“Please be advised that we have been informed by the Appellant that he doesn’t feel that he can attend such a daunting hearing without representation and he does not have the funds to pay for any more litigation. We have supplied opening submissions on the Appellant’s instructions, and he wished that the trial goes ahead, but without his attendance. He relies on the opening submissions.”
“1. The Director will not be attending on any given day. We appreciate that this raises certain problems for the Appellant and these have been fully explained to Mr Auletta. 2. The issue of the pleaded case and inadmissibility of evidence is withdrawn, given we will not be there to properly argue our point and given the lateness of the issue. …”
“… that a tax loss, let alone a fraudulent tax loss, has been proved in any of its supply chains.”
“1. There is a tax loss in all the dirty supply chains. 2. There is no tax loss in its own supply chains. 3. The contra traders did not act fraudulently and, therefore the Appellant is not connected to fraud. 4. The construction of the supply chains is correct in all the dirty and clean chains and, therefore, the goods purchased by the contra traders were later purchased by the Appellant.”
“167 – A right of deduction shall arise at the time the deductible tax becomes charged. 168 – In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following form the VAT which he is liable to pay; (a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person”
“… where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connection with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.” (paragraph 61) 16. In the light of the above, the Commissioners have the right to refuse a claimed repayment of input tax if the taxable person knew or should have known that his transaction was connected with fraud. 17. The ECJ in Kittel (paragraph 51) refers to “traders who take every precaution which could reasonable be required of them to ensure that their transactions are not connected with fraud”
“Where an initial enquiry gives rise to information suggesting the need for further enquiry, the test is reapplied to assess the need for that further enquiry.”
“102. In my judgment in a case of alleged contra trading, where the taxable person claiming repayment of input tax is not himself a dishonest co-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. 103. Thus it must be established that the taxable person knew or should have known by a connection between his own transaction and at least one of those frauds. I do not consider that it is necessary that he knew or should have known of a connection between his own transaction and both of these 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. As Millett J put it in Agip (Africa) Limited v Jackson[1990] CH 265 , 295 (in the context of dishonest assistance in a breach of trust): In my judgment, however, it is no answer for a man charged with having knowingly assisted in a fraudulent and dishonest scheme to say that he thought that it was ‘only’ a breach of exchange control of ‘only’ a case of tax evasion. It is not necessary that he should have been aware of the precise nature of the fraud or even of the identity of its victim. A man who consciously assists others by making arrangements which he knows are calculated to conceal what is happening from a third party, takes the risk that they are part of a fraud practised on that party.” 104. This conclusion is, I think, consistent with what Burton J said in Just Fabulous (§ 24): “whether or not Evolution knew of the precise nature of the defaulter chain or of the goods purportedly dealt with in that chain or the identities of the participants in that chain, Evolution knew of the fraudulent aim of Blackstar in acquiring, through the off-set on the contra trading transaction, the opportunity to receive by such off-set, VAT which it would not be able to recover direct form the Revenue. 105. In other words, if the taxable person knew of the fraudulent purposes of the contra trader, whether he had knowledge of the dirty chain does not matter.”
