R (Just Fabulous (UK) Ltd) v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Burton |
| Judgment Date | 15 March 2007 |
| Neutral Citation | [2007] EWHC 521 (Admin) |
| Docket Number | Case No: CO/9471/2006; CO/8419/2006 AND CO/5647/2006 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 15 March 2007 |
[2007] EWHC 521 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Mr Justice Burton
Case No: CO/9471/2006; CO/8419/2006 AND CO/5647/2006
Mr Michael Patchett-Joyce (instructed by Dass ) for Just Fabulous and (instructed by Hassan Khan & Co ) for Brayfal and Mr Paul Lasok QC (instructed by Irwin Mitchell) for Evolution and Greystone
Rupert Anderson QC leading Peter de Verneuil Smith (Just Fabulous), Andrew MacNab (Evolution and Greystone) and Mario Angiolini and Alan Bates (Brayfal) (instructed by HM Revenue and Customs ) for the Defendants
Hearing dates: 6, 7 March 2007
This has been the hearing of three applications for judicial review, in each of which the Defendants have been the Commissioners of HM Revenue and Customs ("the Revenue"). Although they were ordered to be heard consecutively, since there was one issue of law to be resolved common to all three, I directed that there be legal submissions on that issue only once; and in the event, not least because the other issues in each application were resolved during the course of the hearing as I shall describe, the three applications were heard together. The first is brought by Just Fabulous (UK) Ltd ("JF"), pursuant to permission granted by Dobbs J; the second by Evolution Export Trading Ltd and Greystone Export Trading Ltd ("Evolution"), by permission of Davis J; and the third by Brayfal Ltd ("Brayfal"), by permission of Sullivan J. All three claims arise out of the fact that the Revenue has not paid sums claimed by them as due in their VAT returns: JF claimed repayment of VAT totalling £19.5 million in respect of their VAT returns for March, April and May 2006, relating to their acquisition of mobile phones from four suppliers; Evolution claimed total repayment of VAT of £30.3m in VAT returns in January, February and March 2006, with regard to mobile phone transactions relating to seven suppliers including Blackstar UK Ltd ("Blackstar"); Brayfal claimed repayment of VAT in the sum of £914,000, in their March 2006 VAT return, again in respect of the acquisition of mobile phones, in their case all from one supplier, Future Communications Ltd ("Future"). In each case the Defendants have been represented by Rupert Anderson QC, leading Peter de Verneuil Smith in the JF case, Andrew MacNab in the Evolution case and Mario Angiolini and Alan Bates in the Brayfal case. Michael Patchett-Joyce appeared for the Claimants in both the JF and Brayfal cases, and Paul Lasok QC appeared for the Claimants in the Evolution case. All their written submissions were extremely thorough, clear and helpful, as were the oral submissions, and I was greatly assisted by the co-operative way in which a hearing, or series of hearings, listed for four days was completed in two.
VAT
The provisions in respect of Value Added Tax, VAT, which originated in the First Council Directive of 11 April 1967 (67/227/EEC) and the Sixth Council Directive (77/388/EEC), are now contained in Council Directive 2006/112/EC of 28 November 2006 ("the 2006 Directive") to which, for convenience, the parties referred, and I shall in this judgment refer. It is not suggested that there is any material change so far as this case is concerned. The Value Added Tax Act 1994 ("the 1994 Act") is the relevant statutory implementation by the United Kingdom. The relevant Articles of the 2006 Directive to which attention was drawn in the course of the hearing are as follows:
"Article 1
1. This Directive establishes the common system of …VAT.
2. The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged.
On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various cost components …
Article 2
1. The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such …
Article 167
A right of deduction shall arise at the time the deductible tax becomes chargeable.
Article 168
Insofar as the goods and services are used for the purposes of the tax 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:
(a) 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 … "
Article 167 was formerly Article 17(1) of the Sixth Council Directive.
It is common ground that when the taxable person charges a customer VAT and receives it, it does so in broad terms as agent for the Revenue to whom, after lawful deductions, it must account: see the judgment of the European Court in Elida Gibbs Ltd v Customs and Excise Commissioners [1996] STC 1387:
"22. It is not, in fact, the taxable persons who themselves bear the burden of VAT. The sole requirement imposed on them, when they take part in the production and distribution process prior to the stage of final taxation, regardless of the number of transactions involved, is that, at each stage of the process, they collect the tax on behalf of the tax authorities and account for it to them. "
Unfortunately the common system of VAT has been very open to abuse and manipulation by fraud. The simplest such example, described as "missing trader fraud " is where a trader receives VAT, but fails to account for it to the Revenue, whether because it goes into liquidation with the monies untraceable or because it was never a real entity at all. In the first instance, of course, that is a loss to the person who has paid over the VAT, for which the missing trader is supposed to account, but as that customer is itself then ordinarily able to recover VAT paid over to its supplier, the loss is incurred by the Revenue as and when it is forced to reimburse what it has not in fact received. Such simple missing trader fraud becomes more sophisticated and complex, once goods are sourced from abroad. When the goods enter into the United Kingdom, they arrive free of VAT and the first purchaser in the United Kingdom is liable to pay what is loosely called an 'acquisition tax': if the system operates lawfully then that importer charges VAT to the next purchaser and receives it from that purchaser, and then accounts to the Revenue for what he has received (his 'output tax' ) less what he has paid out (his 'input tax' ).
MTIC and Carousel Fraud
In what is called a Missing Trader Intra-Community ("MTIC") fraud, the goods – if indeed they exist – are then the subject matter of a series of successive transactions within the United Kingdom, being onsold, usually at a markup, with VAT returns completed by each purchaser, resulting in a small payment to the Revenue, after setting off the input tax against the output tax, until eventually the goods are acquired by an exporter. As goods when exported are no longer the subject of the VAT regime of the Member State, the exporter can claim as a credit, and thus prima facie is entitled to receive from the Revenue, the total sum of VAT due and purportedly paid in respect of the goods exported. Of course, if VAT were indeed 'common' throughout the European Union, such that it did not fall to be repaid and paid on the frontier, this opportunity would not arise.
The description given by way of an attachment to Mr Anderson's skeletons of what is called a "simple" MTIC fraud is set out below: a diagram which explains it is attached as Annexure 1 to this judgment:
" Trader A, in an EU member state (say France), sells taxable goods to Trader B, in another member state (say the UK). In effect, Trader B acquires those goods free of VAT.
Trader B, who is the defaulting trader in the UK (i.e. a trader who incurs liability to VAT but who goes missing without discharging that liability) or the trader using a hijacked VAT number (i.e. a trader using a VAT number belonging to someone else), sell the goods to a UK "buffer" ( UK Buffer 1).
Trader B charges VAT on the supply to UK Buffer 1. Trader B is liable to account to HMRC for the output VAT it has charged to its customer ( UK Buffer 1), but goes missing before discharging that liability to the tax authorities.
The goods can then be sold through a number of UK Buffer companies.
The last UK Buffer company (UK Buffer 3 in this example) sells the goods to the UK Broker 1 (Trader C ). UK Buffer 3 pays HMRC the output VAT charged after having deducted the input VAT paid.
UK Broker 1/Trader C exports the goods to another Member State or outside the EU. Exports are exempt from VAT, but UK Broker 1 /Trader C is entitled to claim a refund of the input VAT paid on the purchase of the goods from HMRC. The resulting tax position is shown in the right hand column [in the diagram] ("VAT returns"). Should HMRC make this repayment, the loss of VAT by Trader B Is crystallised and goes on to fuel the next round of MTIC transactions.
When UK Broker 1/Trader C's purchaser is Trader...
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