Regent Commodities Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 February 2010 |
| Neutral Citation | [2010] UKFTT 68 (TC) |
| Date | 12 February 2010 |
| Court | First-tier Tribunal (Tax Chamber) |
[2010] TC 00380
[2010] UKFTT 68 (TC)
David Demack (Judge) (chairman), Miss Susan Stott FCA, CTA (Member)
James Pickup QC, instructed by Bark & Co Solicitors, London, for the Appellant
Christopher Foulkes and Karen Robinson both of counsel instructed by the General Counsel and Solicitor to Her Majesty's Revenue and Customs for the Respondents
VAT - Input tax repayment claim - MTIC fraud whether fraudulent tax losses in deal chains of alleged contra-traders - Yes - Whether connected to appellant - Yes - Whether appellant had knowledge or means of knowledge of connection to fraudulent tax losses - Yes - Appeal dismissed.
Input tax - Dealer in mobile phones and computer central processing units - MTIC fraud - Whether appellant knew or ought to have known that it participated in transactions connected with fraud - The appeal concerned a disputed decision of the commissioners to refuse input tax credit of more that £2m in respect of 15 transactions in period 04/06 - The commissioners took the view that the transactions formed part of an overall scheme to defraud the revenue and that there were features of the transactions and conduct on the part of the appellant which demonstrated that it knew or should have known of the fraudulent connection - The commissioners submitted at the appeal hearing that all the deals were connected with a fraudulent scheme or schemes involving many parties playing a number of roles - Each party knew with whom it should trade in respect of given goods and each was aware that its deals were contrived and fraudulent - Even if the appellant did not have actual knowledge of the fraud, it had means of knowledge - The appellant submitted that there was no evidence that it knew its transactions were connected with fraud or that there was anyone pointing it towards a particular supplier or customer - Had the appellant been told from whom to buy or to whom to sell it would not have undertaken the transaction - The appellant submitted that it had taken all reasonable steps to ensure the transactions were not connected with fraud, including extensive due diligence - Held, that had the appellant followed its own systems and procedures, its case might have had some prospect of success - However, the tribunal identified a number of breaches of procedure and evidence that the appellant was aware that its deals were contrived and pre-arranged - In the judgment of the tribunal, there was compelling evidence that the appellant knew its transactions were connected with fraud and that there was a guiding hand behind the company's transactions - The appellant failed to take all reasonable steps to ensure its transactions were clean including adequate due diligence - The result was that the appellant failed to discover information which ought to have led to further enquiries - The appellant became committed to enter into transactions with four contra-traders linked to other transactions of fraudulent traders - Had the appellant asked the appropriate questions it would have concluded that the uncommercial features of the deals could only be explained by taking into account other fraudulent transactions - Appeal dismissed.
1. On or about 12 May 2006 the appellant company, Regent Commodities Ltd ("Regent"), a wholesale dealer in mobile phones and CPUs, submitted its VAT return for the quarterly period 04/06, claiming input tax repayment of £3,083,775.37. The return was selected for in-depth verification. On completion of the verification process into part of the claim, on 6 June 2007 to be precise, Regent was notified by letter that the Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") had rejected its claim for £2,027,626.75 in respect of 15 transactions in the period. The Commissioners satisfied themselves that the transactions in print formed part of an overall scheme to defraud the revenue, and that there were features of those transactions and conduct on Regent's part which demonstrated that it knew or should have known that that was the case, in that it either deliberately or recklessly ignored factors which indicated that those transactions may have formed part of such an overall scheme. By Notice of Appeal, given on 11 June 2007, Regent appealed against the decision, "refuting the allegation that they ignored factors which indicated that the relevant transactions formed part of an overall scheme to defraud". On 14 September 2007, the Commissioners issued an amended decision letter increasing the amount of input tax denied to £2,107,822.50. Other elements of Regent's 04/06 repayment claim remain the subject of extended verification, and consequently are not the subject of this appeal.
