Revenue and Customs Commissioners v CCA Distribution Ltd ((in Administration))
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 June 2015 |
| Neutral Citation | [2015] UKUT 513 (TCC) |
| Date | 24 June 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Morgan, Judge Timothy Herrington
Jeremy Benson QC, Christopher Kerr and Ben Hayhurst instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Appellant
James Pickup QC and Simon Taylor, instructed by Smith & Williamson LLP appeared for the Respondent
Value added tax – Input tax – MTIC appeal – Whether First-tier Tribunal made errors of law in concluding that taxpayer neither knew or should have known that its transactions were connected to fraud – Yes – Appeal allowed and case remitted for reconsideration to differently constituted tribunal.
[1] This is an appeal against a decision of the First-tier Tribunal (Judge Malachy Cornwell-Kelly and Mr John Agboola ACCA) (“the F-tT”) released on 22 April 2013 (“the Decision”). The F-tT allowed an appeal by the respondent, CCA Distribution Limited (“CCA”), against decisions of the appellant (“HMRC”) to deny CCA the right to deduct input tax in excess of £9.8 million in relation to purchases of mobile phones made in three VAT periods, namely 04/06, 05/06 and 06/06.
[2] HMRC denied CCA its claimed right to deduct input tax in relation to 39 purchase transactions effected by CCA in those VAT periods. In each of those deals CCA purchased the goods from one of three UK companies and exported the goods to one of a number of EU companies. The grounds on which HMRC refused the credit of input tax were that it was satisfied that the transactions concerned formed part of an overall scheme to defraud the revenue and that there were features of those transactions and conduct on the part of CCA which demonstrated that CCA knew or should have known that this was the case. It will be apparent from this short introduction that this was what is commonly known as an MTIC appeal. We will not set out in this decision a full description of what is typically involved in this type of case but we will assume that the reader is familiar with the concept, and the conventional terms used, in such appeals.
[3] CCA accepted the allegation of connection with fraud but disputed HMRC's finding that it knew or should have known that the transactions in question were so connected. The F-tT were split on this issue. Judge Cornwell-Kelly (“the Judge”) exercised his casting vote in favour of allowing CCA's appeal pursuant to article 8 of the First-tier Tribunal and Upper Tribunal (Composition of Tribunal) Order 2008. Mr Agboola (“the Member”) would have dismissed the appeal. Much of the Decision is taken up with findings which both members of the F-tT were prepared to make. The Judge then set out the reasoning on which he alone relied and this was followed by the reasoning relied upon by the Member in support of his conclusion that there was a fraudulent scheme going on and CCA was a willing participant in the scheme.
[4] It is helpful as further background to note that in respect of each of the 39 transactions with which this appeal is concerned CCA acquired the goods from what is known as a “contra-trader”. This is a term coined by HMRC to describe a fraudulent trader which (a) acquires goods from a UK trader as a participant in a chain of transactions which includes a defaulting trader (known as the “dirty chain”) and exports them to an EU trader claiming a credit for input tax (“the dirty input tax”) on the purchase and (b) in a chain which includes no defaulter (known as the “clean chain”), imports goods from an EU trader and sells them to another UK trader and then offsets the dirty input tax against the clean output tax he is liable to pay HMRC in respect of the sale to the second UK trader. The purpose of this is to attempt to turn the dirty input tax into clean input tax in the hands of the second UK trader (who himself exports the goods to an EU trader) and to distance the second UK trader from the default in the dirty chain so that he could not know of his connection to the default. It also means that it is more difficult for HMRC to discover the connection.
[5] In respect of the 39 transactions referred to above, CCA is in the position of the second UK trader in that it acquired the goods concerned from what it accepted was a fraudulent contra-trader before exporting them. It was therefore at risk of being denied credit for input tax on its purchases if HMRC were to discover the role of the fraudulent contra-trader and were to establish that CCA knew or should have known of the connection to fraud in the dirty chain. CCA also featured as a “buffer” in a further 117 transactions where it was positioned in a dirty chain between another UK trader from whom it acquired goods which were sold to two of the three contra traders it dealt with in the clean chains. HMRC did not seek to deny CCA credit for input tax in relation to these deals, but as we shall see, these transactions are relevant to the fraudulent scheme as a whole. HMRC's position is that the identity of CCA's customer and supplier was crucial to the scheme and to the circulation of money through pre-ordained movements.
[6] HMRC contends that CCA was not a free agent but had agreed to buy from a supplier in the scheme and to sell to a customer in the scheme to ensure that the funds continued to circulate and it would not have been rational for the organisers of the fraud to have used a conduit for the goods and money that was in ignorance of the scheme. This contention was in essence accepted by the Member in his statement of dissent. On the other hand, CCA points to the fact that it needs to look to HMRC for repayment of its input tax and risks its own capital pending HMRC's scrutiny of its claim for credit. CCA is thus fully exposed in the way the contra-trader, who does not need to seek a repayment from HMRC, is not exposed. CCA's alternative to HMRC's contention is that it was an innocent trader unwittingly caught up in the scheme. The Judge found that HMRC had not made out its case on the question of knowledge or means of knowledge as a consequence of which, through the exercise of the Judge's casting vote, the appeal was allowed. The question for us is whether the F-tT made errors of law in the course of coming to its conclusions.
[7] The F-tT correctly set out the legal framework for its decision and it referred in detail to the principal cases which were relevant. In particular, it identified and set out the legal principles that govern the circumstances in which the right to claim credit for input tax can be denied. We need not summarise everything which was stated by the F-tT in this respect as it will suffice to refer to the two main authorities which are relevant. At [7], the F-tT referred to the findings of the European Court of Justice in Kittel v Belgium; Belgium v Recolta Recycling SPRL ECASECASVAT(Joined Cases C-439/04 and C-440/04) [2008] BVC 559 as analysed by Moses LJ in his judgment in the Court of Appeal in Mobilx Ltd (in Administration) v R & C Commrs VAT[2010] BVC 638 where Moses LJ said at [41] and [42] :
[41] In Kittel after paragraph 55 the [European] Court developed its established principles in relation to fraudulent evasion. It extended the principle, that the objective criteria are not met where tax is evaded, beyond evasion by the taxable person himself to the position of those who knew or should have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT:–
[56] In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with 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 resale of the goods.
[57] That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.
[58] In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.
[59] Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of “supply of goods effected by a taxable person acting as such” and “economic activity”.
[emphasis added]
The words I have emphasised “in the same way” and “therefore” link those paragraphs to the earlier paragraphs between 53–55. They demonstrate the basis for the development of the Court's approach. It extended the category of participants who fall outwith the objective criteria to those who knew or should have known of the connection between their purchase and fraudulent evasion. Kittel did represent a development of the law because it enlarged the category of participants to those who themselves had no intention of committing fraud but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants. Once such traders were treated as participants their transactions did not meet the objective criteria determining the scope of the right to deduct.
[42] By the concluding words of paragraph 59 the Court must be taken to mean that even where the transaction in question would otherwise meet the objective criteria which the Court identified, it will not do so in a case where a person is to be regarded, by reason of his state of knowledge, as a participant.
[8] The F-tT also referred to [52], [59] and [60] of Mobilx where Moses LJ dealt with the meaning of “should have known”, as...
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