Mobilx Ltd ( in administration) v Revenue and Customs Commissioners
Blue Sphere Global Ltd v Same
Calltel Telecom Ltd and another v Same
[2010] EWCA Civ 517; [2010] WLR (D) 124
CA: Carnwath, Moses LJJ, Sir John Chadwick: 12 May 2010
Where a trader had means of knowing that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT he lost his right to deduct input tax but only when he knew or should have known that the transaction was connected to fraud. To lose his entitlement it was not sufficient that the taxpayer knew or should have known that it was more likely than not that his purchase was connected to fraud.
The Court of Appeal so stated when (1) dismissing the appeal of Mobilix Ltd (in administration) against a decision of Floyd J [2009] EWHC 133 (Ch) dismissing the company’s appeal against a decision of the VAT and Duties Tribunal that the company should have known that all its transactions were more likely than not to be implicated in VAT fraud; (2) dismissing the appeal of the Revenue and Customs Commissioners (“the Revenue”) against a decision of Sir Andrew Morritt C [2009] EWHC 1150 (Ch) allowing the appeal of Blue Sphere Global Ltd that the VAT and Duties Tribunal was wrong to have concluded that it was sufficient to prove that the company was involved in transactions connected with fraudulent evasion of VAT. The Chancellor held that it was necessary to prove the company ought to have known that by its participation it was participating in transactions which were connected with the fraudulent evasion of VAT; and (3) dismissing the appeal of Calltel Telecom Ltd and Opto Telelinks (Europe) Ltd against a decision of Floyd J [2009] EWHC 1081 (Ch) dismissing their appeals as taxpayers against a decision of the VAT and Duties Tribunal that they knew they were participating in transactions connected with fraudulent evasion of VAT. The Revenue had refused input tax credit claims on the basis that the traders knew or should have known that the transactions in which they were involved were or were likely to be connected with fraud. The tribunal upheld the refusals.
MOSES LJ said that the appeals related to the meaning of the test which the Revenue contended determined its right to refuse a taxable person’s entitlement to deduct input tax. The appeal turned on what the Court of Justice of the European Communities meant in Axel Kittel v Belgium; Belgium v Recolta Recycling (Joined Cases C-439/04 and C-440/04) [2006] ECR 1-6161, paras 59 and 61. The right to deduct may be refused if “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.” Two essential questions arose: what the European Court of Justice meant by “should have known”, and second the extent of the knowledge which it must be established that the taxpayer had or ought to have had: was it sufficient that the taxpayer knew or should have known that it was more likely than not that his purchase was connected to fraud or must it be established that he knew or should have known that the transactions in which he was involved were connected to fraud? Once it was appreciated how closely Kittel followed the approach the court had taken six months before in Optigen Ltd v Customs and Excise Comrs (Case C- 354/03) [2006] ECR 1-483, it was not difficult to understand what it meant when it said that a taxable person “knew or should have known” that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. In Optigen the court ruled that despite the fact that another prior or subsequent transaction was vitiated by VAT fraud in the chain of supply, of which the impugned transaction formed part, the objective criteria, which determined the scope of VAT and of the right to deduct, were met. But the court limited that principle to circumstances where the taxable person had “no knowledge and no means of knowledge”(para 55). The court must have intended Kittel to be a development of the principle in Optigen. Kittel was the obverse of Optigen. The court must have intended the phrase “knew or should have known” which it employed in Kittel, at paras 59 and 61, to have the same meaning as the phrase “knowing or having any means of knowing” which it used in Optigen, at para 55. If a taxpayer had the means at his disposal of knowing that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT he lost his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right were not met. It profited nothing to contend that, in domestic law, complicity in fraud denoted a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who failed to deploy means of knowledge available to him did not satisfy the objective criteria which must be met before his right to deduct arose.
Perhaps of greater weight was the challenge based, in Mobilix and Blue Sphere, on the Revenue’s denial of the right to deduct on the grounds that the trader knew or should have known that it was more likely than not that transactions were connected to fraud. The question arose in those appeals as to whether that was sufficient or whether, as the Chancellor concluded in Blue Sphere, the right to deduct input tax may only be denied where the trader knows or should have known that the transaction was connected to fraud. In short, did a trader lose his entitlement to deduct if he knew or should have known of a risk that his transaction was connected to fraudulent evasion of VAT? The Revenue contended that the right to deduct may be denied if the trader merely knew or should have known that it was more likely than not that by his purchase he was participating in such a transaction. In his Lordship’s judgment the test in Kittel was simple and should not be over-refined. It embraced not only those who knew of the connection but those who “should have known”. Thus it included those who should have known from the circumstances which surrounded their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turned out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He might properly be regarded as a participant for the reasons explained in Kittel. The true principle to be derived from Kittel did not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader might be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion. Such an approach did not infringe the principle of legal certainty. On his Lordship’s interpretation of the principle in Kittel, there was no question of penalising the traders. If it was established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT. The principle in Kittel, properly understood, was compliant with the rights of traders to freedom from interference with their property enshrined in article I of the First Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms. It did no more than remove from the scope of the right to deduct a person who, by reason of his degree of knowledge, was properly regarded as one who had aided fraudulent evasion of VAT. The appeals would be dismissed.
SIR JOHN CHADWICK and CARNWATH LJ agreed.
AI
