Summary

Where every transaction engaged in by a company could be traced back to a supplier who had defrauded the Revenue by avoiding the payment of VAT on imported goods and where that company had been made aware of the fact, a VAT and Duties tribunal had been correct to refuse to allow the company to reclaim tax that the Revenue had never received. A reasonable and proportionate response by the company to being told that it was involved with fraudulent suppliers would be to either radically alter its method of trading or to stop trading.

Facts

The appellant company (M) appealed against a decision of the VAT and duties tribunal dismissing an appeal against a decision of the respondent commissioners to refuse to repay input tax claimed by M.

M had been incorporated for the intended purpose of reselling used mobile phones and computer chips, referred to as CPUs. This area of trading was well-known to be rife with Missing Trader Intra-Community fraud; a device designed to defraud the Revenue by re-claiming VAT that had never paid. M submitted an application to the Revenue for VAT registration. The application indicated that M intended to engage in the "wholesale distribution and export of mobile phones". A covering letter accompanying that application included a request that M be permitted to make monthly returns. M carried out due diligence on its immediate supply chains and customers to ensure that they were not engaged in business that could be linked to fraud. M's primary trade shifted from the purchase and resale of mobile-phones to CPUs, where it made lucrative profits. M's application for monthly returns was granted. However, the Revenue frequently communicated with M's directors expressing concerns that a number of its transactions could be traced back to defaulting traders. It was an accepted fact that all of M's transactions in the relevant period led back to fraudulent traders. It was not suggested that M were in any way knowingly implicated in VAT fraud but that they should have been aware that the supply chain could be so traced. The Revenue reclaimed the VAT that it had repaid M over the relevant period. The tribunal concluded that M had forfeited the right of deduction on the basis that (i) M's rapid abandonment of trade in phones in favour of CPUs was consistent with a prior, at the time undisclosed, intention to deal in CPUs and supported the conclusion that M had misled its advisors and the Revenue about the nature of its intended business; (ii) in light of its significant profits, M's directors must have known that M's business could not have been legitimate; (iii) M ought to have known, having regard to the objective evidence and its dealings with the Revenue, that every transaction in which it engaged led back to a defaulter.

Held

(1) There was a difference between lack of candour and deliberate deceit. They were at opposite ends of the spectrum of good faith in business dealing. The tribunal clearly considered that a serious allegation had been made against M. In fact there was no such allegation in the Revenue's statement of case that M had known, at the date of its application, that it would trade in CPUs. Nor had an allegation of a lack of candour been made. The only reliance placed by the Revenue in this area was that M had left an area of relatively safe trade in mobile phones and entered into a riskier area of trading. On that basis, the tribunal was not entitled to make an adverse finding against M. It was a fundamental aspect of civil litigation that parties should not learn for the first time in a judgment of serious adverse allegations against them. They had to be given a proper opportunity of dealing with them before they could form a building block of any substance in the case against them. (2) The tribunal could clearly be taken to have been suggesting that (a) easy profits spelt fraud and that M's directors should have realised and; (b) whilst good money was being earned, a "Nelsonian" attitude to warning signals should be taken. The first consideration was based on a link between the profits and illegality and the second was a suggestion that the directors simply shut their eyes to the objective evidence of fraud. However, it was not part of the Revenue's pleaded case before the tribunal that easy profits were a badge of fraud, nor was such a theory ever suggested. The tribunal was not entitled to reach such a conclusion on the evidence. This was a serious accusation which the company had no proper opportunity to answer. One of the underlying propositions, namely that profitable business was necessarily fraudulent, was simply not established. (3) The ultimate question for the tribunal was what M should have known on the basis of the information supplied to it. On the evidence, the tribunal was entitled to find that M should have known, on the balance of probabilities, that all its transactions were leading back to defaulting traders. Due diligence on one's immediate supplier might be all that one could do but if chains were consistently being identified as "dirty" more drastic action would be required. A reasonable and proportionate response would be to either radically alter the method of trading or get out of it altogether. M did not do either. There was ample evidence to show that the way in which M was carrying on its trade was not protecting it from becoming implicated in "dirty" chains and, on that basis, the tribunal's ultimate conclusion was upheld.

Appeal dismissed