Prizeflex Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 October 2016 |
| Neutral Citation | [2016] UKUT 436 (TCC) |
| Date | 17 October 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
The Hon Mr Justice Morgan, Judge Greg Sinfield
David Scorey QC and Stuart Cribb, counsel, instructed by Neumans LLP, appeared for the appellant
Jonathan Kinnear QC and Howard Watkinson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Missing trader intra-Community (MTIC) fraud – Transactions connected with fraud – (1) Whether appellant knew or ought to have known that transactions were connected with fraud – (2) Whether HMRC had alleged dishonesty – (3) Whether HMRC's pleadings were adequate – (4) Whether FTT dealt appropriately with the allegation – (5) Whether evidence of good character of director of appellant company was admissible – Company's appeal dismissed.
The Upper Tribunal (UT) dismissed the company's appeal against the decision of the First-tier Tribunal (FTT) ([2014] TC 04075) that the appellant knew, or ought to have known, that certain transactions were connected with fraud.
Prizeflex Ltd (“Prizeflex”) traded in mobile phones. On 26 July 2004, HMRC wrote to Prizeflex about missing trader intra-Community (“MTIC”) fraud and asked the company to verify certain transactions. Also, HMRC visited Prizeflex on 24 August 2004 and explained joint and several liability for VAT.
In May and June 2006, Prizeflex entered into 16 deals, whereby it purchased mobile phones from suppliers in the UK and immediately sold them to customers registered for VAT in other EU countries for delivery there. As the sales were zero-rated, Prizeflex charged no output VAT. In its VAT returns for the monthly accounting periods of 05/06 and 06/06, Prizeflex claimed input tax of £1,326,470 on the purchases of the phones. It was agreed that each deal had been traced back to a defaulting trader, who had charged VAT, but had then “disappeared” without accounting for it to HMRC.
HMRC decided that Prizeflex was not entitled to deduct the input tax incurred on the purchase of the phones, on the grounds that the transactions were part of a MTIC fraud and that Prizeflex through its director Mr Surana knew, or ought to have known, that the transactions were connected with the fraudulent evasion of VAT.
The FTT decided that Prizeflex:
1) should have known that deal 1 was connected with fraud; and
2) had actual knowledge that all of deals 2 to 16 inclusive were connected with fraud.
Thus, the FTT dismissed the appeal by Prizeflex, which then appealed to the UT.
The UT held that it was not necessary to decide whether Prizeflex, through its director Mr Surana, was either a fraudulent company itself or was involved in a fraudulent conspiracy. The correct issue was whether Prizeflex knew, or should have known, that its transactions were connected with the fraudulent evasion of VAT, i.e. the Kittel test (para. 53 of the decision).
Before the FTT, it appears to have been accepted that Prizeflex was entitled to lead evidence of good character in relation to Mr Surana. HMRC did not submit that such evidence was inadmissible. Against that background, the UT decided that it seemed unlikely that the FTT was giving a legal ruling that good character evidence was inadmissible. It seemed more likely that the FTT meant that the evidence they had been given, as to Mr Surana's character, was not material when considering whether Mr Surana knew, or ought to have known, that the transactions were connected to fraud (para. 54 of the decision).
At the UT, the overarching submission was that HMRC's allegation that Prizeflex knew, or ought to have known, that the transactions were connected to fraud necessarily meant that Prizeflex, in the person of Mr Surana, had acted dishonestly. Prizeflex submitted that HMRC had failed to plead the allegations of fraud distinctly and precisely or to particularise them properly.
Prizeflex submitted that HMRC's allegation of dishonesty must be specifically alleged and adequately particularised, which had not been done (para. 81 of the decision). Prizeflex argued that the FTT had wrongly accepted that HMRC could allege that matters involved dishonesty without specifying those matters fully (para. 83 of the decision). Prizeflex's overarching submission was that the FTT had misunderstood their function. They did not appreciate the nature of the alleged fraud and they must be satisfied that Mr Surana was dishonest (para. 83 of the decision).
In relation to Prizeflex's points on the nature of the alleged fraud, HMRC submitted that they had fully pleaded an orchestrated contrived scheme and Prizeflex had accepted that to be the case. There was evidence in relation to the other participants in the scheme. In relation to the allegations of dishonesty, HMRC submitted that there was no need for the FTT to make a finding on it, as the Kittel test does not require that finding (para. 84 of the decision).
However, the UT did not accept that the FTT had misunderstood or rejected HMRC's primary case (para. 87 of the decision).
