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

Precedent	Rule or Principle Cited For	Application by the Court
Mobilx Ltd (in Administration) v HMRC; HMRC v Blue Sphere Global Ltd; Calltel Telecom Ltd and another v HMRC [2010] STC 1436	HMRC bears the burden of proof to establish that a trader knew or should have known of fraud connection to deny input tax deduction.	Court relied on Mobilx as binding authority for the standard of knowledge and application of Kittel principles.
Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04 and C-440/04) [2006] ECR 1-6161	Establishes that traders who knew or should have known of fraud are participants and lose right to deduct input VAT.	Applied to determine that Company A lost right to deduct input tax due to knowledge or constructive knowledge of fraud.
Mahag ben kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Ad Főigazgatósága and Pál Péter Dávid v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Ad Főigazgatósága [2012] EUECJ C-80/11	Clarifies that refusal of right to deduct requires objective evidence that the taxpayer knew or should have known the transaction was connected with fraud.	Considered in relation to contra-trading and knowledge; rejected appellant's argument that knowledge must be confined to a single supply chain.
Gábor Tóth v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Ad Főigazgatósága [2012] EUECJ C-324/11	Right to deduct may be refused if the taxpayer knew or should have known the transaction was connected with fraud by the supplier.	Applied to support the principle that knowledge of fraud negates right to deduct input tax.
Megtian Limited (in administration) v HMRC [2010] STC 840	Knowledge test applies equally to contra-trading as to typical MTIC fraud.	Supported the Tribunal’s conclusion that contra-trading falls within the same legal test for knowledge of fraud.
Export 365 v HMRC [2007] EWHC 1737 (Ch)	Tribunal may rely on inferences drawn from primary facts to determine knowledge of fraud.	Used to justify consideration of totality of evidence and circumstances surrounding transactions.
Red12 v HMRC [2010] STC 589	Focus on totality of evidence; due diligence is not determinative of knowledge; inference may be drawn from patterns of transactions.	Adopted to assess Company A's knowledge based on overall conduct and circumstances.
HMRC v Atlantic Electronics Ltd [2012] UKUT 45 (TCC)	Factors to consider in deciding whether to apply old or new costs regime in Tribunal proceedings.	Applied in deciding costs regime and costs order in this appeal.
Persaud (Luke) v Pursaud (Mohan) [2003] EWCA Civ	Wasted costs jurisdiction requires conduct akin to abuse of process, not mere negligence.	Considered in deciding that appellant’s conduct did not justify a wasted costs order.
Attorney General v Blake [2000] EWHC 453 (Admin)	Defines abuse of process as improper use of court process.	Used to assess whether appellant’s failure to notify HMRC of witness requirements amounted to abuse of process (it did not).

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.