The estimates before the Court of Appeal put the potential tax losses as a result of MTIC fraud as being £5.5 billion in 2005-2006 and, more recently, £2.5 billion in 2008-2009. It was also made clear to the Court that there were waiting behind this case more than eight hundred live appeals involving £2 billion of VAT. The Court was not in the dark as to the expected significance of its judgment.
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The result and comments
The Court of Appeal dismissed all of the appeals before it, concluding that the error of law made by the Tribunal in Moblix (asking whether the trader ought to have known that the transactions were more likely than not to be connected with fraud) was not material, as the Tribunal had made sufficient findings of fact to meet the correct test.
It is fairly clear that the Court of Appeal intended to send a message to traders in certain industries that if they close their eyes to the obvious, they risk being considered participants in the fraud that they facilitate, and so losing their right to deduct VAT. There is certainly much in Moses LJ's judgment that will have been welcome to HMRC.
The Court also, however, made clear that it is not enough that the trader simply ran the risk of being involved in fraud; and while the line between this and having been in a position where it ought to have known of the connection with fraud may be difficult to discern in many cases, this must provide some comfort to the trader who knowingly enters a suspect industry but attempts to steer clear of fraudulent trading.
One substantial effect of the judgment may prove to be the shifting of the focus onto the ability of the trader to show an alternative explanation for the circumstances suggestive of fraud. It is to be expected that traders will face an uphill task to convince a sceptical tribunal that there was at the relevant time a legitimate grey market in which, for instance, huge and consistent returns were readily available to start-up companies with no previous experience in the sector.
Melanie Hall QC, Philip Moser, Ian Hutton and Fiona Banks were instructed by HMRC
