Global Enterprises (GB) Ltd v Revenue & Customs

Factual and Procedural Background

This opinion concerns an appeal by Company A against a decision of HM Revenue and Customs (HMRC) denying Company A's right to deduct input tax amounting to £1,009,741.25 for the VAT accounting period ended 30 April 2006. The denial was based on the finding that 12 transactions involving the purchase and sale of mobile phones by Company A were connected to missing trader intra-community (MTIC) fraud, a scheme designed to defraud the revenue. HMRC asserted that Company A knew or should have known of this connection.

Company A was represented by Attorney Holland, while counsel Kerr and Coxhill appeared for HMRC. The appeal was heard by the First-tier Tribunal, Tax Chamber, over several days in October 2012.

The factual background includes detailed descriptions of the MTIC fraud mechanism, typical participants in such fraud (defaulters, brokers, buffers), and the concept of contra-trading as a variation of MTIC fraud. Company A engaged in a series of transactions involving mobile phones, some of which were broker deals connected to known fraudulent tax losses, and others were buffer deals within the UK.

Company A's director, Plaintiff, was found to have been aware of MTIC fraud risks and had received multiple communications from HMRC warning about such fraud. Despite some due diligence efforts, numerous red flags were identified in Company A's trading practices and its commercial relationships, including the use of freight forwarders with poor reputations and customers and suppliers with suspicious profiles.

The procedural history includes the appeal being brought under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, with extensive witness evidence and cross-examination conducted during the hearing.

Legal Issues Presented

1. Was there a tax loss?
2. If so, did this loss result from a fraudulent evasion?
3. If there was a fraudulent evasion, were Company A's transactions connected with that evasion?
4. If such a connection was established, did Company A know or should it have known that its transactions were connected with a fraudulent evasion of VAT?

Arguments of the Parties

Appellant's Arguments

• The principles established in prior case law do not extend to contra-trading, and the fraud must precede the appellant's purchase in the same supply chain.
• There is a conflation between the criteria for the right to deduct input tax and the objective factors establishing knowledge of fraud, leading to a misapplication of legal principles.
• HMRC must establish indications of infringement or fraud before imposing a duty on the appellant to make inquiries.
• Company A conducted reasonable due diligence, including verification of VAT registrations and obtaining reports on suppliers and customers.
• The trading model and some transactions, including one traced back to a manufacturer with no tax loss, indicate legitimate commercial activity.
• The appellant contended that the only reasonable explanation test was improperly applied and that deductive subjectivity is inappropriate.
• Regarding costs, the appellant argued the new costs regime should apply and that the conduct leading to wasted costs was not improper, unreasonable, or negligent.

Respondents' Arguments

• Company A's transactions were connected to MTIC fraud and Company A knew or should have known of this connection.
• The trading environment was unrealistically benign, indicating a contrived scheme rather than genuine commerce.
• Company A failed to take reasonable steps a prudent businessman would take to protect commercial interests.
• HMRC relied on patterns of transactions, circularity of funds, and inconsistencies in due diligence to establish knowledge of fraud.
• HMRC sought costs for wasted expenses incurred due to the appellant's failure to inform which witnesses were required for cross-examination.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal accepted that a tax loss had occurred in each of the 12 transactions and that the losses resulted from fraudulent evasion of VAT. It applied the legal principles established by the European Court of Justice in Kittel and subsequent UK authorities, notably Mobilx, which hold that a trader who knew or should have known that their transactions were connected to fraud loses the right to deduct input tax.

The Tribunal rejected the appellant’s arguments that knowledge should be confined to a single supply chain or that contra-trading was excluded from the legal test. It agreed with authorities that the test for knowledge is the same regardless of whether the connection to fraud is direct or via contra-trading.

In assessing knowledge, the Tribunal considered the totality of evidence, including the nature of the transactions, the rapidity and circularity of payments, the failure to adhere to contractual terms regarding release of goods, and the suspicious commercial profiles of suppliers, customers, and freight forwarders.

The Tribunal found Plaintiff’s evidence to be evasive, inconsistent, and lacking credibility. Despite some due diligence steps, Plaintiff failed to investigate or follow up on numerous red flags, such as the filing of abbreviated accounts by companies with very high turnover, missing accountant references, and negative indicators in due diligence reports.

Applying the objective factors and legal standards, the Tribunal concluded that Plaintiff, and thus Company A, knew or should have known that the transactions were connected to fraudulent evasion of VAT. Even if not known, the only reasonable explanation for the circumstances was that the transactions were connected to fraud.

Regarding costs, the Tribunal exercised its discretion to apply the old costs regime to costs incurred before 1 April 2009 and the new regime thereafter. It found that the appellant’s legal representative had acted negligently by failing to timely inform HMRC of which witnesses were required, causing unnecessary costs. However, this did not amount to improper or unreasonable conduct warranting a wasted costs order.

Holding and Implications

The appeal is DISMISSED. Company A’s right to deduct input tax for the 12 transactions connected to MTIC fraud is denied.

The Tribunal ordered Company A to pay the costs incurred by HMRC before 1 April 2009, to be assessed if not agreed. Costs incurred after that date are subject to the new costs regime.

This decision confirms the application of established legal principles concerning MTIC fraud and the knowledge test for denial of input tax deduction, including in cases involving contra-trading. It reinforces the requirement for traders to exercise reasonable care and due diligence in their transactions to avoid participation in fraudulent schemes. No new precedent was established beyond the application of existing law.