“79. The Tribunal relied on the judgment of Burton J in R (Just Fabulous (UK) Limited and others v HMRC[2007] EWHC 521 (Admin) . In that case Burton J had to consider the position in relation to contra trading, a case where by definition the transaction in which the trader is involved is outside the fraudulent chain altogether. At [43] having referred to the passages in Kittel which I have cited above, Burton J recorded the Revenue’s submission that: “the words which record these definitive statements are untrammelled by any reference to the need for establishing that the taxable person must be a member of a defaulter chain, or that he must be dealing in the same goods as had been the subject of a defaulter chain.” 80. Burton J accepted those submissions without reservation at [50] to [53]. If the Revenue can justifiably refuse repayment of VAT, on the basis of the rest in Kittel , in the case of a contra trade, it seems to me that there is no obstacle to applying the same principle to successive members of the defaulter chain itself, provided always that the taxpayer in question satisfied the Kittel test. In the case of contra trading, the impugned transaction is necessarily one which can have no causative relationship with the importer’s fraud. No causal connection of the kind suggested as being necessary by Mr Cordara is recognised by Burton J in Just Fabulous or by Lewison J in the course of his careful review of the authorities in Livewire and Olympia . 81. It will be recalled that the rationale in Kittel for refusing repayment where the purchaser knows that he was taking part in a transaction connected with fraudulent evasion of VAT was that he “aids the perpetrators of the fraud and becomes their accomplice”
“48. As Lewison J pointed out in Livewire (see paragraph 26 above), in alleged contra trading cases there are, at least, two potential frauds (1) the dishonest failure to account for VAT by the defaulter or missing trader (A) in the dirty chain, namely, AS Genstar and Wade Tech and (2) the dishonest cover up of that fraud by the contra trader (C), namely Infinity. In this case, the Tribunal rejected the contention of HMRC that Infinity had itself been fraudulent even though it must have known or have had reason to suspect that within its transaction chains there were missing, hijacked or otherwise defaulting traders, see paragraph 141. Accordingly for the purpose of applying the Kittel test the only relevant fraud is that of AS Genstar and Wade Tech.” 28. In that case, however, there was no suggestion that the Appellant had actual knowledge of a connection with fraud, and the Tribunal had found that the alleged contra trader had only means of knowledge of the fraudulent defaults within its “dirty” (broker) chains. Having recognised Lewison J’s identification of two potential frauds, therefore, the Chancellor went on to consider only the possibility of the Appellant’s means of knowledge of those fraudulent defaults. He concluded that if the alleged contra trader was not part of a scheme such that it had actual knowledge of the fraud in its chains when that fraud happened, then the Appellant could not have known of the same. Therefore it could not be said that it ought to have known. He went on: “55. In my view it is an inescapable consequence of contra trading that for HMRC to refuse a reclaim by E it must be in a position to prove that C was party to a conspiracy also involving A. Although the fact that C is party to both the clean chain with E and dirty chain with A constitutes a sufficient evasion of VAT involved in the subsequent dirty chain. At the time he entered into the clean chain there was no such dirty chain of which he could have known, nor was the occurrence of such dirty chain inevitable in the sense of being pre-planned.”
“33. Mr Patchett-Joyce’s submission under Ground 3 was that, in light of Livewire, it was necessary in any case where a disallowance of input tax was to be made good as against the broker at the foot of the clean chain in a contra trading case to demonstrate, and for the Tribunal on appeal to find, that the broker knew or ought to have known specifically of one or other in those two aspects of the underlying fraud. By contrast, Mr Patchett-Joyce submitted (correctly) that in the present case the Tribunal had addressed the question of what Megtian knew or ought to have known as a single question applicable both to the straight transactions and the contra trading transactions, without any such specific analysis in relation to the latter. Mr Patchett-Joyce was quick to point out that it was understandable that the Tribunal took this course, bearing in mind that Livewire was decided shortly after it released its Decision in the present case. Nonetheless it was, he submitted a fatal error of law, in relation to the contra trading transactions. 34. I disagree. I do not read Lewison J’s analysis of the issue as to what must be shown that the broker knew or ought to have known in a contra trading case as amounting to a rigid prescription that, as a matter of law, such an analysis must be performed in every contra trading case, such that it will be defective unless it identifies one or other of the alternative frauds as being that which the broker knew or ought to have known. 35. In the first place, Lewison J was, as he made very clear, addressing the question what had to be demonstrated against an honest broker who was not a dishonest co-conspirator in the tax fraud. In the present case, the Tribunal’s conclusion, after hearing oral evidence from the cross-examination of Mr Andreou, Megtian’s shareholder and principal manager, was that Megtian knew that the transactions on which it based its claim were connected to fraud: see paragraph 112 of the Decision. Participation in a transaction which the broker knows is connected with tax fraud is a dishonest participation in that fraud: see below. 