TC03380: Tricor Plc (formerly PNC Telecom Plc)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 March 2014 |
| Neutral Citation | [2014] UKFTT 241 (TC) |
| Date | 03 March 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 241 (TC)
Judge Michael Tildesley OBE, Ms Helen Myerscough ACA.
Ian Bridge, counsel, instructed by Morgan Rose solicitors (David Tunney appeared in January 2012) appeared for the Appellant
Jeremy Benson, Queens Counsel, and Christopher Foulkes, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, (Christopher Foulkes in January 2012) appeared for HMRC.
Value added tax - Input tax - HMRC denied input tax claims totalling £1,847,976.80 in respect of 16 transactions of mobile phones and CPUs - Was there a VAT loss? - Yes - Was the loss fraudulent? - Yes - Were the appellant's transactions connected with the fraud? - Yes - Did the appellant know or should have known that its transactions were connected to fraudulent evasion of VAT? - Yes the appellant knew - Appeal dismissed.
[1]On 31 May 2007 and 15 January 2008 the Appellant appealed against HMRC's decisions to refuse repayment of VAT in the following sums: £192,338.13 in respect of four transactions in the VAT period 12/05, £1,508,638.70 claimed in respect of 12 transactions in the VAT period 03/06, and £147,000.00 in respect of one transaction in the VAT period 06/06.
[2]HMRC's reason for refusal was that it concluded that the Appellant's transactions were each connected to the fraudulent evasion of VAT and that the Appellant knew or should have known of the connection of its transactions with the fraudulent evasion of VAT.
[3]The Appellant accepted that the disputed transactions were connected to the fraudulent evasion of VAT but denied that it knew or should have known of that connection.
[4]The Appeal was heard on 9 to 27 January 2012 and adjourned part-heard until 9 May 2012 for closing speeches. During the intervening period the Appellant appointed new representatives who applied to recuse Judge Tildesley, which was refused by Judge Berner on 9 May 2012. The hearing was resumed before the original Tribunal on 9 September 2013. On 20 September 2013 the Tribunal reserved its decision.
[5]The chronology of the proceedings and the evidence received are set out in Appendices 1 and 2 of the decision.
[6]The Tribunal has issued three decisions on preliminary points: disclosure of evidence and documents (11 December 2012 and 5 February 2013), admissibility of evidence and leave to recall witnesses (5 May 2013), and the admissibility of Mr Fletcher's evidence (9 September 2013). These decisions form part of this decision.
[7]The dispute concerned 16 deals involving the wholesaling of mobile phones during the period from 2 December 2005 to 13 April 2006. HMRC broke down the 16 deals into 24 transactions because in some of the deals the consignment of mobile phones was broken down into smaller consignments with separate invoices1. The Tribunal, however, in this decision retained the integrity of the 16 deals structure.
[8]The Appellant was a public company listed on the Alternative Investment Market in London. The Appellant had approximately 1,600 shareholders including members of the public. The Appellant was incorporated on 27 April 1992 and became a successful business supplying telephony services which included personal numbering, premium services, advance routing, and messaging. In June 2003 the Appellant, however, went into administration due to poor management and the collapse of shares in the dot.com boom.
[9]In 2004 two former directors of the Appellant, Mr Leo Knifton and Mr Joe Case, decided to revive the Appellant's fortunes. On 30 January 2004 the Appellant came out of administration. On 24 August 2004, Messrs Knifton and Case took the place of the existing board of directors which were removed following a shareholders' vote. Messrs Knifton and Case decided that the Appellant should concentrate on just one of its varied activities which was the wholesaling of mobile phones in the UK and Europe. In this regard Mr Richard Andrews joined the Appellant as a consultant in June 2005.
[10]Mr Case looked after the financial side of the mobile phone business, ensuring that the various transactions were paid for and funded. Mr Case also had the final say on whether a deal went ahead. Mr Andrews was responsible for negotiating the deals and creating the due diligence file. Mr Knifton took no role in the wholesaling of mobile phones.
[11]The Appellant declared no sales until the 06/05 VAT accounting period, when the sales turnover was in excess of £830,000. This was the first complete VAT period for the Appellant following the Advocate General's opinion in Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd v C & E CommrsECASECASECAS(Joined Cases C-354/03, C-355/03 and C-484/03) [2006] BVC 119, which called into question the validity of HMRC's stance in respect of non-economic activity. Turnover increased further during the following periods: 09/05 £8,957,137; 12/05 £9,993,794; and 03/06 £9,301,395 . During the first 12 months for which sales were declared, the Appellant achieved a turnover in excess of £29 million from a standing start.
[12]Mr Andrews described himself as a consultant. He received from the Appellant for his services commission of 35 per cent of the value of the deals struck. He invoiced the Appellant £231,226 for the deals he set up between 3 October 2005 and 16 December 2005; and £263,442.73 for those arranged between 10 January 2006 and 14 March 2006. In March 2006 Mr Andrews agreed to halve his commission to 17.5 per cent.
[13]The Appellant ceased trading in mobile phones around April 2006. The Appellant then traded in other electronic products such as Sat Navs and Nintendo games. The company also opened new divisions: Specs and Lenses and Carbon Trading. These new ventures did not work out. Messrs Case and Knifton resigned their directorships in March 2011. Mr Case remained a shareholder. The Appellant is now a shell company. The Appellant has set aside a provision of £132,000 each for Messrs Case and Andrews in the event of a successful appeal. According to Mr Case, the sum of £132,000 represented salary in lieu for dealing with the Appeal.
[14]A taxable person is entitled to deduct VAT paid in respect of supplies of goods made to him used for the purposes of his business (article 168art. 168 Council Directive 2006/112/EC (formerly art. 17 Sixth VAT Directive)).
[15]The Court of Justice in the joint cases of Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559established an exception to the right to deduct when the trader knew its transactions were connected to fraud. The Court stated at paragraph 56:
…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.
[16]The Court of Justice concluded at paragraph 59:
… 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".
[17]The Court of Appeal in Mobilx Ltd (in Administration) v R & C CommrsVAT[2010] BVC 638 clarified the test in Kittel
[59]The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who "should have known". Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.
[60]The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.
[18]Under the test in Kittel the requisite state of knowledge is that which existed at the time the Appellant entered into the disputed transactions. Further HMRC has the burden of establishing on the balance of probabilities the requisite state of knowledge for each of the disputed transactions. This, however, does not mean that the Tribunal must look at each transaction in isolation. The Tribunal is entitled to examine all the available and relevant evidence when determining the Appellant's state of knowledge, otherwise termed as the big picture approach. The authority for this proposition is derived from Lord Justice Moses' endorsement2 of Mr Justice Christopher Clarke's dicta in Red 12 Trading Ltd v R & C CommrsVAT[2010] BVC 166:
[109]Examining individual transactions on their merits do not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms...
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