Introduction

The case of Excel RTI Solutions Ltd v. Revenue & Customs (Rev 1) ([2010] UKFTT 519 (TC)) revolves around the denial of input VAT totaling £3,302,830. Excel RTI Solutions, an IT consultancy and mobile phone trading company, engaged in purchasing mobile phones with the intent to sell them to overseas customers. The contention arose when HMRC (Her Majesty's Revenue and Customs) denied the input VAT on these transactions, alleging that they were connected with fraudulent VAT evasion schemes.

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) dismissed Excel RTI Solutions' appeal against HMRC's denial of input VAT. The core decision was based on the Tribunal's acceptance of HMRC's argument that the input VAT incurred by Excel was connected to fraudulent evasion of VAT. The Tribunal relied heavily on precedents established in Kittel v Belgium and Mobilx Ltd v Revenue and Customs Commissioners, asserting that Excel either knew or should have known about the fraudulent activities within their supply chains.

Analysis

Precedents Cited

The judgment heavily referenced two pivotal cases:

• Kittel v Belgium and Belgium v Recolta Recycling ([2006] ECR I-6161; [2008] STC 1537): Established that input VAT incurred in transactions connected with fraudulent VAT evasion can be denied if the taxpayer knew or should have known about the fraud.
• Mobilx Ltd v Revenue and Customs Commissioners ([2010] STC 1436, CA): Reinforced the principles from Kittel, emphasizing the burden of proof on HMRC to demonstrate the link between the taxpayer’s transactions and fraudulent activities.

Legal Reasoning

The Tribunal applied the Kittel test, requiring HMRC to prove that the input VAT was connected to fraudulent evasion and that Excel was aware or should have been aware of this connection. Key factors considered included:

• The intricate money flow through multiple parties and FCIB accounts, suggesting orchestration of fraudulent activities.
• Patterns of synchronized payments and shipments that indicated coordinated schemes.
• Excel’s extensive due diligence measures, which, paradoxically, highlighted the complexity and sophistication of the fraudulent schemes they were allegedly part of.

The Tribunal concluded that the evidence presented by HMRC, particularly the FCIB banking records, demonstrated that Excel was either complicit in or should have reasonably suspected involvement in VAT fraud schemes.

Impact

This judgment underscores the stringent measures HMRC can employ to deny input VAT deductions when interconnected fraudulent activities are evident. It reinforces the burden of proof on taxpayers to demonstrate that their transactions are free from any fraudulent connections. Future cases in the realm of VAT will reference this decision to justify the denial of input VAT in complex fraudulent schemes.

Complex Concepts Simplified

Abuse of Rights

Abuse of rights refers to the misuse of legal provisions to achieve a purpose contrary to their intended objective. In this case, Excel's attempts to reclaim input VAT were deemed an abuse because they were intertwined with fraudulent VAT evasion.

Contra-Trading

Contra-trading involves transactions where goods or funds are traded back and forth between parties in a way that masks the true nature or origin of the transactions. This was evident in how Excel's mobile phone consignments were part of a larger fraudulent scheme involving multiple defaulters and buffer companies.

Joint and Several Liability

Joint and several liability allows authorities to hold multiple parties responsible for an obligation, such as unpaid VAT, irrespective of each party's individual contribution. HMRC's letters referenced this concept, indicating potential liability for Excel regardless of the actions of intermediary traders.

FCIB Banking Chains

FCIB (First Curacao International Bank) records played a crucial role in the judgment, revealing the interconnected financial transactions that pointed towards coordinated VAT fraud.

Conclusion

The decision in Excel RTI Solutions v. HMRC serves as a robust affirmation of HMRC's authority to deny input VAT deductions when transactions are embedded within complex fraudulent schemes. By leveraging precedents like Kittel and Mobilx, the Tribunal emphasized the necessity for taxpayers to meticulously ensure their transactions are free from ties to VAT evasion. This judgment reinforces the legal impetus to prevent the abuse of tax regulations, ensuring that input VAT claims are legitimate and disconnected from fraudulent activities.