NG International Ltd v R & C Commissioners

JurisdictionUK Non-devolved
Judgment Date24 July 2012
Neutral Citation[2012] UKUT 259 (TCC)
Date24 July 2012
CourtUpper Tribunal (Tax and Chancery Chamber)

[2101] UKUT 259 (TCC).

Upper Tribunal (Tax and Chancery Chamber).

Judge Roger Berner, Judge Timothy Herrington.

NG International Ltd
and
Revenue and Customs Commissioners

Lawrence Power (instructed by JH Law Solicitors) for the appellant.

Philip Moser QC (instructed by the Solicitor to HM Revenue and Customs) for the respondents.

The following cases were referred to in the judgment:

Agip (Africa) Ltd v JacksonELR [1990] Ch 265

C & E Commrs v Federation of Technological IndustriesECASVAT (Case C-384/04) [2007] BVC 582; [2006] ECR I-4191

Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECASVAT (Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161

Megtian Ltd (in administration) v R & C CommrsVAT [2010] BVC 314

Mobilx Ltd (in administration) v R & C CommrsVATVAT [2010] BVC 638 (CA); [2009] BVC 205

Netto Supermarkt GmbH & Co OHG v Finanzamt MalchinECASVAT (Case C-271/06) [2009] BVC 157; [2008] ECR I-771

POWA (Jersey) Ltd v R & C CommrsVAT [2012] UKUT 50 (TCC); [2012] BVC 1,596

Red 12 Trading Ltd v R & C CommrsVAT [2010] BVC 166

R & C Commrs v Livewire Telecom LtdVAT [2009] BVC 172

Value added tax - Input tax - Missing trader intra-Community (MTIC) fraud - Constructive knowledge - Due diligence - Mobile phones - Whether taxpayer knew or should have known that transactions connected with fraud - Application of "only reasonable explanation" test - Whether fraud could have been detected by due diligence - Alleged reliance on representations by HMRC - Whether First-tier Tribunal misdirected 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.

HMRC refused the taxpayer's VAT repayment claims in respect of the monthly accounting period ended 31 March 2006 and the three-monthly accounting period ended 30 June 2006. The repayment claims were in respect of 28 transactions and totalled £1,456,401.27. The case was one in which it was alleged that the transactions could be traced directly back to defaulters; there was no allegation of "contra-trading". Except in respect of a small amount of input tax that was not shown to have been attributable to the export sales of mobile phones, the FTT dismissed the taxpayer's appeal. The FTT found that, firstly, there was fraudulent evasion of VAT connected to the relevant transactions. The FTT went on to find that, although it considered that there were some strong indicators in some of the evidence from which it might be inferred that the shareholder of the taxpayer who ran its business was a knowing participant in the fraud, overall it did not consider that HMRC had satisfied the burden of proof in order to find actual knowledge. But the FTT concluded that the features of the transactions and the surrounding circumstances were such that the taxpayer (through the shareholder) should have known that its purchases were connected to the fraudulent evasion of VAT. The taxpayer appealed on the ground that the FTT failed to direct itself properly as to the meaning of the only reasonable explanation for the circumstances being fraud and took too broad an approach. Its case was that if there was more than one (reasonable) explanation which pointed towards legitimate trade then a trader could not be said to have constructive knowledge of a fraud where in this case it was admitted by HMRC that 100 per cent due diligence checks could not have detected the fraud and the taxpayer relied on representations made by HMRC. It further submitted that a person who had not taken all reasonable precautions was not automatically unable to rely on the legality of his own transactions; rather that person should only be prevented from doing so to the extent that, had it conducted perfect due diligence on its suppliers, such due diligence would have indicated the fraud by the missing traders.

Held, allowing the appeals:

1.A trader should have known that his purchase was connected to fraudulent evasion of VAT if, viewed objectively, having regard to all the circumstances surrounding his transactions, he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion. The test was thus clearly and simply defined. It was a test to be applied by reference to all the relevant circumstances. That included circumstantial and similar fact evidence, looking at the totality of the deals effected by the trader and their characteristics, what the trader did or omitted to do and what it could have done, together with the surrounding circumstances. (Mobilx Ltd (in administration) v R & C Commrs [2010] EWCA Civ 517; [2010] BVC 638 applied.)