The UT concluded at para. 98 that:
1) the case put by HMRC was made clear to Prizeflex;
2) HMRC's case was clearly put in the cross-examination of Mr Surana and he had had a full opportunity to explain his involvement and his state of mind;
3) the central question for the FTT was whether Mr Surana knew, or ought to have known, that the transactions were connected to fraud, i.e. the Kittel test;
4) the FTT had made their findings of fact, based on all of the evidence, that Mr Surana did know of the connection to fraud in relation to deals 2 to 16 and ought to have known of the connection to fraud in relation to deal 1;
5) of central importance to the FTT's decision was the assessment of the evidence given by Mr Surana;
6) the FTT did not accept Mr Surana's evidence on the question of his knowledge; despite his denials when cross-examined, they concluded that he knew of the connection to fraud in relation to deals 2 to 16;
7) those findings of fact answered the central question which the FTT had to decide in considering the appeal; and
8) there was nothing procedurally unfair in relation to the investigation by the FTT of the central question.
Also, if the FTT had committed an error of law by refusing to admit character evidence, the UT decided that it would probably have dismissed the appeal on this point, on the ground that the only possible answer was that the character evidence should be given no weight (para. 119 of the decision).
It was not disputed that, at the FTT, HMRC had not properly pleaded the details of a loan to Prizeflex and how it was relied on in their Amended Statement of Case. However, it is not necessary to plead every fact provided that sufficient facts are pleaded to enable the taxpayer to understand the case that is made against him. The UT held that it was a matter of case management for the FTT as to whether pleadings should be amended and/or the evidence of the loan admitted. In the circumstances, the UT did not consider that the FTT had erred or strayed outside the ambit of their discretion (para. 128 of the decision).
Thus, the UT upheld HMRC's disallowance of the disputed input tax.
In this case, much of the dispute is not of general interest, so this headnote covers only the significant parts of the decision by the UT.
This is the usual victory for HMRC in their difficult fight against MTIC fraud. Mr Surana was unable to provide a convincing commercial explanation, or any written evidence, of why certain deals were entered into, how they were negotiated, how particular buyers were found for particular sellers or vice-versa or why it was that no deals failed, were only partially fulfilled or were fulfilled by more than one supplier, This was compelling evidence that Prizeflex knew that the transactions were fraudulent when it entered into them.
[1] This is an appeal by Prizeflex Limited (“Prizeflex”). Prizeflex traded in mobile phones. In May and June 2006, Prizeflex entered into 16 deals whereby it purchased mobile phones from suppliers in the UK and immediately sold them to customers registered for VAT in other EU countries for delivery there. As the sales were zero-rated supplies, Prizeflex did not charge any output VAT. In its VAT returns for the monthly accounting periods of 05/06 and 06/06, Prizeflex claimed input tax of £1,326,470.87 on the purchases of the mobile phones. Each deal traced back to a defaulting trader who had charged VAT but then disappeared without accounting for it.
[2] In a letter sent on 5 August 2008 (the date was wrongly typed as 5 August 2007), the Respondents (“HMRC”) ruled that Prizeflex was not entitled to deduct input tax incurred on the purchase of the mobile phones on the grounds that the transactions were part of a missing trader intra-Community (“MTIC”) fraud and that Prizeflex, through its director Mr Nishel Surana, knew or ought to have known that the transactions were connected with the fraudulent evasion of VAT.
[3] Prizeflex appealed to the First-tier Tribunal (Tax Chamber) (“FTT”). The appeal was heard over six days in July and August 2014. Prizeflex accepted that each of the 16 transactions had been traced back to a fraudulent trader. The only issue for the FTT was whether Prizeflex, through Mr Surana, knew or should have known that the purchases of mobile phones which it carried out as part of these 16 deals were connected with fraud.
[4] In a decision released on 15 October 2014, [2014] TC 04075, (“the Decision”), the FTT (Judge Rachel Short and Mr Richard Thomas) found that Prizeflex should have known that deal 1 was connected with fraud and had actual knowledge that all of deals 2 to 16 were connected with fraudulent transactions. Accordingly, the FTT held that all of the disputed input tax claimed by Prizeflex should be disallowed and dismissed the appeal.
[5] Save as otherwise indicated, paragraph references...
To continue reading
Request your trial
-
Prizeflex Limited v The Commissioners for HM Revenue and Customs
...[2016] UKUT 0436 (TCC) Appeal number: UT/2015/0017 VALUE ADDED TAX - MTIC – transactions connected with fraud – whether appellant knew or ought to have known that transactions were connected with fraud –whether HMRC’s allegations involved an allegation of dishonesty – whether HMRC’s pleadin......
-
Prizeflex Limited v The Commissioners for Her Majesty's Revenue & Customs
...[2016] UKUT 0436 (TCC) Appeal number: UT/2015/0017 VALUE ADDED TAX - MTIC – transactions connected with fraud – whether appellant knew or ought to have known that transactions were connected with fraud –whether HMRC’s allegations involved an allegation of dishonesty – whether HMRC’s pleadin......