Prizeflex Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 October 2014 |
| Neutral Citation | [2014] UKFTT 963 (TC) |
| Date | 15 October 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 963 (TC)
Judge Rachel Short, Mr Richard Thomas
Simon Farrell QC and Robert Morris instructed by Jeffery Green Russell Solicitors representing the Appellant
Jonathan Kinnear QC and Howard Watkinson, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
VAT - Denial of input tax deductions - Transactions connected with fraudulent transactions - Whether Appellant knew or should have known that the deals were so connected - Kittel and Mobilx applied - Director of Appellant sophisticated and knowledgeable - No commercial explanation for how deals arranged - Large number of similar deals - Mobile phone handsets not new to market - Box ticking due diligence - Should have known that first deal connected to fraud - Knew remaining 15 deals connected to fraud-al dismissed.
[1]This is an appeal against a decision by HMRC of 5 August 2007 that £1,326,470.87 of input tax deductions claimed by Prizeflex Ltd ("Prizeflex") for the VAT periods 05/06 and 06/06 should not be allowed. HMRC denied Prizeflex the right to deduct the input tax because the transactions on which it was incurred were connected with the fraudulent evasion of VAT and Prizeflex knew or should have known of that. Prizeflex appealed against HMRC's decision on 3 September 2008.
[2]The input tax in dispute relates to 16 deals, the details of each of which are set out below.
DealInvoice number |
Invoice DateNet sale (£)Units |
Goods |
Released to market |
12685 |
09-May-06394,500.003,000 |
Nokia 7610 |
May 2004 |
2a2686 |
15-May-06315,000.001,000 |
Nokia 9300i |
Jan 2006 |
2b2686 |
15-May-06357,000.001,000 |
Nokia N91 |
April 2006 |
32688 |
15-May-06263,000.002,000 |
Nokia 7610 |
May 2004 |
42690 |
17-May-06624,000.003,000 |
Nokia N70 |
Sept 2005 |
5a2691 |
18-May-06187,873.50499 |
Nokia N80 |
April 2006 |
5b2691 |
18-May-06160,339.50999 |
Samsung D600 |
Sept 2005 |
62692 |
18-May-06317,000.001,000 |
Nokia 9300i |
Jan 2006 |
72693 |
23-May-06437,000.002,000 |
Sony Ericsson W810i |
March 2006 |
8a2696 |
26-May-0699,300.00600 |
Nokia 6270 |
Sept 2005 |
8b2696 |
26-May-06216,750.00750 |
Nokia N90 |
June 2005 |
9a2698 |
26-May-06514,800.001,300 |
Nokia N80 |
April 2006 |
9b2698 |
26-May-06580,500.001,500 |
Nokia 8800 |
Oct 2005 |
102701 |
30-May-06376,500.001,000 |
Nokia N80 |
April 2006 |
112705 |
13-Jun-06736,000.002,000 |
Nokia 8800 |
Oct 2005 |
12a2707 |
15-Jun-06432,600.001,400 |
Nokia N80 |
April 2006 |
12b2707 |
15-Jun-06362,000.001,000 |
Nokia 8800 |
Oct 2005 |
13a2708 |
19-Jun-06165,000.00500 |
Nokia 8800 |
Oct 2005 |
13b2708 |
19-Jun-0696,500.00500 |
Sony Ericsson W810i |
March 2006 |
142709 |
23-Jun-06327,500.001,000 |
Nokia N91 |
April 2006 |
152710 |
27-Jun-06700,000.002,000 |
Nokia 8800 |
Oct 2005 |
162800 |
03-Jul-06310,000.001,000 |
Nokia N91 |
April 2006 |
Total value of all sales £7,973,163.00
[3]There is no dispute that each of the 16 deals in which Prizeflex was involved for these periods and for which it claims input tax have been traced to a fraudulent trader, the fraud in question being missing trader intra-community fraud ("MTIC") or that the onus is on HMRC to demonstrate that Prizeflex knew or should have known at the time that its deals were connected to fraudulent transactions.
[4]Mr Farrell raised a number of points relating to the evidence provided by HMRC which the Tribunal considered as preliminary matters. Mr Farrell said that there were a number of issues that had not been particularised in HMRC's statement of case and should be excluded from the arguments before the Tribunal. In particular Mr. Farrell took issue with;
(2) Mr Fletcher's status as an expert witness and the potentially biased nature of his evidence.
