[2011] UKFTT 265 (TC)
TC01127
Appeal number: LON/2008/1227
Value Added Tax – Input tax – Disallowance of input tax on basis MTIC fraud – Appellant knew or ought to have known trade connected with fraud – Whether legitimate expectation input tax would be repaid on basis due diligence said by HMRC to be adequate – No – Appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
SCEPTRE SERVICES Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS (VAT)Respondents
TRIBUNAL: MISS J C GORT (Judge)
MRS SHAHWAR SADEQUE
Sitting in public in London on 24 May-3 June 2010, 3 November-15 November and 13 December 2010
The Appellant was represented in the earlier part of the hearing by Mr Eamon McNicholas of counsel instructed by Burges Salmon LLP and in the later part by Mr Nigel Popplewell, solicitor of Burges Salmon
Mr John Black QC and Daniel Margolin of counsel, instructed by Howes Percival LLP, for the Respondents
© CROWN COPYRIGHT 2010
1
DECISION
1.The Appellant (“Sceptre”) appeals against
(a)A decision of the Commissioners contained in a letter dated 14 May 2008 denying entitlement to the right to deduct input tax in the sum of £333,211.16 claimed in the Value Added Tax accounting period 07/06 and £504,897.77 in the period 08/06.
(b)A decision contained in a letter dated 5 June 2008 that the net amount of £44,458.80 had been assessed as due for the above period; and
(c)A decision contained in a letter dated 26 September 2008 informing Sceptre of an error in the decision letter of 14 May 2008 amending the amount of VAT due for the period 07/06 to £345,251.15 and for the period 08/06 to £447,804.
By a Direction dated 5 August 2008 the appeals were consolidated, and the total amount of VAT now in issue is £793,055.15.
2.The Commissioners’ grounds for denying repayment of input tax are that the input tax was incurred in transactions connected with the fraudulent evasion of input tax and Sceptre either knew or should have known of that fact.
3.The decisions relate to a total of 17 transactions involving the sale by Sceptre of consignments of iPods, computer components and hard disk drives to customers in Europe. Nine of the transactions were in VAT period 07/06 (July 2006) and the remaining eight transactions were in VAT period 08/06 (August 2006). “Deal Sheets”, setting out in schematic form each of Sceptre’s 17 deals, and the antecedent trading “chains”, appear in Annex 1. The Commissioners’ case is that each of the 17 transactions formed part of an overall scheme to defraud the Revenue in that each of them can be traced back, via contrived and pre-arranged chains, to one out of a group of five defaulting traders (being traders who fraudulently failed to account to the Commissioners for VAT due).
4.By Notices of Appeal dated 6 June 2008 and 17 June 2008 Sceptre appeals against the decisions on grounds which may be summarised as follows:-
(i)Sceptre took every precaution that could reasonably be required of it to ensure that its transactions were not connected with fraud.
(ii)Sceptre did not know and should not have known that by purchasing the items in question it was participating in a transaction or transactions connected with fraud.
(iii)Sceptre:
(a)had no actual or constructive knowledge of any fraudulent evasion of VAT;
(b)had no actual or constructive knowledge of any connection between any fraudulent evasion of VAT and the purchase of the goods;
(c)did not participate in any fraud;
(d)did not aid the perpetrators of any fraud nor become their accomplice; and
(e)performed all reasonable and proportionate checks to ensure its transactions were not connected with fraud.
Whilst Sceptre disputes the Commissioners’ entitlement to disallow the sums claimed there is no specific issue as to quantification.
The Background
5.Sceptre was incorporated in 1979 with the name “Alnery No.2 Ltd”. It later became Sceptre Services Ltd. Mr Anthony Rayer (“Mr Rayer”) is the sole shareholder and director of Rayer Group Ltd which is the holding company that owns Sceptre and Sceptre’s subsidiary company, Rayer’s Holdings Ltd. Rayer Holdings Ltd had been a family company run by Mr Rayer’s father which Mr Rayer entered in 1984. At that time the business comprised a property investment and holding division, a wholesaling textile division and a retailing division. Mr Rayer handled the paperwork and quite early on he introduced a computer-based system. In 1987 a Mr Colin Evans (“Mr Evans”), an accountant, was brought into the business and since 2004 has been Sceptre’s company secretary. He was in court almost every day of the hearing but did not give evidence. About 1986 to 1987 Rayer Holdings (not Sceptre at that time) began retailing computers, hardware and software. At the end of the 1990s Mr Rayer’s father retired and the retail and wholesale textiles business was wound up. In 2003 Mr Rayer acquired Sceptre Services outright from Rayer’s Holdings Ltd and various organisational changes were made in the group culminating in Rayer owning Rayer Group Ltd, which owns both Sceptre and Rayer’s Holdings Ltd. Sceptre had been registered for VAT with effect from 23 September 2003.
