Universal Enterprises (EU) Ltd and Customs Revenue Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 June 2015 |
| Neutral Citation | [2015] UKUT 311 (TCC) |
| Date | 05 June 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Henderson, Judge Malcolm Gammie CBE QC
Michael Patchett-Joyce, Counsel, instructed by CTM Litigation and Tax Services, appeared for the Appellant
James Puzey, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax – Denial of repayment of input tax due to MTIC fraud – FTT concluding that the taxpayer knew that its transactions were connected with fraud – Whether extension to contra-trading transactions compatible with the right to deduct under EU law – Whether case should be referred to the court of justice to consider the issue – Whether HMRC bound to plead fraud or conspiracy to succeed.
[1] Universal Enterprises (EU) Limited (“Universal”) appeals from the decision of the First-tier Tribunal (Judge Richard Barlow and Robert Barraclough) dismissing Universal's appeal against the refusal of the Respondent Commissioners (“HMRC”) to allow Universal's claims for input tax credit for the monthly periods 04/06, 05/06 and 06/06. The total sum involved is £4,054,818.30.
[2] HMRC refused to repay Universal the input tax it had claimed because it took the view that the tax arose from transactions that were connected with the fraudulent evasion of VAT arising from missing trader intra-community (“MTIC”) trading.
[3] As those familiar with MTIC fraud and its case law will be aware, it is a field that has developed a terminology of its own. Given the number and variety of other decisions dealing with transactions of this nature we do not propose to provide a glossary or explanation of the various terms employed. We summarise the principal features of the various transactions into which Universal entered in the paragraphs that follow and record the conclusions reached by the First-tier Tribunal (“FTT”) based on the evidence. We refer to those transactions and that evidence in more detail later in this decision in so far as it is necessary to do so having regard to Universal's grounds of appeal.
[4] In the April 2006 period (04/06) Universal entered into a series of transactions for the purchase and sale of mobile telephones and computer ink cartridges. 58 of the transactions that Universal entered into were said to be traced directly to a fraudulent tax loss in the chain of supply of which Universal was part (a “dirty chain”). In respect of those transactions Universal accepted that HMRC had accurately described the transactions in their evidence and that the failure by previous traders in the chain of transactions to account for VAT had been fraudulent. The only issue for the FTT to resolve, therefore, was whether Universal knew or should have known that its transactions in those dirty chains were connected with fraud (FTT paragraph 20).
[5] Six further transactions in the 04/06 period and all the transactions in the May 2006 (15 in number) and June 2006 (4 in number) periods (05/06 and 06/06) were part of a “clean” transaction chain. In other words, they comprised chains of transactions that, considered alone, involved no dishonest default. Nevertheless, HMRC claimed to be entitled to deny Universal the repayment of input tax in respect of its transactions in those clean chains on the basis that those chains were connected with fraud by being appropriately associated with “dirty” chains (the “contra-trading” construct).
[6] In respect of the clean chains of transactions Universal also accepted that HMRC had accurately described the transactions in their evidence. In the FTT, however, Universal put HMRC to proof that the contra-trader's clean chains and Universal's transactions in those chains were connected with the frauds in the contra-traders' dirty chains. Universal also put HMRC to proof that the contra-trader was dishonest in respect of the clean chains (FTT paragraph 24).
[7] Having considered the evidence the FTT concluded that Mr Ebrahim Sodha (“Mr Sodha”) was Universal's directing mind and that he knew that the clean and dirty chain transactions were connected with fraud (FTT paragraphs 102 and 107). Mr Sodha had put himself forward as the person who was the principal person concerned in the actual running of the company and the transaction of its business at the relevant times. Having heard Mr Sodha's evidence and that of his daughter, Ms Fariyal Sodha, the FTT concluded that both of them were unreliable and untruthful witnesses (FTT paragraph 113).
[8] Undeterred by the FTT's conclusions and by a substantial body of opinion in this Tribunal and by Court of Appeal authority to the contrary, Mr Patchett-Joyce on behalf of Universal sought to persuade us, first, that the FTT had erred on a number of grounds and, second, that before reaching our decision we should refer the case to the Court of Justice of the European Union (“CJEU”) for its opinion on certain matters.
