Northside Fleet Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 August 2021 |
| Neutral Citation | [2021] UKFTT 287 (TC) |
| Court | First-tier Tribunal (Tax Chamber) |
[2021] UKFTT 287 (TC)
Judge Tony Beare, Mr Julian Sims
Mr Howard Watkinson, instructed by ASW Solicitors, appeared for the appellant
Ms Joanna Vicary, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Keywords – Denial of relief for input tax on the basis that the Appellant knew or should have known that the supplies in question were connected to the fraudulent evasion of VAT – Denial of zero rating for supplies made by the Appellant on the basis that the Appellant knew or should have known that the supplies in question were connected to the fraudulent evasion of VAT – Conclusion that, in relation to the supplies made to the Appellant, on the balance of probabilities, the Appellant did not know, but should have known, of that connection and appeals dismissed to that extent – Conclusion that, in relation to the supplies made by the Appellant, the appeals succeeded because either the Respondents had not adequately pleaded their case or the Respondents had not satisfied the burden of showing that, on the balance of probabilities, the supplies were connected to the fraudulent evasion of VAT
The FTT dismissed the appellant's appeal against the disallowance of input tax on Kittel grounds. However, its appeal against an HMRC ruling that its sales were connected to fraud was allowed.
The appellant traded in cars. Following investigations HMRC determined that input tax incurred on certain purchases should be disallowed on Kittel grounds because they were connected to fraud and that zero rating on some intra-community sales should not be permitted because the sales were connected to fraud.
In relation to the purchases, input tax can be disallowed on Kittel grounds if HMRC can demonstrate that, on the balance of probabilities (para. 33):
- Tax loss had occurred;
- The tax loss was caused by fraudulent evasion;
- The purchases were connected to that fraudulent evasion; and
- Northside knew or should have known that the purchases were connected to fraudulent evasion.
The FTT heard evidence from HMRC, some of which was subject to challenge by Northside. However, it concluded that in respect of the sales, HMRC had proved that all the purchases under consideration were connected to the fraudulent evasion of VAT.
In respect of the “knew” test, the FTT accepted Northside's evidence that it had not known of the connection. It noted, inter alia, that the company (which was a repayment trader subject to regular compliance checks by HMRC) had traded for five years with no allegation of nefarious activity, that the profits made on the contested transactions was no greater than that made on its uncontested transactions, that the director had been open with HMRC and professional advice had been obtained regarding improvements to the company's procedures (para. 104).
In respect of the “should have known” test, the FTT considered that the evidence was more finely balance and expressed bemusement with some of HMRC's arguments (para. 106). The FTT referred back to the House of Lords decision in Mobilx Ltd (in administration) v R & C Commrs [2010] BVC 638 which established that to satisfy the should have known test “the connection with fraud must be the only reasonable explanation for the transactions and not simply one possible explanation” (para. 113). The FTT concluded that this test had been met and therefore dismissed this aspect of the appeal. The FTT's reasoning, set out at para. 110, included the fact that all the suppliers were recently incorporated and had no trading history. The director of Northside had previously been given information about MTIC fraud by HMRC and he should have 1) realised that this was a feature of businesses which were involved in fraudulent activity and 2) taken action to examine the trades more closely.
The second aspect of the appeal concerned whether or not Northside could zero rate sales to VAT registered customers in the Republic of Ireland. The ECJ established in Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága (Case C-273/11) [2012] BVC 640 that “if a supplier did not every step reasonably asked of it to satisfy itself that a transaction … does not result in its participation in fraud” that zero rating could be denied.
The FTT first considered whether HMRC could demonstrate, on the balance of probabilities, that the sales in question were connected to the fraudulent evasion of VAT. In respect of many sales it concluded that HMRC had not discharged this burden. However, in relation to the sale of five vehicles it was satisfied that there was a connection to fraud, i.e. the FTT was satisfied that the company purchasing the car committed a VAT fraud in relation to the vehicle (para. 116).
