Fonecomp Ltd v Revenue & Customs Commissioners (2012)
A decision to deny a company's input tax claim in respect of its purchase of mobile phones in relation to two deals was correct where the deals were shown to be connected to VAT fraud and where that company had the means to know that the only reasonable explanation for the deals was that they were part of a scheme to defraud the Revenue.
The appellant company (F) appealed against the decision of the respondent Revenue to deny its input tax credit in respect of its purchase of mobile phones in two transactions.
F had bought, and immediately sold and exported, the phones to companies incorporated in the European Union. The Revenue rejected F's claim to input tax on the basis that its purchases were connected to the fraudulent evasion of VAT by a second company (S) and that F knew or should have known of the connection to the VAT fraud. The Revenue claimed that S defaulted in its VAT payment in respect of certain transactions, and that F's purchases were connected with S's default through a third company (K), which had acted as a contra trader. The Revenue contended that F was, through K, in the position of third trader and that the activities of K provided the connection between F's purchase and S's default, such that F either knew, or should have known, of its connection to VAT fraud. In addition the Revenue alleged that there was a wider managed scheme associated with K's transactions which involved F, in an organised assault on the Revenue which involved reclaiming the VAT on which S defaulted.
F argued that the Revenue had to allege conspiracy in order to succeed.
(1) The right to a VAT credit unless and until it was denied did not exist if the relevant conditions were satisfied, Kittel v Belgium (C-439/04)  E.C.R. I-6161 applied. The Kittel principle that, where it was 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 concerned with fraudulent evasion of VAT then it was a matter for the national court to refuse to allow the right to deduct, was part of UK law, Mobilx Ltd (In Administration) v Revenue and Customs Commissioners  EWCA Civ 517,  S.T.C. 1436 followed. The taxpayer was barred from input tax credit only if he had knowledge that the transaction was connected to fraud. Where a person had the means of knowing that the only reasonable explanation for his transaction was that it was connected to a fraudulent evasion of VAT, then it could be said that he should have known that it was connected to such fraud. If the taxpayer deployed all means available to him and could not thereby discover a connection to fraud then he was entitled to the input tax credit. The knowledge required was not of the specifics of any particular fraud, but knowledge that by purchasing the taxpayer would be participating in VAT fraud, Blue Sphere Global Ltd v Revenue and Customs Commissioners  EWHC 1150 (Ch),  S.T.C. 2239, Livewire Telecom Ltd v Revenue and Customs Commissioners  EWHC 15 (Ch),  S.T.C. 643, Megtian Ltd (In Administration) v Revenue and Customs Commissioners  EWHC 18 (Ch),  S.T.C. 840 considered. The Revenue did not need to plead conspiracy and no part of the Revenue's case on Kittel failed by reason of a failure to plead conspiracy. The burden of proof rested on the Revenue and the standard of proof was the normal balance of probabilities. The question was objectively whether input tax was deductible on a particular transaction. The action of the Revenue in relation to other persons in the chain were not relevant. Kittel did not impose a penalty, rather it limited and circumscribed the rights to deduct input VAT (see paras 11-21, 37-40, 53-54, 60-61 of judgment). (2) On the evidence, the information available to F was not sufficient for F to conclude that every transaction it undertook was connected to fraud, but it was sufficient to enable it to conclude that such fraud could be present. For each deal, F's purchase was connected with K's fraudulent arrangements in relation to, and with, the fraudulent evasion of VAT by S. There was a connection of inputs and outputs along the chain from K to F, and an offsetting connection within K of all its outputs against the inputs from S. F's purchase assisted S's fraud. F's purchase was also part of an overall scheme to defraud the Revenue. F knew that VAT fraud was prevalent and that it could be an explanation for its deals. F should have known that its purchases were connected with fraud. The due diligence that it undertook could not have affected that conclusion; the information available to F led to the conclusion that its purchases were connected to a fraud (paras 84, 218-221, 224, 240).