The Court of Appeal has refused to overturn High Court and Tribunal rulings in three trader VAT carousel fraud cases, with HM Revenue & Customs (HMRC) victories in two upheld.
HMRC won appeal verdicts in long-running legal battles with mobile phone and computer chip traders Mobilx, which is now in administration, and Calltel and Opto Telelinks, which were heard in a conjoined case. The trio have been fighting HMRC for around £25 million in combined VAT deductions.
In parallel, trader Bluesphere Global had its High Court victory over HMRC upheld in the same hearing, the first to reach the Court of Appeal since the seminal Axel Kittel case went through the European Court of Justice (ECJ), and established the ‘means of knowledge’ test.
The ECJ ascertained: “Having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT.”
The Court of Appeal provided new guidance on ‘means of knowledge’ for mobile traders wound up in VAT fraud cases. The Court of Appeal stated: “A trader who should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT, cannot be regarded as a participant in that fraud.
“The highest it could be put is that he was running the risk that he might be a participant. This is not the approach of the court in Kittel, nor is it language it used.
“In those circumstances, I am of the view that it must be established that the trader knew or should have known that by his purchase he was taking part in such a transaction.”
The court also highlighted that the burden of proof would be for HMRC to prove that a trader’s knowledge was such that input tax should be withheld. HMRC must also query why a trader may have received a large amount of capital in a short period.
As a result of the Court of Appeal hearing, tribunals are likely not to focus on the question of due diligence, but will seek to find out whether the trader should have known that he was participating in a fraudulent transaction.
VAT specialists Dass Solicitors said in a statement: “On first reading, the Court of Appeal’s judgment is fairly damning. HMRC’s interpretation of Kittel is confirmed.”
It added: “It is unlikely that this Court of Appeal’s judgment will be the last word on either Kittel or, contra trading.
“With regard to Kittel, Calltel and Mobilx are intending, if they have not already done so, to appeal against the judgment to the Supreme Court, previously the House of Lords. As, no doubt, any such appeal will involve a significant challenge to the Court’s legal analysis of Kittel, we maybe approaching a reference to the ECJ.
“Insofar as contra trading is concerned, it is not known whether HMRC will appeal the BSG finding. If they do not, it is our view that Tribunals will have to follow not only the Lord Chancellor’s decision but also his reasoning for that decision.”