Traders both won and lost in the ongoing sector-wide battle with HM Revenue and Customs (HMRC) over withheld VAT repayments last month.
In a landmark ruling, city lawyers Thomas Cooper successfully appealed a VAT and Duties Tribunal verdict to uphold HMRC’s refusal to repay around £1.1 million input tax to trader Blue Sphere Global on the grounds it had ‘means of knowledge” of carousel fraud in a supply chain.
The case was heard in the High Court Chancery Division and supports an earlier judgement against HMRC by Mr Justice Lewison in the Livewire case, reinforcing the requirement of HMRC to prove a link between the trader and the fraud. Thomas Cooper claimed the verdict precluded HMRC “refusing, save in exceptional cases, to refund VAT to legitimate traders.”
Meanwhile, the conjoined case between traders Calltel Telecom and Opto Telelinks, worth over £18.2 million in witheld VAT and on appeal from the VAT and Duties Tribunal, went the way of HMRC in the High Court Chancery Division last month.
Judge Floyd said: “By October 2005, some 179 chains had been verified and all had been traced back and found to be ‘dirty’.”
Mark Whelan, a solicitor at Thomas Cooper said: “The Government’s policy of subjecting all repayment claims of this nature to the process of extended verification is a devastating blow.
“The Judge’s comments as to whether it is appropriate for HMRC to impose a liability for tax on a taxpayer on the basis of ECJ decisions, to which effect has been given by a number of decisions in the Tribunal, will no doubt give HMRC serious cause for concern. Blue Sphere Global has done severe damage to HMRC’s approach to these cases and Appellants involved in both contra and linear trading carousel fraud litigation will be very encouraged by this.”
Alias Dass of VAT specialists Dass Solicitors said: “The Blue Sphere Global case is a contra-trading case. It used to be the case that a trader connected to fraud in any way could not claim money back. This may now change. The trader in this instance prevailed and it can be classed as a victory for all traders. It will effectively strengthen lawyers’ cases for traders at tribunals. If a case is borderline, this inevitably helps strengthen a trader’s position.”
Martin O’Neill, senior consultant at Vantis Group, said: “The victories in Livewire and Blue Sphere Global do not open the floodgates to the repayment en-masse to all companies, but they do give good grounds for companies who have run their affairs responsibly to feel confident that the VAT Tribunal will find in their favour after a hearing of their appeal.
“The Chancery Division’s judgements bind all subsequent VAT Tribunals in appeals where the facts of the case are materially similar. It would be incorrect for companies who consider their cases are materially similar to those of Livewire and Blue Sphere Global to expect HMRC to abandon their cases at this juncture and repay any outstanding monies. All cases rely upon a determination of the individual facts of a case, and it is likely that each case will have to be heard, in turn, in the VAT Tribunal.
“There is also a note of caution in all these judgements, namely that the courts will look critically and not hesitate to find against taxpayers they consider have had knowledge of a fraud, have acted recklessly in their affairs, or have turned a blind eye to the existence of fraud in their supply.”
IPT director Anthony Elliott-Square said: “HMRC has been denying legitimate claims of input tax, which has driven many good companies to the wall. The Treasury is broke and is using this as an excuse for not paying out these claims. Let’s hope the Blue Sphere Global judgement means common sense will prevail and the correct criminal routes will be taken to prove fraud. This also may see the start of cases bypassing tribunal and going to the Chancery Court immediately, where they can be heard in front of the right people.”
There are presently over 600 appeals of this nature awaiting Tribunal hearings, with many progressing to appeal before the High Court. The potential cost to the Exchequer of meeting all repayment claims is estimated at between £4 billion and £8 billion.