A R Communications & Electronics Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 September 2011 |
| Neutral Citation | [2011] UKFTT 637 (TC) |
| Date | 28 September 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 637 (TC)
Kenneth Mure, QC (Chairman); S A Rae, LLB., WS; Peter Sheppard, F.C.I.S., F.C.I.B., ATII
Eric Robertson, Advocate, instructed by Pravin Jain, Solicitor, and John O'Donnell (BTG Tax) for the Appellant
Peter Gray, QC and Eugene Creally, QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Input Tax - MTIC fraud and contra trading - Whether appellant knew or should have known of connection of transactions with fraud - The appeal was against a decision of the commissioners to deny input tax claims of £1,214,801 in respect of 16 purchases of mobile phones made in June and July 2006 - The commissioners believed that the appellant knew or ought to have known that the transactions were connected with the fraudulent evasion of VAT - It was not claimed by the commissioners that the defaults in the payment of VAT and the appellant's disputed claim for repayment both arose in the same chain of transactions - Their assertion was that the disputed transactions were at the conclusion of a clean chain, on which the appropriate VAT had been paid on the occasion of each re-sale, but that the chain was used to disguise a dirty chain - The commissioners submitted that there were three contra traders each acting as brokers exporting goods at the conclusion of dirty chains in which there had been earlier defaults in the payment of VAT - They contended that these failures were deliberate, that the pattern of trading in each case was fraudulent and that all the transactions formed part of an organised scheme to defraud the revenue - The appellant denied that its transactions were part of a scheme to defraud the commissioners, but argued that that, in any event, the circumstantial evidence was insufficient to impute the necessary degree of knowledge to the company and its director - At most, the director was an "innocent dupe" - The appellant maintained that there was no evidence of actual knowledge of a fraudulent scheme and no justification for inferring constructive knowledge - Held, that the clean or contra chains originated with three other traders and the evidence was that each of these had been knowingly involved in a scheme to defraud the commissioners of VAT or should have known this - The contra chains were initiated to offset or disguise the repayment claims in respect of dirty chains in which the three companies had been brokers - The contra chains had no commercial purpose - Their only conceivable purpose was as a means of disguising a repayment in a related dirty chain by creating a tax offset - In the judgment of the tribunal, the contested transactions in this appeal were the conclusion of a deliberate scheme to defraud the revenue - While certain factors were arguably indicative of actual knowledge on the part of the appellant, the tribunal had no hesitation in concluding in any event that it should have been clear to the appellant that the only reasonable explanation for the nature and pattern of the disputed transactions was that they were tainted with MTIC fraud - The only and inevitable conclusion was that the appellant either knew or ought to have known of the connection of its transactions with fraud - Appeal dismissed.
1.This is an appeal by AR Communications & Electronics Ltd ("ARC") against the refusal by the Respondents ("HMRC") to make a repayment of input tax of £1,214,801.88, all as set out in their letter to ARC dated 25 April 2008 (A/120). The input tax was paid by ARC in respect of 16 purchases of mobile phones made in June and July 2006.
2.HMRC argue that ARC knew or ought to have known that these transactions were connected with the fraudulent evasion of Value Added Tax and found on the decision of the ECJ in Kittel, infra.
3.HMRC agreed to lead under reservation of all questions anent the onus of proof. They led 7 witnesses, 6 of whom were their own officers, and Mr John Fletcher CA, an expert witness who is in private practice. (James McGee, one of their officers, was led simply to enable him to be cross-examined on behalf of ARC, and the evidence of a further HMRC officer, Sangita Parmar, was agreed and admitted, as was part of the evidence of a third officer, Lesley Camm).
4.Value Added Tax Act 1994 section 25Section 25 of the Value Added Tax Act 1994 provides:
(2)subject to the provisions of this section, [a taxable person] is entitled at the end of each accounting period to credit for so much of his input tax as is allowable under Section 26, and then to deduct that amount from any output tax as is due from him.
Section 26(1) provides:
(1)the amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period… as is allowable by or under regulations as being attributable to [taxable supplies].
Value Added Tax Act 1994 section 77ASection 77A makes provision for joint and several liability of traders in supply chains where tax is unpaid.