The FTT then considered whether Northside knew or should have known of that its sale was connected to VAT fraud. The FTT was not satisfied that the evidence presented by HMRC demonstrated that either of these tests were met. This part of the appeal was dismissed.
In cases concerning the application of Kittel grounds the burden of proof is on HMRC. HMRC must evidence that, on the balance of probabilities, the taxpayer knew or should have known that its transactions are connected to fraud (the fraud usually being committed by someone else in the supply chain). In this case, the FTT described the evidence presented by HMRC as both bemusing and puzzling but, nonetheless, concluded that the appellant should have known of a connection to fraud. The appellant will be understandably disappointed in this. The case provides another demonstration of how important it is that businesses take the risks of being inadvertently caught up in fraudulent supply chains seriously.
| HEADING | PAGE NUMBER |
| INTRODUCTION | 1 |
| THE LAW | 2 |
| THE MATTERS IN DISPUTE | 7 |
| THE AGREED FACTS | 13 |
| THE EVIDENCE | 17 |
| FINDINGS OF FACT | 36 |
| DISCUSSION | 41 |
| CONCLUSION | 59 |
| RIGHT TO APPLY FOR PERMISSION TO APPEAL | 60 |
| APPENDIX | 61 |
[1] This appeal relates to:
- decisions by the Respondents to deny the Appellant the right to recover input tax for the purposes of value added tax (VAT) in respect of certain acquisitions made by the Appellant in the Appellant's monthly VAT accounting periods ending 01/17, 02/17, 03/17, 04/17, 05/17, 06/17 and 07/17; and
- decisions by the Respondents to refuse zero-rating for certain supplies made by the Appellant in the Appellant's monthly VAT accounting periods ending 01/17, 02/17, 03/17, 04/17, 05/17, 06/17 and 07/17 and the final VAT accounting period before its de-registration (referred to as VAT accounting period 99/99).
[2] The Respondents have based their decision to deny the input tax recovery on the basis that the transactions in question were connected to the fraudulent evasion of VAT and the Appellant either knew or should have known that that was the case, under the principle set out in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 (“Kittel”), whilst the Respondents have based their decision to refuse zero-rating on the basis that the transactions in question were connected to the fraudulent evasion of VAT and the Appellant either knew or should have known that that was the case, under the principle set out in Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága (Case C-273/11) [2012] BVC 640(“Mecsek”).
[3] The aggregate amount of input tax at stake in relation to the decisions described in paragraph 1(1) above – following an amendment to the figures in issue on 27 December 2018 – is £197,469.40 (£142,936.06 plus £54,533.34), whilst the aggregate amount of output tax at stake in relation to the decisions mentioned in paragraph 1(2) above is £470,715.99 (£351,250.00 plus £119,465.99).
[4] Originally, these matters were the subject of two separate appeals but those appeals were consolidated by way of a direction made by the First-tier Tribunal on 2 August 2019.
[5] There is no dispute between the parties in relation to the law which is relevant to this appeal.
[6] Articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT (the “2006 Directive”) provide as follows:
Article 167
A right of deduction shall arise at the time the deductible tax becomes chargeable.
Article 168
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT, which he is liable to pay:
- the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person …
[7] Article 273 of the 2006 Directive provides that “Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers”.
[8] The above provisions are reflected in the UK domestic legislation by sections 24, 25 and 26 of the Value Added Tax Act 1994 (the “VATA”), the relevant parts of which provide as follows:
24 Input tax and output tax
(1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say–
- VAT on the supply to him of any goods or services; …
being (in each case) goods or services used or to be used for the purpose of any business...
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Northside Fleet Ltd v R & C Commissioners
...In Northside Fleet Ltd v R & C Commrs [2022] BVC 509, the Upper Tribunal (UT) upheld the decision of the FTT in Northside Fleet Ltd [2021] TC 08230 that the taxpayer should have known of the connection to fraud and HMRC were therefore correct to deny input tax recovery. Summary Northside wa......