[9] The six grounds of appeal that he advanced can be summarised as follows:
a) Ground 1: There was no legal basis on which HMRC were entitled to deny Universal the right of deduction and therefore repayment;
b) Ground 2: There was no sufficient connection between Universal's transactions and the frauds of the alleged defaulters in the contra-trading transactions;
c) Ground 3: The FTT failed to have proper regard to the absence of any pleaded case in conspiracy where it was alleged that Universal had been involved in “clean” chains that formed part of HMRC's contra-trading construct;
d) Ground 4: The FTT failed to have proper regard to the absence of any pleaded case in fraud against Universal;
e) Ground 5: The FTT was wrong to find a connection between Universal's being a party to transactions in “clean” chains and the contra-traders' “dirty” chains in the contra-trading construct; and
f) Ground 6: The FTT was wrong to find that Universal had the requisite knowledge of fraud in either the “clean” chains or the contra-traders' “dirty” chains.
[10] As appears from this summary, Grounds 2, 3 and 5 are formulated specifically by reference to the concept of contra-trading. Mr Patchett-Joyce explained, however, that this was only because of the Court of Appeal's decision in Mobilx Ltd (in administration) v R & C Commrs VAT[2010] BVC 638. It was Universal's case that there was no support for the contra-trade construct in EU law and that the construct was in fact incompatible with the reasoning of the Court of Justice in Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó FŒigazgatósága; Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó FŒigazgatósága ECASECASVAT(Joined Cases C-80/11 and C-142/11) [2012] BVC 458 (hereafter “Mahagében”) and subsequent case law.
[11] Mr Patchett-Joyce submitted that there was a tension between Mobilx and EU law and that we should not consider ourselves bound by the Court of Appeal's decision. On that basis he suggested that no sufficient “connection” in law had been established in relation to the “straight” chains and that Ground 2 was therefore only limited to the deals in which the refusal of the benefit of the right of deduction depended on the contra-trading construct because Universal had assumed that we would follow and apply Mobilx. Ground 5 was, essentially, an extrapolation of Ground 2.
[12] Mr Patchett-Joyce also took the opportunity to “clarify” Ground 6. He noted that there was no fraud as such in the “clean” chains and, thus, the reference to a finding that Universal was a knowing party to fraud in those chains did not make sense. He said that it was HMRC's case that fraudulent evasion of VAT occurred either at the opposite end of the domestic supply sequence (i.e. there was fraudulent evasion in the “straight” chains, being the case put against Universal in relation to most of its 04/06 deals), or where the contra-trade concept was relied upon, such evasion had occurred in the “dirty” chains, in which Universal did not feature (being the case put against Universal in relation to the remainder of its 04/06 deals, and its 05/06 and 06/06 deals). Universal's case was that it had no requisite knowledge that any of its transactions were connected with any fraudulent transaction; i.e. whether the connection is sought to be made via “straight” sequences of supply, or the contra-trade construct.
[13] Accordingly, he suggested that Ground 6 should be recast to read that the FTT had erred in law and was wrong to find that Universal had the requisite knowledge that its transactions were connected with fraudulent evasion of VAT, whether the fraudulent evasion relied upon was in the direct sequence of supply or via the contra-trade construct.
[14] Mr Patchett-Joyce referred us to a case (Staatssecretaris van Financiën v Schoenimport “Italmoda” Mariano Previti vof; Turbu.com BV and Turbu.com Mobile Phone's BV v Staatssecretaris van FinanciënECASECASECASVAT (Joined Cases C-131/13, C-163/13 and C-164/13) [2015] BVC 6) that was pending before the CJEU in support of Ground 1 in respect of which the CJEU delivered its judgment following the conclusion of the hearing. The parties also informed us following the conclusion of the hearing that permission to appeal to the Court of Appeal had been given in Fonecomp Ltd v R & C Commrs VAT[2014] BVC 502. Fonecomp's appeal was to raise closely related issues to those in Universal's case, in particular the issue of contra-trading, contending (as Universal had done before us) that a trader only loses the right to deduct if it knows or ought to know that the default will occur in the same chain of supply as his purchase, but not if the default occurs in a different chain of supply. As Lady Justice Arden in due course put it, “The need for there to be a fraud in the same chain of supply is the leitmotif of [Fonecomp's] grounds of appeal.” The Court of Appeal gave its decision...
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