6.According to its VAT registration form (“VAT 1”) dated 17 September 2003 its main business activities were described as being selling computer hardware/software and it intended importing/exporting goods. The VAT 1 shows Sceptre’s estimated turnover in the following twelve month period to be £100,000, it did not expect the purchases to regularly exceed the VAT on its taxable supplies and it did not expect to be either buying from or selling goods to other EU Member States. Sceptre operates from a property at 4 Bessemer Road in Cardiff which is owned by Rayer’s Holdings Ltd. Regular checks were carried out on Sceptre’s VAT returns by officers of the Commissioners.
7.Sceptre’s submitted VAT returns for the VAT periods 07/06 and 08/06 on or about 1 August 2006 and 1 September 2006 respectively. The returns were selected for extended verification due to the large repayments requested by Sceptre and the Commissioners conducted detailed enquiries into the build-up of figures on the returns and traced the transactions back through the supply chains. Sceptre was informed on 21 September 2006 of the fact that its VAT returns were undergoing verification for period 07/06 and on 25 October 2006 for period 08/06. Sceptre was updated on the position of the verifications on various occasions. Following completion of the verifications the Commissioners issued the decisions to the Appellant denying entitlement to the right to deduct input tax.
The legislation
8.Articles 167 and 168 of Council Directive 2008/112/EC of 28 November 2006 on the common system of VAT provide:
167 – A right of deduction shall arise at the time the deductible tax becomes due.
168 – Insofar as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
the VAT due or paid in that member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person.
9.The Value Added Tax Act 1994 provides:
s.1(1)Value added tax shall be charged …
(a)on the supply of goods or services in the United Kingdom (including anything treated as such a supply);
(b)on the acquisition in the United Kingdom from other Member States of any goods.
s.24-(1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say-
(a) VAT on the supply to him of any goods or services;
(b)VAT on the acquisition by him from another member State of any goods; and
(c)VAT paid or payable by him on the importation of any goods from a place outside the member States,
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him …
s.73(1) Where a person has failed to make any returns required under the Act … or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.
Sch 11 Para 5(1) VAT due from any person shall be recoverable as a debt due
to the Crown;
(2)Where an invoice shows a supply of goods or services as taking place with VAT on it, there shall be recoverable from the person who issued the invoice an amount equal to that which is shown on the invoice as VAT or, if VAT is not separately shown, to so much of the total amount shown as payable as is to be taken as representing VAT on the supply.
(3)Sub-paragraph (2) above applies whether or not –
(a)the invoice is a VAT invoice issued in pursuance of paragraph 2(1) above; or
(b)the supply shown on the invoice actually takes or has taken place …; or
(c)the person issuing the invoice is a taxable person; and any sum recoverable under the sub-paragraph shall, if it is in any case VAT be recoverable as such and shall otherwise be recoverable as a debt due to the Crown.
(6)Regulations may provide –
(a)for VAT on the supply of goods or services to a taxable person, VAT on the acquisition of goods by a table person from other member States land VAT paid or payable by a taxable person on the importation of goods from places outside the member States to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases.
25-(1)A taxable person shall –
(a)in respect of supplies made by him, and
(b)in respect of the acquisition by him from other member States of any goods
account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods” at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.
(2)Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.
26-(1)The amount of input tax for w3hich a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
Regulation 29 of the Value Added Tax Regulations 1995 provides:
29-(1)Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.
(2)At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of –
(a)a supply from another taxable person, hold the document which is required to be provided under regulation 13) …
provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold, instead of the document or invoice (as the case may require) specified in sub-paragraph (a) … above, such other documentary evidence of the charge to VAT as the Commissioners may direct.
Thus, if a taxable person has incurred input tax that is properly allowable, he is entitled to set it against his output tax liability and, if the input tax credit due to him exceeds the output tax liability, receive a repayment.