(3) In previous directions of 20 October 2011 Judge Berner considered whether Mr Fletcher's evidence could be allowed as expert evidence in this case and confirmed that it could be. The Tribunal therefore refused Mr Farrell's request to exclude this evidence but took notice of his comments concerning the weight which should be given to it.
(4) The late inclusion of allegations concerning an alleged loan of £150,000 made on 1 June 2006 to Prizeflex by Mr Mohammed Shabir Patel, a director of First Solutions (England) Ltd and Mobile Solutions, supplier to one of Prizeflex's suppliers. The lateness was exacerbated by the fact that the main witness for Prizeflex involved in the making of this loan, Mr Sumati Surana, was now dead.
(5) The Tribunal agreed with Mr Farrell that HMRC's references to the significance of the alleged loan from Mr Patel in their statement of case had not been clearly set out, but nevertheless did not consider that there was sufficient prejudice to Prizeflex in having to deal with this issue to persuade the Tribunal to exclude the evidence.
(6) A lack of detailed pleadings of fraud, which had to be specifically pleaded. Mr Farrell referred to a number of allegations of fraud which he said had not been specifically pleaded by HMRC including the allegation that Prizeflex had dealt with fraudulent traders in Germany in 2009.
(7) The Tribunal accepted the principle that allegations of fraud had to be specifically pleaded but considered that since it had been accepted by the parties that the deals in dispute had been traced to fraudulent transactions, HMRC's case was based on Prizeflex's knowledge of the fraud of others, rather than its own fraudulent dealings, therefore Mr Farrell's point of principle was not strictly relevant.
[5]The issue in dispute between the parties is whether the deduction for input tax claimed by Prizeflex can be denied by HMRC because it relates to transactions which Prizeflex knew or should have know were connected with fraud.
[6]Prizeflex was incorporated in 1987 and was registered for VAT in February 1988, the VAT1 describing its business as "importer/exporter/wholesale of jute goods and clothes". Mr Sumati Surana was a director of Prizeflex from 1987 until his death in 2009. Nishel Surana ("Mr Surana") was the son of Sumati Surana. He had worked in the business on a part time basis from 2003 after leaving university and working for O2. Mr Surana started working full time for the business and was made a director in April 2006 and had sole responsibility for Prizeflex's mobile phone business. In July 2004 "telecommunication" was added to Prizeflex's VAT trade classification. On 26 May 2005 Prizeflex applied to make VAT returns monthly.
[7]HMRC wrote to Prizeflex on 26 July 2004 setting out the scale of MTIC fraud and asking them to carry out Redhill verification on their counterparties. HMRC visited Prizeflex's offices on 24 August 2004 and explained "joint and several liability" and Redhill verification to Prizeflex and visited again on 24 June 2005 and issued Prizeflex with Notice 726. HMRC wrote to Prizeflex on 1 December 2005 requesting the company's business records for its exports. On 12 September 2006 HMRC Officers Quinn and Ebechidi carried out a further visit to Prizeflex and obtained detailed information about Prizeflex's mobile phone business. Prizeflex notified HMRC by a letter of 24 September 2006 of the details of the due diligence which they undertook on their suppliers and customers.
[8]The relevant EU legislation which sets out a VAT registered trader's right to reclaim input tax was, in the periods concerned, the Sixth VAT Directive (77/388/EEC), at Article 17. The UK legislation implementing the Directive's rules about input tax reclaims is in Value Added Tax Act 1994 section 24sections 24 to Value Added Tax Act 1994 section 26sections 26 Value Added Tax Act 1994. These provisions state that if a registered trader has suffered input tax which is allowable, he has a right to offset this against his output tax liability or receive a repayment if the input tax exceeds the output tax due.
[9]European cases have decided that the general rule in Article 17 is subject to an exception in the following circumstances :
"a taxable person who knew, or should have known that, by his purchase, he was taking part in a transaction connected with the fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the re-sale of the goods"
This is because in such a situation the taxable person aids the perpetrators of the fraud and becomes an accomplice.
In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions is apt to prevent them …
Where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew, or should have known that, by his purchase, he was participating in a transaction connected with the fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.
(Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559).
[10]The UK's own courts have commented on the application of the Kittel decision in Mobilx Ltd (in liquidation) v R & C CommrsVAT[2010] BVC 638 ("Mobilx") a decision of the Court of Appeal:
(The test) includes those who should have known from the circumstances which surround their transactions that they were connected to a fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with the fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.
If he chooses to ignore the obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct…
Even if a trader has asked appropriate...
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