2.The taxpayer's argument that in applying the test the tribunal had to look at each of the individual facts and circumstances, including each individual transaction, and then assess on the evidence whether there was a reasonable explanation for it other than its connection to fraud put a meaningless gloss on the test. The test was simple and should not be over-refined; so too was the analysis of whether a trader should have known of the connection to fraud. (Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161 and Mobilx considered.)

3.The taking of reasonable precautions included the making of relevant enquiries, but it was not in any sense confined to those enquiries. It also included reasonably having regard to all the relevant circumstances surrounding the trader's transactions. No matter what due diligence a trader had undertaken, and no matter that the due diligence itself would not lead to a discovery of the fraud itself, if the trader should have concluded, by reference to all the surrounding circumstances, that there was no other reasonable explanation for those circumstances, taken as a whole, but that his transactions were connected to fraud, then he would not be entitled to deduct or recover the input tax on his purchase. On the other hand, the right to deduct input tax would not be forfeited even if reasonable precautions had not been taken, if the connection to fraud would not reasonably have been discovered if those precautions had been taken. In such a case the trader would not reasonably have been able to discern the connection to fraud from the surrounding circumstances known to him, and would not have been able to discover that connection from making reasonable enquiries, however extensive those enquiries might have been. It could not in such a case be said that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with fraudulent evasion of VAT. (R & C Commrs v Livewire Telecom Ltd [2009] EWHC 15 (Ch); [2009] BVC 172, Red 12 Trading Ltd v R & C Commrs [2009] EWHC 2563 (Ch); [2010] BVC 166 and Mobilx considered.)

4.The tribunal rejected the argument that recovery of input tax could be denied only to the extent that, had the trader conducted perfect due diligence on its suppliers, or taken all reasonable precautions, the taking of such precautions would have indicated the fraud by the missing traders. What needed to be demonstrated was that the trader should have known of the connection with fraud, and it was not necessary to show constructive knowledge of the fraud by the missing traders as such. (Mobilx followed.)

5.The evidence did not support any broad assertion that it was admitted by HMRC that the fraud was undetectable by due diligence. On that basis the premise of the taxpayer's ground of appeal could not be made out. In any event, the ground of appeal could not have been sustained, even if it had been found that due diligence itself could not have uncovered the connection to fraud. Due diligence was not determinative. All the circumstances had to be taken into account, including what could or could not be discovered by undertaking reasonable due diligence.

6.The FTT made no finding that there had been reliance on representations by HMRC. In any event, reliance on HMRC, even if it could be shown, would be only one factor amongst all the circumstances to be taken into account. It remained necessary to consider, objectively, whether the trader should have known that there was no reasonable explanation for the circumstances surrounding the transaction other than it was connected to fraud.

7.The FTT directed itself properly on the law. It then carried out a thorough evaluation of the evidence before it by reference to a number of particular issues. Those issues comprehensively covered the circumstances of the relevant trading transactions. They included both due diligence carried out on the taxpayer's customers and suppliers, relevant features of its trading activities and other relevant circumstances. It had found that, based on the evidence presented, the case of actual knowledge had not been made out. But it found that the features of the transactions themselves and the surrounding circumstances were such that the taxpayer should have known that its purchases were connected to the fraudulent evasion of VAT. The FTT applied the correct legal test, and its conclusions, based on the evidence that it received, were unimpeachable.

DECISION

1.NG International Limited ("NGI") appeals, with permission of this Tribunal, against the decision of the First-tier Tribunal ("FTT") (Judge Poole and Mr Holden) released on 3 September 2010 ([2010] UKFTT 417 (TC); [2011] TC 00687), dismissing NGI's appeal.

2.The appeal concerns one of the now-familiar MTIC (missing trader intra-community) fraud cases. Essentially, NGI, a dealer in mobile phones, appealed to the FTT against the decision of HMRC to refuse VAT repayment claims in...

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