by tracing the chains of transactions involving these phones into, within and out of the UK, the overall fraud becomes clear; that there is a connection between the fraudulently unpaid VAT and NG's transactions; and that NG (through its director Amarjit Singh Riyait) knew or should have known of the fraud.
4. There are no allegations of what is commonly called "contra-trading": all the transactions of NG the subject of the appeal trace directly back (through chains of UK sales and purchases) to UK defaulters.
5. The leading authority in this area of law is the decision of the ECJ in the joined cases of Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559. The ECJ ruled (at [59] and [61]) that the right to deduct may be refused if:
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
6. In the Court of Appeal judgment in the joined cases of Mobilx Ltd (in Administration) v R & C Commrs; R & C Commrs v Blue Sphere Global Ltd; Calltel Telecom Ltd & Anor v R & C CommrsVAT[2010] BVC 638 at [49] it was made clear that this refusal of the right to deduct does not depend on any specific UK legislation:
It is the obligation of domestic courts to interpret the VATA 1994 in the light of the wording and purpose of the Sixth Directive as understood by the ECJ (Marleasing SA 1990 ECR 1-4135 [1992] 1 CMLR 305) (see, for a full discussion of this obligation, the judgment of Arden LJ in Revenue and Customs Commissioners v IDT Card Services Ireland Limited [2006] EWCA Civ 29 [2006] BVC 244, §§ 69-83). Arden LJ acknowledges, as the ECJ has itself recognised, that the application of the Marleasing principle may result in the imposition of a civil liability where such a liability would not otherwise have been imposed under domestic law (see IDT§ 111). The denial of the right to deduct in this case stems from principles which apply throughout the Community in respect of what is said to be reliance on Community law for fraudulent ends. It can be no objection to that approach to Community law that in purely domestic circumstances a trader might not be regarded as an accessory to fraud. In a sense, the dichotomy between domestic and Community law, in the circumstances of these appeals, is false. In relation to the right to deduct input tax, Community and domestic law are one and the same.
7. The substance of the Axel Kittel test is commonly broken down into its constituent parts in order to apply it, and we find it helpful to do so. For the denial of a right to deduction of input VAT to be justified, each of the following elements must be present (having regard to "objective factors"):
(2) A fraudulent evasion of VAT must be shown to have taken place
(3) A connection between that fraudulent evasion and the trader's purchase must be established
(4) It must be shown that the trader knew or should have known that by its purchase it was participating in a transaction which was connected with fraudulent evasion of VAT
The formulation of the last of these three elements has attracted much discussion and argument in earlier cases, but the Court of Appeal in the leading case of Mobilx/Blue Sphere/Calltell at [56] has effectively approved this formulation of it.
8. This decision sets out first a background summary of the Appellant's history and trading, before turning to the above three elements. The first and second elements fall naturally to be considered together, then the third element will be considered separately.
9. NG was incorporated on 24 July 2003. It was formed by Mr Amarjit Singh Riyait ("Mr Riyait") and Mr Dalbir Singh Sambi ("Mr Sambi"). They initially formed it with a view to importing and exporting electrical and other goods manufactured in China; a friend of Mr Riyait's carried on a similar business and had taken Mr Riyait to a trade fair in China. Mr Riyait had access to a workshop which had been bought jointly with his uncle for use in their building business, but that business had ceased to trade upon the retirement of his uncle in November 2002. The workshop was therefore empty and Mr Riyait intended to use it to store imported goods before their onward sale.
10. Mr Riyait and Mr Sambi were already 60:40 partners in another business called DA Travel, a partnership carrying on a travel agency and money exchange business which they had acquired in November 2001. It was agreed that they would share in the new venture in the same proportions (though board resolutions of NG were only passed on 4 July 2005 to allot the necessary shares). DA Travel carried on business from premises at 332 Leeds Road, Bradford and there was some spare office accommodation available there for the new venture. Mr Riyait and Mr Sambi both became directors of NG and Mr Riyait was company secretary.
11. According to a return made to Companies House and signed by Mr Riyait, up to 31 May 2004 NG's only transaction was the issue of the two subscriber shares to Mr Sambi and Mr Riyait. However Mr Riyait gave evidence that during this period he travelled to China and Hong Kong to research products in which to trade and generally worked to get the business of NG up and running.
12. As part of this activity, Mr Riyait applied for voluntary VAT registration of NG on 10 May 2004. In the Application for Registration (form VAT1), he described the intended business activities of NG as "Import/Export Electrical goods, Toys, household & general goods, soft drinks" and he gave 1 July 2004 as the expected date of NG's first taxable supply. In due course, NG was registered for VAT with effect from 1 July 2004.
13. For approximately the following year, NG carried out a small scale import and distribution trade in goods such as electric fans. Its VAT returns over that period showed the following:
Outputs reported (ex VAT) |
Output VAT reported |
Inputs reported (ex VAT) |
Input VAT reported |
Overall VAT reported |
|
August 04 (2 month period) |
0 |
0 |
£18,252 |
£16,011.51 |
- £16,011.51 |
November 04 (3 month period) |
£48,390 |
£8,468.31 |
0 |
0 |
£8,468.31 |
February 05 (3 month period) |
0 |
0 |
0 |
0 |
0 |
May 05 (3 month period |
£2,992 |
£507.84 |
£29,048 |
£5,432.03 |
-£4,924.19 |
August 05 (3 month period) |
£23,228 |
£4,064.89 |
£3,980 |
£696.62 |
£3,368.27 |
September 05 (1 month period) |
£890 |
£155.75 |
£3,980 |
£99.49 |
£56.26 |
14. NG's accounts for the year to 31 May 2005 showed a turnover of £51,383 and a loss of £11,633. Apart from £100 of share capital, the financing was provided by directors' loans of £134,820. Mr Riyait gave evidence that this was provided by...
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NG International Ltd v R & C Commissioners
...itself - Taxpayer's appeal dismissed. This was an appeal by the taxpayer company against a decision of the First-tier Tribunal ([2010] UKFTT 417 (TC); [2011] TC 00687) substantially upholding the decision of HMRC to refuse VAT repayment claims in respect of transactions in mobile phones. HM......