Summary

A First-tier Tribunal had not erred in upholding the Revenue and Customs Commissioners' decision refusing to allow the deduction of input VAT on the basis that the relevant transaction had been connected to fraud, and the taxpayer ought to have known about that fraud.

Facts

The appellant sole trader (C) appealed against the First-tier Tribunal's dismissal of his appeal against the respondent commissioner's refusal to allow the deduction of input VAT in respect of the purchase of digital music players from a company (S).

C had been the last link in a chain of companies involved in the purchase and sale of 3000 digital music players; C bought those players from S and on-sold them to Dutch companies. The commissioners refused to allow the deduction of input VAT on the players on the basis that there was a connection between C's purchase and a fraud elsewhere, which C should have known about, was upheld by the FTT. The FTT concluded that the players had been imported into the United Kingdom and sold and bought in an unbroken chain of substantially contemporaneous transactions ending with C's purchase and his export of them; a company (E) had been part of that chain and had fraudulently evaded the VAT payable by it as its stage of the chain; C should have known that his purchase was connected with VAT fraud. The ultimate finding was made in the light of C's failure to fully assess the risks and poor quality paperwork. The issues were whether (i) there was sufficient evidence before the FTT for it to have reasonably concluded that E had participated in the chain; (ii) C knew or ought to have known of the fraud of others.

C contended that the evidence did not support the facts as found by the FTT and submitted that the only document that the FTT could have relied on to conclude E was featured in the chain was a release note E sent to a freight forwarder instructing the release of the goods to the next party in the chain and that it was insufficient to establish that connection, given other evidence which cast doubt on it, or was inconsistent with it.

Held

(1) The question was whether there was evidence before the FTT from which it could have reasonably drawn its conclusions, Edwards v Bairstow and Georgiou (t/a Marios Chippery) v Customs and Excise Commissioners [1996] S.T.C. 463 followed. The absence of a clear explanation of the FTT's reasoning made that task more difficult; the FTT had, inter alia, failed to explain its reasons for concluding that there had been an unbroken chain. The specific question was whether E had featured in the series of transactions that led to C's acquisition of the goods, it being accepted that the last link in the chain had been established: the critical question was therefore whether the evidence was sufficient to establish E's participation as it was solely on E that the commissioners depended to establish fraudulent tax loss. The level of detail available from E's invoices, although not conclusive, supported the inference that the information about those transactions had been drawn from source documents and was not a reconstruction based on assumption or interpolation. Accordingly, it was a reasonable assumption that E had come into possession of at least one batch of players. Of even more significance were the prices charged in the chain which allowed C a modest profit. Leaving the freight forwarder's report to one side, there was sufficient evidence from which the FTT could properly conclude that a chain including E had been demonstrated; the report was, more probably than not, inaccurate in what it said about E's participation (see paras 31-32, 39-42, 44 of judgment). (2) The question that the FTT had to address was whether when C entered into the transactions, if he had applied his mind to the matter, he could have thought that there was a reasonable, meaning possible and plausible, explanation for the transactions, other than they were connected with fraud, Mobilx Mobilx Ltd (In Administration) v Revenue and Customs Commissioners [2010] EWCA Civ 517, [2010] S.T.C. 1436 followed. The FTT had been entitled to find that it should have occurred to C that he was running risks and that he should have taken additional precautions; it had accepted that C had not realised the extent of the risks that he had been running, but there was no authority to the effect that a distinction was to be drawn between a trader who deliberately closed his eyes to the obvious, and one who failed to act on the evidence available, Kittel v Belgium (C-439/04) [2008] S.T.C. 1537 and Mobilx considered. When C's knowledge of the trade, the presence of fraud and evidentiary findings including C's failure to assess fully the risks and his poor quality paperwork and due diligence, it was plain that there had been sufficient material to conclude that C should have known of the connection to fraud in the goods that he had bought from S (paras 68-69).

Appeal dismissed