Summary

A trader could lose the right to claim input tax wherever fraud occurred in a chain of transactions as long as the transaction entered into by the trader was connected with that fraud and he knew or should have known it was connected with it.

Facts

The appellant taxpayer (M) appealed against two decisions of the respondent commissioners by which they had disallowed M's input tax claims, giving rise to claims for repayments. M traded in mobile phones. M's claims for input tax credit were refused on the basis that the 30 transactions in question were connected with carousel fraud and that M should have known that the transactions were connected with fraud. M's case was that it was entitled to claim input tax in the sum of £5,909,067.50 and that all it had to do to make out that claim, in principle, was to produce evidence that it was registered for VAT and had bought goods in the course of a business on which VAT of that amount was charged; further, that it had used those goods to make taxable supplies by exporting the them so that they were zero-rated.

Held

(1) A trader could lose the right to claim input tax wherever fraud had occurred in a chain of transactions as long as the transaction entered into by the trader was connected with that fraud and the trader knew or should have known it was connected with it. It would be contrary to the express policy behind the ECJ's conclusions in Kittel v Belgium (C-439/04) (2008) STC 1537 ECJ (3rd Chamber) if a person who actually knew that his transaction would assist in the perpetration of a fraud was not deprived of the right to claim input tax, Kittel v Belgium followed. It was consistent with that decision that a person who assisted in fraud, either knowingly or where he should have known, should suffer the same consequences whether his assistance was direct, indirect or tangential. What amounted to the necessary connection with the fraud was to be judged largely as a matter of fact, but it was clear that the connection must be one that somehow assisted with the fraud. (2) The evidence in the instant case, including the deliberate evasion of contact with Revenue and Customs by those involved, clearly indicated that the chains of transactions in question were contrived and involved fraud. The evidence also demonstrated that all of M's non-contra deals were in respect of goods that were originally sold by fraudulent defaulting traders to intermediaries before they were sold to M, that a tax loss had occurred in respect of each one of them and that all 30 transactions were connected with fraud in the sense required by Kittel, Mobilx Ltd v Revenue and Customs Commissioners Unreported October 6, 2006 V&DTr (Manchester) considered. (3) When considering the state of M's knowledge, it was relevant to consider that in all 30 deals M had made a substantial profit where it had no risk of significant loss. There was also evidence that the phones in question were being traded by M with higher profit margins than would normally be achievable. M had instructed an inspection company to carry out a 100 per cent open box inspection on phones in the custody of the freight forwarders but, given the high volume of phones, such an inspection was impossible and that should have been apparent to M. Thus, the report's only purpose was to convince Revenue and Customs that the transactions were genuine. Further, significance was placed upon the fact that in some cases M dealt in very substantial sums with companies with low credit ratings. The warnings M had received in that respect must have raised doubts about the bona fides of the transactions. The cumulative effect of the evidence was that M knew or should have known that the transactions were connected with fraud.

Appeal dismissed