2. The Commissioners maintain that Regent's claim arises from the "Missing Trader Intra-Community Fraud" variety of VAT fraud known as contra-trading. The "classic way" in which the fraud works was described by Christopher Clarke J in Red 12 Trading Ltd v R & C CommrsVAT[2010] BVC 166 as follows:
2. …Trader A imports goods, commonly computer chips and mobile telephones, into the United Kingdom from the European Union ("EU"). Such an importation does not require the importer to pay any VAT on the goods. A then sells the goods to B, charging VAT on the transaction. B pays the VAT to A, for which A is bound to account to HMRC. There are then a series of sales from B to C to E (or more). These sales are accounted for in the ordinary way. Thus C will pay B an amount which includes VAT. B will account to HMRC for the VAT it has received from C, but will claim to deduct (as an input tax) the output tax that A has charged to B. The same will happen, mutatis mutandis, as between C and D. The company at the end of the chain - E - will then export the goods to a purchaser in the EU. Exports are zero-rated for tax purposes, so trader E will receive no VAT. He will have paid input tax but because the goods have been exported he is entitled to claim it back from HMRC. The chains in question may be quite long. The deals giving rise to them may be effected within a single day. Often none of the traders themselves take delivery of the goods which are held by freight forwarders.
5. A jargon has developed to describe the participants in the fraud. The importer is known as "the defaulter". The intermediate traders between the defaulter and the exporter are known as "buffers" because they serve to hide the link between the importer and the exporter, and are often numbered "buffer 1, buffer 2 etc. The company which exports the goods is known as "the broker".
3. Contra-trading is fully explained in paragraphs 9 and 10 of the judgment of Burton J in R (on the application of Just Fabulous (UK) Ltd) v R & C CommrsVAT[2007] BVC 490. In Red12 Trading, Christopher Clarke J summarised its effect as follows:
7. …Goods are sold in a chain ("the dirty chain") through one or more buffer companies to (in the end) the broker ("Broker 1") which exports them, thus generating a claim for repayment. Broker 1 then acquires (actually or purportedly) goods, not necessarily of the same type, but of equivalent value from an EU trader and sells them, usually through one or more buffer companies, to Broker 2 in the UK for a mark up. The effect is that Broker 1 has no claim for repayment of input VAT on the sale to it under the dirty chain, because any such claim is matched by the VAT accountable to HMRC in respect of the sale to Broker 2. On the contrary a small sum may be due to HMRC from Broker 1. The suspicions of HMRC are, by this means, hopefully not aroused. Broker 2 then exports the goods and claims back the total VAT. The overall effect is the same as in the classic version of the fraud; but the exercise has the effect that the party claiming the repayment is not Broker 1 but Broker 2, who is, apparently, part of a chain without a missing trader ("the clean chain"). Broker 2 is party to the fraud.
In the instant case, in relation to the transactions giving rise to the input tax claim in dispute Regent is in the position of Broker 2. In relation to other transactions we must also consider it acted as a buffer in the dirty chain.
4. The Commissioners do not accept that in contra-trading cases the chain connected to the appellant is "clean": they assert that it is fraudulent. They observe that the difference between the two chains is that the clean chain does not have a fraudulent loss in it. Nevertheless, for ease of reference, we shall throughout our decision continue to use the expression "clean chain".
5. The present appeal involves consideration of what the Commissioners describe as "Two-tier" contra-schemes. In such schemes the first contra-trader ("Contra 1") operates in the same way as in a single contra-trading scheme. However, it uses an additional source of supply for the goods it sells to its EU customers. The additional source is a second contra-trader ("Contra 2") which also follows the normal single contra-trader pattern of trading in that the net input tax in a third chain is offset against the net output tax in a fourth chain. Contra 1 takes the position of broker for Contra 2's UK suppliers. That results in Contra 2's repayment claim arising from the third chain "shifting up" the chains to Contra 1. However, because Contra 1 is not acting simply as a broker, the claim does not remain there. Contra 1 is itself offsetting the tax liabilities on different types of supply (input tax in the first and fourth chains against output tax in the second chain). Because of the relative values of the first and fourth chains against the second chain, the bulk of the repayment claim is further shifted to the broker sourcing goods from Contra 1. In such a scheme the repayment claim made by the broker is linked partly to the tax loss at the defaulter in the first chain (Contra 1) and partly to the tax loss at the defaulter...
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