POWA (Jersey) Ltd v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 February 2012 |
| Neutral Citation | [2012] UKUT 50 (TCC) |
| Date | 08 February 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 50 TCC.
Upper Tribunal (Tax and Chancery Chamber).
Roth J.
Michael Patchett-Joyce (instructed by PM & M Accountants) for the appellant.
James Puzey (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following cases were referred to in the judgment:
Blue Sphere Global Ltd v R & C CommrsUNKVAT [2009] EWHC 1150 (Ch); [2009] BVC 580
BonikECASECAS (Case C-285/11) OJ 2011 C238/08 (reference)
Calltel Telecom Ltd v R & C CommrsUNKVAT [2009] EWHC 1081 (Ch); [2009] BVC 555
Compagnie Maritime Belge v EC Commission (Cases C-395/96P and C-396/96P) [2000] ECR I-1365
Criminal proceedings against RECAS (Case C-285/09) 7 December 2010
Edwards v BairstowELRTAX [1956] AC 14; (1955) 36 TC 207
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 v R & C CommrsUNKVAT [2010] EWHC 18 (Ch); [2010] BVC 314
Mobilx Ltd v R & C CommrsUNKVAT [2010] EWCA Civ 517; [2010] BVC 638
Netto Supermarkt GmbH & Co OHG v Finanzamt MalchinECASVAT (Case C-271/06) [2009] BVC 157; [2008] ECR I-771
Optigen Ltd v C & E CommrsECASECASECASVAT (Joined Cases C-354/03, C-355/03 and C-484/03) [2006] BVC 119; [2006] ECR I-483
R (on the application of Teleos plc) v R & C CommrsECASVAT (Case C-409/04) [2008] BVC 705; [2007] ECR I-7797
Value added tax - Input tax - Missing trader intra-Community (MTIC) fraud - Contra-trading - Knowledge or means of knowledge - Whether connection to fraudulent trading as condition of denial of right to deduct input tax required privity of contract with fraudulent trader - The ECJ case-law required involvement in rather than connection with fraud - Whether FTT applied correct test.
This was an appeal by the taxpayer from the decision of the First-tier Tribunal ([2009] UKFTT 360 (TC); [2010] TC 00298) disallowing almost all of its claim for credit for input VAT in the accounting period 06/06 in respect of 37 transactions in computer chips on the ground that it knew or should have known that it was involved in missing trader intra-Community (MTIC) fraud.
The taxpayer was engaged in trading computer chips. It effectively took over the business of another company with the same directors which had been struck off the register of companies for failure to file accounts and ceased trading in about January 2006. Its first VAT return was for the three months period 03/06. It was a return seeking repayment and the sum claimed was paid by HMRC without extended verification. Its second return was for the period 06/06 and claimed a repayment in excess of £1m. That prompted extended verification enquiries which led to the decisions by HMRC under challenge. In each of the 37 relevant transactions the sale by the taxpayer was to a customer overseas and was accordingly zero-rated. The chain of transactions which led to the eventual purchases and sales was traced by HMRC. They showed that the goods had passed through several purchasers and re-sellers within a matter of days, and sometimes within a single day. In many of the chains, the traders in the chain made minute profits, sometimes marking up the chips by only a few pence each. In none of the chains was there a manufacturer or an authorised supplier of chips. The taxpayer was said by HMRC to be the "broker", meaning the trader at the end of the UK chain who sold the goods to a purchaser overseas. Three of the transactions in the present case were said to be examples of "contra-trading". The taxpayer accepted before the FTT that there was evidence of fraud in the earlier part of the chains.
The FTT found that there was no cogent and plausible evidence regarding the manner in which the taxpayer's trade was conducted. The directors knew that there was not a genuine market for the chips. The due diligence undertaken was limited in extent and consequently in its value. The FTT concluded that the taxpayer knew that it was entering into transactions connected with the fraudulent evasion of VAT or had the means of knowing of the connection but deliberately ignored it. On that basis, applying the test in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559; [2006] ECR I-6161, the FTT determined that HMRC were correct in refusing to permit the taxpayer to deduct the input tax which it had incurred.