The European Court of Justice (“the ECJ”), in its judgment dated 6 July 2006 in the joined cases Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (“Kittel”), has confirmed that, in the context of MTIC fraud, traders who “knew or should have known”, that the transactions in which they were engaging were connected with such frauds will not be entitled to reclaim any input tax incurred. In particular, in the Kittel judgment, the ECJ stated:
“56.… a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.
57.That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.
58.In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.
59.Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’.”
The Court of Appeal applied the principle in Kittel set out in paragraph 59 above in the case of Mobilx Ltd, rejecting the trader’s challenge to it.
Missing Trader Intra Community(“MTIC”) Fraud
10.When the VAT system is correctly operated, it is axiomatic that
- An amount of VAT charged by one VAT registered trader to another VAT registered trader should be accounted for as output tax, and then
- The amount of VAT previously charged as output tax, may subsequently be reclaimed by the purchaser as input tax (so as to ensure that the tax is neutral regardless of how many transactions are involved); and
- When a business’s input tax claim exceeds its output tax it will be entitled to make a claim for a repayment of VAT.
A transaction chain in an MTIC fraud involves a “missing” or “defaulting” trader, who imports goods from another EU Member State; a number of intermediary or “buffer” traders, and a “broker” trader, who exports the goods. These are known as “tax loss chains” or “defaulter chains”. In an effort to disguise or hide any tax loss, “contra trading” chains are often contrived to run in conjunction with tax loss chains as part of an overall scheme to defraud the revenue.
11.The Scheme operates as follows:-
(i)Trader A, based in an EU Member State (e.g. France), sells taxable goods to Trader B, in another EU Member State (e.g. the UK). In effect, Trader B acquires those goods free of VAT.
(ii)Trader B, who is the defaulting trader in the UK (i.e. a trader who incurs liability to VAT but who goes missing without discharging that liability) or the trader using a hijacked VAT number (i.e. a trader using a VAT number belonging to someone else), sells the goods to a UK “buffer” (UK Buffer 1)
(iii)Trader B charges VAT on the supply to UK Buffer 1. Trader B is liable to account to HMRC for the output VAT it has charged to its customer (UK Buffer 1), but goes missing before discharging that liability to the tax authorities.
(iv)The goods can then be sold through a number of UK Buffer companies.
(v)The last UK Buffer company (UK Buffer 3) sells the goods to the UK Broker 1 (Trader C). As is normally the case with all buffer traders, UK Buffer 3 pays HMRC the output VAT charged after having deducted the input VAT paid.
(vi)UK Broker 1/Trader C exports the goods to another Member State or outside the EU Exports are zero-rated for VAT purposes, but UK Broker 1/Trader C is entitled to claim a refund of the input VAT paid on the purchase of the goods from HMRC. Should HMRC makes this repayment, the loss of VAT by Trader B is crystallised and goes on to fuel the next round of MTIC transactions.
The Issues
12.The principal issues before the Tribunal are:
(i)Have HMRC suffered a tax loss?
(ii)Did that loss arise from the fraudulent evasion of VAT? If so
(iii)Were the transactions entered into by Sceptre in the relevant period connected to that fraud?
(iv)Did Sceptre know, or should Sceptre have known, that they were so connected?
With regard to these matters the burden of proof lies upon the Commissioners.
The Evidence
13.There were 19 agreed bundles of evidence. In addition we heard oral evidence on behalf of the Commissioners from the following officers: Christopher Williams (“Officer Williams”), David Phillips, Rod Stone, Andrew Williams, Michael Quartey, Adam Smith, Sarah Barker, Angela Seymour, Gerard Marescaux, Ian Webster, John Cordwell and Ghazalah Shah. Dr Kevin Findlay, an independent consultant, also gave evidence on behalf of the Commissioners. The witness statements of the following officers of the Commissioners were read: Gail Taylor, Claire Downton, Emma Bishop, Helen Harris, Nicola King, Susan Okolo, Harry Patterson, Susan Payiatis, David Reynolds, Frances Varney and Richard Wilkinson. In addition the statement of Allan Coughlin of Cardiff University was read to the Tribunal. Mr Anthony J Rayer was the only witness who gave evidence on behalf of the Appellant.