Summary

Repayment of input tax was rightly refused on the ground that the taxpayers knew that their dealings in mobile phones were connected with a VAT fraud elsewhere in the chain of supply.

Facts

The appellant companies (C and O) appealed against a decision ((2007) BVC 2544) refusing repayment of input tax on the ground that they knew or had the means of knowing that their dealings in the goods in question were connected with a fraud elsewhere in their chain of supply. C and O were related companies under the common ownership of an individual (G). They dealt in mobile phones in the secondary or "grey" market. The transactions entered into by C and O typically involved chains which began with a defaulting trader, or with a trader whose identity had been hijacked, who sold to another trader or "buffer". The phones then passed through the hands of, usually, two or three further buffers before being bought by C which, in most cases, sold them to O, which then sold them to an overseas customer. C and O were consistently repayment traders and their claims for input tax credit exceeded their output tax liabilities. Until the end of 2005 their claims were met by the respondent commissioners. By that time the commissioners had notified C and O that most if not all of the transactions in which they were involved could be traced back to a defaulter and questioned how they could continue to trade in that way whilst claiming not to know or expect that VAT due on the goods would go unpaid. The commissioners refused repayment of input tax in respect of claims in the period January to March 2006. On appeal the VAT and duties tribunal held that C and O, via G, had actual knowledge of the fraudulent purpose of the transactions, and that, even if they had not, they had failed to take every precaution which could reasonably be required of them to ensure that their transactions were not connected with fraud. The tribunal therefore upheld the decision to withhold repayment. The appellants submitted that (1) the tribunal had made findings, that the wholesale secondary mobile phone market was wholly or largely corrupt and without any obvious justification apart from defrauding the Crown of VAT and that G was himself guilty of fraud as opposed to merely having knowledge of the fraud of others, which were unsupported by the evidence; (2) that the tribunal had erred in relation to the requisite levels of knowledge, proximity and participation in the fraud; (3) the commissioners, by refusing to repay VAT otherwise repayable, should not be permitted to recover more than the tax actually lost by the failure of the fraudulent importer to account.

Held

(1) The tribunal was entirely correct to approach the market in which the appellants were concerned with a significant degree of suspicion. Its scepticism as to the need for a high volume market was not the sole basis, or anything like it, for its conclusion that the appellants were fixed with the relevant knowledge of the artificiality and fraudulent nature of the business they were actually conducting. The question was the legitimacy of the business actually conducted by the appellants; not whether it was possible at all to conduct an honest business within the high volume secondary mobile phone market. The tribunal was more than justified in reaching the conclusions which it did that the appellants' business was not legitimate, whether the market sector in question was one which was rife with VAT fraud or, as the tribunal thought, at least in high volumes, wholly illegitimate. On the evidence the tribunal was entitled to make the finding of actual knowledge which it did and to be satisfied that G, C and O were well aware that the appellants were dealing in goods which were being used as the instrument of fraud, and the transactions in which they were themselves engaged were arranged for no other purpose. (2) A trader in the appellants' position who had actual knowledge that he was participating in a transaction which formed part of a chain whose purpose was the fraudulent evasion of tax, even if he had no privity of contract with the perpetrator of the fraud, would forfeit his right to deduct, R (on the application of Just Fabulous (UK) Ltd) v Revenue and Customs Commissioners (2007) EWHC 521 (Admin), (2008) STC 2123 followed. A purchaser who was not in privity of contract with the importer nevertheless aided the perpetrators of the fraud. He supplied liquidity into the supply chain, both rewarding the perpetrator of the fraud for the specific chain in question, and ensuring that the supply chains remained in place for future transactions. By being ready, despite knowledge of the evasion of VAT, to make purchases, the purchaser made himself an accomplice in that evasion, Kittel v Belgium (C-439/04) (2008) STC 1537 ECJ (3rd Chamber) applied and Livewire Telecom Ltd v Revenue and Customs Commissioners (2009) EWHC 15 (Ch), (2009) STC 643 considered. (3) The right to deny repayment was not a penalty. There was no principle that the right to repayment of input tax could continue to be exercised, notwithstanding knowledge of the fraud of the importer, to the extent that the claim for repayment exceeded the loss to the Revenue, Halifax Plc v Customs and Excise Commissioners (C-255/02) (2006) Ch 387 ECJ considered.

Appeal dismissed