On appeal the taxpayer submitted that on a proper analysis of the ECJ jurisprudence, even if a trader should have known that there was fraud in a transaction or transactions higher up in the chain, that was not a ground on which its claim for repayment of input tax could be denied since in those circumstances it was not sufficiently involved in the frauds. The test of connection was based on a mistranslation of the ECJ judgment in Kittel and the French words "impliquée dans une fraude" indicated a closer involvement in the fraud than the English expression "connected with".
Held, dismissing the appeal:
1.The taxpayer's linguistic argument was misconceived. Kittel was a development of the case law following the ECJ's decision given only six-months previously in Optigen Ltd v C & E Commrs (Joined Cases C-354/03, C-355/03 and C-484/03) [2006] BVC 119; [2006] ECR I-483. That judgment made clear that when the trader claiming deduction of input tax was not itself fraudulent, the material consideration was whether it knew or had the means of knowing that there was another transaction in the chain characterised by fraud, irrespective of whether that fraudulent trader was one with which the taxable person dealt directly. In Kittel, the taxable person was in fact dealing directly with the fraudulent trader. Not only was there nothing in the reasoning of the ECJ in Optigen, as applied in Kittel, to suggest that the same principle did not equally apply where the taxable person was not dealing directly with a fraudulent trader, but the statement by the ECJ in Kittel asserted positively that the governing principle was the same. That was unsurprising. Under the principle at issue, the question was not whether the trader himself was "involved in" or "connected with" the fraud: the starting point was that no such personal involvement was established. The defining description, "involved in" or "connected with" the fraud, was applied to his transaction. Hence the significance of the second part of the test which had to be satisfied, which addressed the trader's knowledge or means of knowledge. Accordingly, irrespective of whether the test should be expressed as "connected with fraudulent evasion" or "involved in the fraudulent evasion", if the taxpayer should have known that the transactions in which it was engaged were part of a chain in which one or more earlier transactions were fraudulent, albeit that its immediate supplier was not dishonest, that test was satisfied. It followed that the translation point did not make a substantive difference. (Kittel, Optigen and Calltel Telecom Ltd v R & C Commrs [2009] EWHC 1081 (Ch); [2009] BVC 555 applied.)
2.On the basis of that analysis of the ECJ jurisprudence privity with a fraudulent trader was not a condition for refusal to credit input tax. As a matter of English authority, that issue had been determined by the judgment of the Court of Appeal in Mobilx Ltd v R & C Commrs [2010] EWCA Civ 517; [2010] BVC 638. There was no need for a reference to the ECJ of that question based on the translation point.
3.The Court of Appeal's judgment in Mobilx had established that it was insufficient to show that the trader knew or should have known that it was more likely than not that the transaction was connected with fraud. Accordingly, a balance of probabilities in that sense did not form part of the test and the relevant statement in the introductory part of the decision of the FTT was incorrect. However, on reading the decision as a whole, the FTT did in fact apply a test involving the higher standard of knowledge. When it came to its conclusion it formulated the relevant question correctly and held that the taxpayer entered into the transactions knowing or with the means of knowing that they were connected with fraud, regardless of whether the fraud was committed by its immediate counterparty or by a trader at one or removes from it in the chain, or in another chain linked by a contra-trader.
4.The taxpayer's other grounds of appeal failed. The FTT had been entitled to infer that the taxpayer had actual or constructive knowledge; its findings justified the overall conclusion which it reached. There was no requirement that the taxpayer should have known the identity of the contra-trader. No special approach was required in a case involving contra-trading. The correct test as regards knowledge was always the same. HMRC's decision was not disproportionate or discriminatory under EU law. Nor had the FTT erred in its reliance on the finding that the due diligence was superficial.
1.This is an appeal from the decision of the First-tier Tribunal ("FTT") (Judges Colin Bishopp and Peter Whitehead; [2009] UKFTT 360 (TC); [2010] TC 00298) dismissing the appeal of POWA (Jersey) Ltd ("PJL") from the decisions of the respondents ("HMRC") disallowing almost all of its claim for credit for input VAT in the accounting period 06/06. The claims disallowed concerned 37 purchase transactions and the total amount refused was just over £1 million. This is yet a further case of so-called missing trader or "MTIC" fraud on the system of VAT. The decision of the FTT conveniently describes the nature of a typical MTIC fraud as follows:
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5.… goods (almost always small but valuable items such as mobile phones and computer chips) are acquired by a registered trader in the United Kingdom from a trader in another member State, and sold to a second UK-registered trader. The goods then usually change hands several times within the UK...
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