Tradestar International Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 06 January 2022 |
| Neutral Citation | [2022] UKFTT 8 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 8 (TC)
Judge Tracey Bowler, Ms Susan Stott
Value added tax – Input tax – HMRC denied input tax claims on the Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 basis involving alleged direct links to fraudulent VAT losses and contra trading – Were there VAT losses – Yes – Were they fraudulent – Yes – Were the Appellant's transactions connected with the fraud? – Yes – Did Tradestar know or should it have known that its transactions were connected to fraudulent evasion of VAT – Yes – Appeals dismissed.
Applications to admit evidence and strike out evidence.
Value added tax – Input tax – HMRC denied input tax claims on the Kittel basis involving alleged direct links to fraudulent VAT losses and contra trading – Were there VAT losses – Yes – Were they fraudulent – Yes – Were the Appellant's transactions connected with the fraud? – Yes – Did Tradestar know or should it have known that its transactions were connected to fraudulent evasion of VAT – Yes – Appeals dismissed – Applications to admit evidence and strike out evidence – Implications of witness withdrawing from cross examination.
The FTT dismissed an appeal against the disallowance of input tax on the grounds that the appellant either knew or should have known of a connection to fraud.
This appeal concerned input tax disallowed in decisions dated 8 August 2007 and 31 October 2008. Tradestar's stated business activity was the trade in central processing units (CPUs), accounting software and iPods/MP3/MP4 players. The goods were bought and sold in a series of back to back deals, the company did not hold stock at any time.
A brief history of the appeal is contained in para. 10 of the decision, a significant contributing factor to the length of time it took for the appeal to be heard was the appellant not engaging with the process, it received four unless orders over the course of the litigation.
The appellant was represented at the hearing by Mr Burgess, its sole director/shareholder. In view of the fact that the appellant did not have a qualified professional representative, the FTT set out its reasoning in some detail and treated it as a litigant in person throughout the proceedings.
HMRC initially disallowed nearly £4m of input tax on the grounds that Tradestar's transactions were linked to fraud. As a consequence of the development of ECJ case law over the time of the litigation, by the time of the hearing HMRC's case had been refined to be made on Kittel grounds, i.e. the grounds that Tradestar's purchases were connected to the fraudulent evasion of VAT and Tradestar either knew or should have known this.
The FTT's decision is divided into two parts. The first, para. 31–98, considers various procedural matters in relation to the appeal. The second, para. 99–609, considers the substance of the case.
In relation to procedural matters, Mr Burgess requested a postponement and the exclusion of certain components of HMRC's evidence. In addition, he was not present for parts of the hearing, which proceeded in his absence. The postponement was on the grounds that he was attending the hearing remotely from South Africa and due to power problems the internet connection might be inadequate. He was in South Africa to care for his mother and could not return to the UK due to coronavirus travel restrictions. HMRC offered to provide secure facilities at the UK consulate or to pay for a hotel room. This offer was declined. After the hearing had started, although Mr Burgess did have some technical difficulties, the FTT determined that on many occasions he had absented himself (e.g. para. 72) and that it was in the interest of justice for the hearing to proceed in his absence.
The FTT commenced its substantive consideration of the issues by reviewing case law which has grown up around Kittel grounds and describing the missing trader and contra-trading frauds with which Tradestar was alleged to be connected (para. 99–113).
HMRC's evidence in relation to Tradestar's business relationships was extensive. Detailed examination of bank records and invoices enabled the supply chains to be constructed and the defaulting traders identified. Many of the parties used the same bank, FCIB, and details were provided to HMRC by the French and Dutch authorities (para. 195). HMRC demonstrated that money was flowing around in loops (para. 526) and that the same goods were being sold multiple times (para. 501).
Tradestar argued that HMRC's evidence was “incomplete, “conjured up”, inconsistent and unreliable” and that HMRC had “resorted to misleading the Tribunal repeatedly with false evidence and by deliberately suppressing evidence against Tradestar in order to prevent the court from finding out the truth” (para. 148 & 149). However, little evidence to directly contradict HMRC was provided. In addition, Mr Burgess made a deliberate decision to disengage with the hearing (para. 250).
