VIP (Scotland) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 February 2010 |
| Neutral Citation | [2010] UKFTT 63 (TC) |
| Date | 10 February 2010 |
| Court | First-tier Tribunal (Tax Chamber) |
[2010] TC 00375
[2010] UKFTT 63 (TC)
Mr Kenneth Mure, QC, (chairman), James D Crerar, WS I R Welch, JP CA
Donald R Findlay, QC and Ms Frances Connor, Advocate, for the Appellant
Heriot Currie, QC and Mrs Sarah Wolffe QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
Value added tax - Deduction of input tax per Value Added Tax Act 1994 section 25 section 26VATA 1994, ss. 25 and 26 - Repayment refused on basis that MTIC fraud involved - Actual and imputed knowledge of taxpayer - Appeal refused.
Input tax - Mobile phone dealer - MTIC fraud - Whether appellant knew or ought to have known about fraudulent activity - The appeal concerned the commissioners' decision to deny input tax credit on seven batches of mobile phones - These were the subjects of a series of purchases and sales concluded on the same day in circumstances in which the importer had failed to account for VAT on their re-sale in the UK - The commissioners had concluded that the pattern of transactions indicated a "carousel" fraud, with funds moving in a closed circle and the phones being re-sold as zero-rated supplies to customers in Luxembourg - The commissioners contended that the appellant knew, or should have known, that the transactions were part of a fraudulent chain of transactions - The appellant argued that it had acted reasonably and prudently on the basis of its knowledge at the relevant time - There was no evidence that it had contact with any defaulter or that it had knowledge of any fraud being perpetrated - Reasonable and appropriate checks had been carried out and, argued the appellant, its actions should not be viewed with the benefit of hindsight - Held, that it was clear that each of the transaction chains bore the characteristics of carousel fraud - The question was whether the appellant knew or should have known of the fraudulent nature of the transactions - In the judgment of the tribunal, the appellant did not exercise due diligence - It made no enquiries as to possible fraudulent links in the supply chains - It did not use international mobile equipment identity (IMEI) numbers as a check on re-circulation of the phones into the UK - It failed to investigate the financial worth and credit rating of the parties it dealt with - The appellant paid reckless disregard to its dealings and its actions were akin to "Nelsonian blindness"- Even if the appellant did not have actual knowledge of the fraud, it should have had such knowledge - The commissioners' decision to disallow the input tax claims was correct - Appeal dismissed.
1. The Appellant company at the material time traded in mobile phones. It seeks repayment of input tax on 7 batches of mobile phones which it purchased in April and May 2006 and re-sold to customers in Luxembourg free of VAT. The Respondents argue that the repayment should be disallowed as these transactions were parts of fraudulent schemes to defraud the UK Revenue and that the taxpayer should have known of this. Each of the 7 batches of phones was the subject of a series of purchases and sales concluded on the same day in circumstances in which another trader which had imported the goods had failed to account for output VAT in respect of their re-sale.
2. Such a "carousel" type fraud has been defined as follows:
… goods - commonly computer chips and mobile phones, … are imported into the United Kingdom by one trader and change hands, usually within the space of a single day, several times before they are exported again, usually but not always to another Member State of the European Union. The importing trader does not account for the output tax due on its sale, … it is known as a "defaulter". The traders, known as "buffers", between the defaulter and the exporting trader, who is known as the "broker", account correctly for the output tax due on their respective sales while claiming credit for the input tax they have incurred on their purchases. … The broker pays VAT on the price of the goods to the buffer from which it has bought them, but (assuming the transactions are all genuine) is entitled to zero-rate its sale; it then seeks … payment from the Commissioners of input tax credit generated by its purchase. (per the Tribunal in Moblix Ltd, noted infra).
Certain features typical of "carousel" fraud have been identified. Third party payments, ie payments made to a party other than to whom payment is due, the use of "freight forwarders" to enable "paper" transactions, and the lack of commercial rationale, have been highlighted. Typically, high value commodities of small physical size are the subject of the sequence of transactions in the "chain". (Euro Stock Shop Ltd infra para 6).
3. Value Added Tax Act 1994 section 25sections 25-26Value Added Tax Act 1994 provide that a taxpayer who makes taxable supplies, may deduct input tax paid by him on his relative inputs. However, as a matter of Community Law the European Court of Justice has refused such repayments where there is fraud and an Abuse of Rights, and the party seeking repayment knew or should have known of the fraud.