Counsel referred also to the following authorities in the course of their submissions:
(i) Kittel v Belgium; Belgium v Recolta Recycling SPRL ECASECAS(Joined Cases C-439/04 and C-440/04) [2008] BVC 559
(ii) Mobilx Ltd (in Administration) v R & C Commrs; R & C Commrsv Blue Sphere Global Ltd; Calltel Telecom Ltd & Anor v R & C Commrs UNK[2010] EWCA Civ 517 [2010] BVC 638
(iii) Red 12 Trading Ltd v R & C Commrs [2009] EWHC 2563 [2010] BVC 166
(iv) Euro Stock Shop Ltd [2009] UKFTT 182 (TC) [2010] TC 00137
(v) Blue Sphere Global Ltd v R & C Commrs UNK[2009] EWHC 1150 (Ch) [2009] BVC 580
(vi) Pars Technology Ltd [2011] UKFTT 9 (TC) [2011] TC 00886
(vii) Calltel Telecom Ltd v R & C Commrs UNK[2009] EWHC 1081 (Ch) [2009] BVC 555
(viii) R & C Commrs v Livewire Telecom Ltd; R & C Commrs v Olympia Technology LtdUNK [2009] EWHC 15 (Ch) [2009] BVC 172
(ix) R & C Commrs v Brayfal LtdVAT[2011] BVC 1615
(x) Eyedial Ltd [2011] UKFTT 47 (TC) [2011] TC 00924
(xi) Emblaze Mobility Solutions Ltd [2010] UKFTT 410 (TC) [2011] TC 00680
(xii) Optigen Ltd v C & E CommrsECASECASECAS (Joined Cases C-354/03, C-355/03 and C-484/03) [2006] BVC 119
(xiii) R (on the application of Just Fabulous (UK) Ltd) v R & C Commrs UNK[2007] EWHC 521 (Admin) [2007] BVC 490
(xiv) Emsland-Starke GMBH v Hauptzollamt Hamburg Jonas [2000] ECRI 11,569
Reference was made also to HMRC's Notice no 726 entitled "Joint and Several Liability for Unpaid VAT".
5.At the outset a brief Statement of Agreed Facts was negotiated. In the course of the hearing three Joint Minutes of Admissions in respect of evidence of certain HMRC officers, in particular Sangita Parmar and Lesley Camm were lodged. All these are produced in Vol K together with Parties' Written Submissions.
6.Roderick Stone gave evidence first for HMRC. He is a senior officer of HMRC with specialist experience in the investigation and combating of Missing Trader Intra Community ("MTIC") fraud and has supervised investigation teams. His experience in this area has been acquired over an extended period. He spoke to his Witness Statement (No 13) which, we noted, is dated 19 November 2008. It represents a consideration of this form of fraud, noting relevant developments over the years, identifying key features of it, and describing various counter-measures.
7.Mr Stone explained that there is a succession of "deals" in an MTIC fraud chain whereby the same subjects are bought and sold by several parties in quick succession, often within one day. Firstly, the goods are imported free of VAT into the UK usually from another EU member state by a UK VAT registered trader. That party sells the goods charging output tax, for which he fails to account to HMRC. He is known as the defaulter, or missing trader. The goods are sold on by the defaulter to one of several intermediaries, or buffers. Each of them in successive deals will charge output tax on re-sale and deduct the relative input tax on purchase, typically making a token profit and accounting for a small balance of VAT. The party at the end of the chain, the broker, will export the goods VAT free ("zero-rated"). He will attempt to recover the input tax which he paid on acquisition. If a VAT fraud is suspected by HMRC, arising from the original failure to account by the importer/defaulter, then it may refuse to make any repayment of input tax to the broker. (That, of course, compensates for the initial default at the start of the chain). A chain with a defaulter is known as a dirty chain. The inclusion of several parties or buffers between importer and exporter serves to "distance" the party seeking repayment from the defaulter. Mr Stone explained that following certain measures introduced by HMRC in 2005 applications for repayment of input tax were in instances subjected to an extended verification process. This occasioned a further development in the pattern of MTIC fraud, vizcontra trading. Contra trading serves to camouflage the broker by introducing an offsetting output tax liability which he sets against his repayment claim. This arises from a new chain in which the broker imports a separate batch of goods. He will re-sell these, charging output tax, thus creating a tax liability to be set against his repayment claim in the first (or dirty) chain. The purchaser, or a subsequent purchaser, then exports the goods zero-rated, so generating a repayment claim in his hands as second broker. This second chain is usually short, and serves to further "distance" the party making recovery of input tax from the defaulter. There is no default in the second chain, known as the contra or clean chain. At each stage VAT is duly accounted for. The contra or clean chain extends the original chain in a sense. However, it is "clean" in the sense that the relative VAT is duly accounted for. Different goods are introduced with the contra chain.
8.The...
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