The FTT set out its findings of fact at para. 272–438. The FTT was satisfied that HMRC had demonstrated that VAT losses had resulted in transactions chains associated with Tradestar's disputed deals and that those losses were due to fraud (para. 439).
The FTT then considered whether Tradestar knew or should have known of this connection to fraud. It concluded that it did. The basis for this conclusion is set out at para. 602. As well as the “contrived nature” of the deal chains, the FTT noted, inter alia, an “absence of evidence of the kind of negotiation with suppliers and customers that would characterise ordinary commercial relationships”; that “Tradestar's due diligence was manifestly inadequate”; and “repeated sales of the same CPUs … with no evidence that customers had returned them”.
The appeal was dismissed.
The FTT reached the expected conclusion. HMRC's case was supported with comprehensive and detailed evidence. The appellant did not appear to make a serious attempt to challenge HMRC's case, relying instead on unsubstantiated allegations that evidence had been fabricated by HMRC.
Mr J. Burgess, director of the Appellant, appeared for the appellant.
Ms Karen Robinson, counsel and Mr Joshua Carey, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents.
[1] The Appellant (“Tradestar”) appeals against two decisions of the Respondents (“HMRC”) dated 8 August 2007 and 31 October 2008 to deny its input tax reclaim. The grounds for HMRC's decisions were that Tradestar's transactions in relation to which the claims for input tax arose were connected with the fraudulent evasion of VAT and that Tradestar knew, or should have known, of this connection.
[2] The first appeal is in respect of ten transactions entered into in VAT period 02/06 with a total VAT value of £1,724,067.55 and seven transactions entered into in VAT period 05/06 with a total VAT value of £2,378,950.00. The goods subject to that appeal are central processing units (“CPUs”), software called Web Accountant and iPods/MP3/4 players.
[3] The second appeal is in respect of two transactions entered into in VAT period 08/06 with a total VAT value of £611,117.50. The goods subject to that appeal are Apple iPods.
[4] The connection with tax losses is said by HMRC to be both by way of direct tax loss (i.e. the fraudulently defaulting trader is in the immediate chain of supply) and also tax losses in parallel chains (i.e. contra-trading where there is a single trader that links both chains together) as explained later in this decision. In each case Tradestar is said to have acted as a broker trader, purchasing from a UK trader and selling to an EU trader.
[5] Tradestar disputes all elements of HMRC's case.
[6] Mr Burgess expressed concerns about the use of the video platform for his appeal. For the reasons explained below his adjournment applications were refused. However, given the accepted problem of power outages in South Africa the Tribunal had directed in November and again at the start of the hearing that the Tribunal should be informed of any planned outages so that arrangements could be made to work around these times, with, for example, early starts or late finishes to other days.
[7] The connection via the video platform worked well in the first 5 days of the hearing. The Tribunal was satisfied that all attending could fully participate in the hearing. However, problems arose with Mr Burgess' connection on 9 August. We address these problems in more detail later in the context of the various procedural decisions made by the Tribunal.
[8] However, our conclusion is that the use of the video platform was a fair and effective way of conducting the hearing, particularly in the context of Mr Burgess' inability to travel to the UK. At the end of the day, Mr Burgess chose no longer to participate in the hearing. We are satisfied that that was a matter of choice rather than inability to attend as we explain later.
[9] We start by describing the background and each party's case which informs not only the arguments regarding the substantive issues, but also the procedural applications. The decision is then split into two parts: the first deals with the various procedural issues arising; the second deals with the substantive issues.
[10] This has been an unusually long running case. It is not necessary to set out the full background and reasons for the delay in progressing to a hearing. However, some elements of the history are particularly pertinent to the decisions made by us:
- Tradestar submitted its Notice of Appeal in relation to the first decision on 15 August 2007 and in relation to the second decision promptly after receiving the decision, although the precise date is not clear;
- Tradestar has been represented at most times during the litigation...
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