4 In the course of the Hearing particular reference was made to the following decisions of the ECJ -
Axel Kittel v Belgian State VAT[2008] BVC 559
Optigen & Ors v C & E Commrs VAT[2006] BVC 119; [2006] ECR I-483; [2006] Ch 218
Further reference was made to the following decisions of the High Court in England and of the Tribunal, viz -
Dragon Futures Ltd v C & E Commrs VAT[2006] BVC 507; [2007] V&DR 348
Calltel Telecom v R & C Commrs VAT[2009] BVC 555; [2009] EWHC 1081 (Ch)
Moblix Ltd v R & C Commrs VAT[2009] BVC 205; [2009] EWHC 133 (Ch)
R & C Commrs v Livewire Telecom Ltd and Olympia Technology Ltd VAT[2009] BVC 172; [2009] EWHC 15 (Ch)
Mobile Export 365 Ltd v R & C CommrsVAT[2008] BVC 125; (2007) EWHC 1737
Euro Stock Shop Ltd v R & C Commrs TAX[2010] TC 00137
R (re Application of Teleos Plc) v HMRC ECAS (Case C-409/04) [2008] BVC 705; [2008] 1 CMLR
Netto Supermarkt GmbH & Co v Finanzamt Malchin ECAS (Case C-271/06) [2009] BVC 157
Our Communications Ltd No. 20, 903; [2009] BVC 4041
Twinsectra Ltd v Yardley ELR[2002] 2 AC 164
Reference might also be made to the recent decision in -
Megtian Ltd (in administration) v R & C Commrs VAT[2010] BVC 314; [2010] EWHC 18 (Ch)
5. Parties negotiated an extensive Joint Minute of Admissions settling helpfully the non-controversial aspects in the case, including the 7 "chains" of transactions, and setting out the sequences of purchases and re-sales of the 7 batches of mobile phones and also the related cash transfers.
As a result the evidence led focused on the 2 critical aspects for our determination, viz - whether the losses of revenue to the Respondents were as a result of fraudulent acts by the defaulting traders in each chain and, further, whether the Appellant was aware or reasonably should have been aware of the fraud.
6. Parties agreed also that the Respondents should lead but under reservation of all considerations relating to the onus of proof. This, we understand, is the customary procedure in MTIC appeals and we found it helpful and appropriate in the present case.
7. Mr Currie for the Respondents led the evidence of six HMRC officers and an independent expert, a chartered accountant and partner in KPMG. Their Witness Statements are produced. Each of these witnesses adopted these subject to only limited revisals and amplification in certain cases.
8. Firstly, Roderick Stone gave evidence. He is an established tax officer with special responsibilities for dealing with MTIC and "carousel" fraud. He was not involved in the investigations in this appeal but he has reviewed the papers. He spoke to the special characteristics of carousel frauds, the "chain" made up of the missing/default trader (at which the loss occurs), the intermediate or "buffer" traders, and then the "broker" who (as here) exports VAT free and then seeks repayment of input VAT. These features arise relevantly in this appeal and have arisen in other MTIC cases. He noted other tell-tales of such schemes including "third party payments" (ie not to the supplier but to a party outside the UK) and "freight forwarders" (who handle and transport the stock). He referred also to pricing, terms of business, and the popularity of offshore banking. The use of facilities of the First Curacao International Bank ("FCIB") by participants in carousel fraud was noted. (Businesses generally tend to have local banking arrangements). He explained various measures adopted to combat this form of fraud. He noted the circumstances in which VAT accounting periods may be shortened to one month and the consequent cash flow advantages to a broker in a carousel fraud. He noted also the "grey" market, explained further in the report of Mr Fletcher, infra.
9. Mr Stone was cross-examined by Mr Findlay on various aspects of his evidence. He was challenged about the level of HMRC's estimate of the level of carousel fraud. More particularly he was questioned about the level of guidance and assistance afforded to traders who were anxious not to flout the law and secure repayments of input tax paid. Mr Stone explained that while guidance is given, there is no check-list or fail-safe procedure. The responsibility rests ultimately with the individual taxpayer. There is no system of rulings or any "clearance" procedure. Mr Stone explained that monthly returns would be permitted where reasonable and proportionate and no suspicious factors were present. He stressed, however, that HMRC's concern related not to an innocent default (say attributable to business failure) but rather fraud. Trading in mobile phones on the "grey" market, if honestly conducted, was perfectly legitimate.
10. The next witness was Peter Birchfield, an MTIC Technical Coordination Team Leader. He was involved in analysing computer data of the First Curacao...
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