The simple issue was whether the appellants were entitled to input tax credit in respect of the purchase of mobile telephones.

The appellants were connected companies under the common ownership and control of a single director (G) and were both wholesale dealers in mobile phones. The appellants rendered VAT returns for the three months to 31 March 2006 claiming repayments in the combined sum of £18,248,712. The commissioners had concerns about the validity of the claims and undertook an extended verification of the returns. This led to their decision to withhold the repayments claimed, apart from a small amount relating to overhead costs. The commissioners maintained that they were not required to pay the tax because the appellants dealt in goods knowing, or with the means of knowing, that their so doing was connected with a fraud elsewhere in the chain of supply or in a related chain. The transactions in question involved the purchase of phones from UK suppliers for immediate sale to customers, usually in other European member states, or for transfer between the appellant companies before supply. The commissioners contended that the true purpose of the chain of supply was to defraud the Revenue.

The principal argument of the commissioners, by the conclusion of the hearing, was that G knew of, and was probably an organiser of, an attempted MTIC fraud. If he did not have actual knowledge of the fraud, it could only be because he had deliberately shut his eyes to it. In the commissioners’ view, the whole of the actions of G led inexorably to the conclusion that the transactions were contrived and that he was aware of the fact. Despite it having been pointed out to G that all, or almost all, of the appellants’ purchases could be traced back to defaulting traders, he took no action. Furthermore, it was not credible that the transactions entered into with other traders could be legitimate: no stock was held; the combined turnover of the appellants was about 687m despite the two companies having no capital and fewer than ten employees; and there was no insurance or comprehensive documentation relating to very valuable consignments.

The appellant submitted that there must be an identifiable connection between the transaction in question and a tax loss; merely showing that a trader in a chain of transactions had failed to account for some VAT did not necessarily mean that he had not accounted for the relevant tax. If a trader had not disappeared, but had disputed an assessment, he could not be said to have defaulted, since it might be found that he did not owe the tax; or it might be that the tax was due, but that no fraud was involved. The appellants submitted that many of the assessments against supposedly defaulting traders had been issued by the commissioners long after the decision had been made to refuse the appellants’ claims, leading to the conclusions that the decisions had been made on supposition rather than on true evidence of a fraudulent default and that the commissioners were trying to improve their evidence at the last minute. The appellants pointed to the relevant tax loss, if any, occurring after they had entered into the transactions and maintained that they had no means of knowledge of the intentions of a trader several steps removed from them; they had no means of finding out what was happening elsewhere in the supply chain. The appellants submitted that fraud must be proved rather than assumed and urged the tribunal to the view that it should be very confident that fraud had been established before endorsing the commissioners’ refusal of the repayment claims.

Having considered the evidence, the tribunal was in no doubt that all, or almost all, of the transactions into which the appellants entered were wholly artificial and nothing more than a device to cheat the tax authorities. From the evidence of G and the manner it was given, the tribunal considered that he knew perfectly well that the purpose of the chains of transactions was fraudulent and that the appellants had entered into those transactions in order to benefit from the fraud. There was nothing to suggest that the appellants or the traders who preceded them in the chains of supply were manufacturers, authorised distributors or high street traders. It was extraordinary beyond belief that in a sequence of seven or eight traders every purchaser was willing to buy the exact quantity that his supplier had available. It made no sense that mobile phones supplied by the appellants with a central European specification should be released onto the UK market. The only conceivable reason for importing them would be to export them again.

From the manner in which the appellant gave his evidence, G was not an innocent person swept into a fraud committed by someone else. From his demeanour and his untruthful evidence, G was under no illusion about the nature of the trade in which the appellants were engaged. The commissioners were right to contend that he was one of the ringleaders, or at least he was party to the fraud. Since the appellants had actual knowledge of the fraudulent transactions, it was not necessary for the tribunal to deal with the question of whether they had means of knowledge. However, if the tribunal had not so found, it would have been evident, in the words of the European Court of Justice in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2006] ECR I-6161, that the appellants had ‘failed to take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud’.

The tribunal dismissed the companies’ appeal.

1. The appellants’ director knew that the appellants were engaged in transactions whose purpose was the commission of a fraud against the commissioners.
2. The appellants’ creation and assembly of documentation relating to their transactions and their due diligence were designed only to persuade the commissioners that they were legitimate traders.
3. The transactions between the two appellants had no true purpose other than to shift their respective VAT liabilities and repayment claims.
4. Every one of the transactions was carried out with the objective of defrauding the Revenue.
5. The commissioners’ decision to withhold the appellants’ repayment claims was correct.

No. 20,266