“In order to demonstrate where the loss arises from MTIC fraud we start with a simple example of an import of goods by X, who sells them to Y, who exports them. The tax on acquisition (import) by X is cancelled by input tax of the same amount, and the output tax charged on the sale by X will be cancelled by the input tax repaid to Y on the export, so that the United Kingdom exchequer receives no net tax”
“The Court (The European Court of Justice when considering Optigen ) rejected the United Kingdom’s argument that unlawful transactions fell outside the scope of VAT. Fiscal neutrality prohibits the distinction between lawful and unlawful transactions; such a distinction must be restricted to transactions concerning products which by their very nature may not be marketed, such as narcotic drugs and counterfeit currency (see paragraphs 49 and the Advocate General’s Opinion paragraph 40). By its rejection of the United Kingdom argument, the Court made it clear that the reason why the fraud vitiates a transaction is not because it makes the transaction unlawful but rather because where a person commits fraud he will not be able to establish that the objective criteria, which determine the scope of VAT and the right to deduct, have been met.”
“As becomes clear from the commissioners own description of what they consider to constitute carousel fraud, its characteristic is that it makes use of lawful economic channels in order to facilitate the retention of money paid as VAT”
“In my judgement in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest conspirator, there are two potential frauds: i) The dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain; and ii) The dishonest cover-up of that fraud by the contra-trader. Thus it must be established that the taxable person knew or should have known of a connection between his own transaction and at least one of these frauds. I do not consider it is necessary that he knew or should have known of a connection between his own transaction and both of those frauds. If he knows or should have known that the contra-trader is engaging in fraudulent conduct and deals with him, he takes the risk of participating in a fraud, the precise details of which he does not and cannot know.”
“44. There is force in the argument of counsel for BSG but I do not accept it. The nature of any particular necessary connection depends on its context, for example electrical, familial, physical or logical. The relevant context in this case is the scheme for charging and recovering VAT in the member states of the EU. The process of off-setting inputs against outputs in a particular period and accounting for the difference to the relevant revenue authority can connect two or more transactions or chains of transactions in which there is a common party whether or nor the commodity sold is the same. If there is a connection in that sense it matters not which transaction or chain came first. Such a connection is entirely consistent with the dicta in Optigen and Kittel because such connection does not alter the nature of the individual transactions. Nor does it offend against any principle of legal certainty, fiscal neutrality, proportionality or freedom of movement because, by itself, it has no effect. 45. Given that the clean and dirty chains can be regarded as connected with one another, by the same token the clean chain is connected with the fraudulent evasion of VAT in the dirty chain because, in a case of contra-trading, the right to reclaim enjoyed by C (Infinity) in the dirty chain, which is the counterpart of the obligation of A to account for input tax paid by B, is transferred to E (BSG) in the clean chain. Such a transfer is apt, for the reasons given by the Tribunal in Olympia to conceal the fraud committed by A in the dirty chain in its failure to account for the input tax received from B. 46. Not all persons involved in either chain, although connected, should be liable for any tax loss. The control mechanism lies in the need for either direct participation in the fraud or sufficient knowledge of it.”
“In my judgment, it would be wrong to approach this case on any basis other than the balance of probability with appropriate respect paid to the need for cogent evidence to reflect the serious nature of the allegation and the inherent improbability that this 22 year old young lady of good character should involve herself in such conduct as that alleged. I simply do not accept that it is appropriate, as a matter of law, to require a higher standard of proof simply because of the nature of the allegation. If murder, why not allegations of rape or the most serious fraud.”
“The Appellant has conceded that fraud existed in its supply chains for transactions undertaken within the periods 02/06, 04/06 and 05/06 and that the goods imported by the fraudster were purchased by it”
“Regarding the contra trading 06/06 period, the Commissioners must, the Appellant submits, prove a conspiracy to commit fraud between all parties in both chains”
“We purchase items which we promise to pay for and we ensure that our sales are on the whole made before we finalise the deal for the purchase. Those sales are made on the basis that we will receive payment for the sale prior to having to pay for the purchase of those sales. In effect, the trader who is selling to us is bankrolling our deal. This is a high risk strategy but one which has proven very successful for us”
“I didn’t trade with Amaro straight away, but found my first supplier through the I P T website. I can’t remember whether this was to do with Amaro not having the stock I wanted, or not offering the right price”
“We do not believe a Tribunal would condone HMRC imposing requirements on businesses in your industry, simply because you trade within this particular industry, which effectively interfere with your Community Rights. These rights includes the free movement of goods and the principle of equality”
“The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT. The tribunal might have concluded that Mr Peters should have known that the transactions into which he entered were concerned with fraud, by reference to the unconventional nature of those circumstances (a finding it came close to making at paragraphs 2 to 8). But it was not the only decision within the bounds of reasonable conclusion”
“The Respondents’ grounds for these decisions are that the input tax incurred by the Appellant in those periods was incurred in transactions connected with the fraudulent evasion of VAT, and that the Appellant either knew or should have known of this fact” and at paragraph 77 “ …..a.) the assessed transactions formed part of transaction chains’ connected with the fraudulent evasion of VAT; and b.) The Appellant either ‘ knew or should have known’ of that fact”
“But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion”
“Much will depend on the facts, but an obvious example might be the offer of an easy purchase and sale generating conspicuously generous profit for no evident reason. A trader receiving an offer would be well advised to ask why it had been made; if he did not he would be likely to fail the test set out in paragraph 51 in the judgement of Kittel. ”
“iii) The principle does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion”
“76. The Respondents contend that, standing back from the individual chains of transactions and looking at the whole picture, as illustrated by the Respondents case as set out above, its true nature can be seen as part of a contrived scheme to defraud the revenue”
“109. Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the Tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and ‘similar fact’ evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. 110. To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile phones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A Tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. 111. Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them”
“The power of the Tribunal to make a direction (sic) that rule 29 of theValue Added Tax Rules 1986 (the 1986 Rules) shall apply is contained in para 7(3) of the Transfer of Tribunal Functions and Revenue and Customs Appeals order 2009 … Proceedings commenced prior to1 April 2009 are consequently “current proceedings” (para 1(2)). In those circumstances para 7(3) gives the Tribunal the power to give directions to ensure that proceeding are dealt with fairly and justly, and in particular may (a) apply any provision in procedural rules which applied to the proceedings before1 April 2009 , or (b) disapply any provisions of the 2009 Rules. Under rule 29 of the 1986 Rules the Tribunal could direct a party to pay the other party such sum as it might determine on account of the costs of the other party “ of and incidental to and consequent on the appeal”