36. Secondly, Lewison J acknowledged that in many if not most cases of contra trading, the clean chain and the dirty chain were likely to be part of a single overall scheme to defraud the Revenue. As he put it, at paragraph 109: “Indeed, it seems to me that the whole concept of contra trading (which is HMRC’s own coinage) necessarily assumes that to be so.” 37. In my judgment, there are likely to be many cases in which a participant in a sophisticated fraud is shown to have actual or blind eye knowledge that the transaction in which he is participating is connected with that fraud, without knowing, for example, whether his chain is a clean or dirty chain, whether contra trading is necessarily involved at all, or whether the fraud has at its heart merely a dishonest intention to abscond without paying tax, or that intention plus one or more multifarious means of achieving a cover-up while the absconding takes place. 38. Similarly, I consider that there are likely to be many cases in which facts about the transaction known to the broker are sufficient to enable it to be said that the broker ought to have known that his transaction was connected with a tax fraud, without it having to be, or even being possible for it to be, demonstrated precisely which aspects of a sophisticated multifaceted fraud he would have discovered, had he made reasonable enquiries. In my judgment, sophisticated frauds in the real world are not invariably susceptible, as a matter of law, to being cared up into self-contained boxes even though, on the facts of particular cases, including Livewire, that may be an appropriate basis for analysis.” 31. In Mobilx & Others the court of Appeal (Moses LJ giving judgment) dismissed a submission that the principles enunciated by the ECJ in Kittel cannot be applied as part of UK domestic law without specific legislation. It then went on to consider what it described as two essential questions: “… firstly, what the ECJ meant by “should have known” and secondly, as to the extent of the knowledge which it must be established that the taxpayer ought to have had: is it sufficient that the taxpayer know or should have known that it was more likely than not that his purchase was connected to fraud or must it be established that he know or should have known that the transactions in which he was involved were connected to fraud?” [Paragraph 4] 32. On the first question, the Court concluded, “52. If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.” 33. In relation to the second question, the Court stated, “53. Perhaps of greater weight is the challenge based, in Mobilx and BSG, on HMRC’s denial of the right to deduct on the grounds that the trader knew or should have known that it was more likely than not that transactions were connected to fraud … In short, does a trader lose his entitlement to deduct if he knew or should have known of a risk that his transaction was connected to fraudulent evasion of VAT? HMRC contends that the right to deduct may be denied if the trader merely knew or should have known that it was more likely than not that by his purchase he was participating in such a transaction. … “56. It must be remembered that the approach of the court in Kittel was to enlarge the category of participants. 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.”
“59. The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”
“61. …The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If he has the means of knowledge available and chooses not to deploy it he knows that if found out, he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct. 62. The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase. If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase. That trader’s knowledge brings him within the category of participant. He is a participant whatever the stage at which the evasion occurs.” (Emphasis added)
“81. HMRC raised in writing the question as to where the burden of proof lies. It is plain that if HMRC wishes to assert that a trader’s state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary. “82. But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, Tribunals should not unduly focus on the question whether a trader has acted with all due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.”
“5. … in contra-trading there are, in its simplest theoretical form, two chains of transactions. First the “dirty chain”, in which there is a missing trader, defaulting trader, or trader using a hijacked VAT number (“missing trader” for short), comprising A (the missing trader) who is the importer of goods into the UK, who sells them to B who sells them to C, who exports the goods, and is thus in a VAT reclaim position. (For simplicity we shall use the expression import and export for intra-Community trade, acknowledging that these are not the proper labels). Secondly, the “clean chain”, in which there are no missing traders, comprising C, who is this time the importer, who sells to D, who sells to E, the exporter (the Appellant in this Appeal is in the position of E). The effect of the clean chain is that the net input tax position of C in the dirty chain is cancelled by output VAT in the clean chain. There is no benefit to C in this as C has paid the input tax to B, and therefore C could be a trader who happens to carry out both import and export transactions unconnected with any fraud, or C could be a trader who is controlled by a “puppet master” to enter into the cancelling transactions to disguise A’s involvement in a fraud. The effect of the contra-trades is that C does not excite Customs’ attention as it is not applying for a repayment; the non-payment of tax by A is less noticeable since without a return the Customs do not know how tax A owes. The input tax reclaimed that C had in the dirty chain has moved to E who is at the end of a clean chain. The only way for Customs to refuse repayment of E’s input tax is to show that E knew or ought to have known of A’s fraud in a completely different chain, and possibly of C’s involvement. Since, as we have demonstrated in our example in paragraph 4 above, the only gain from A’s fraud is the recovery of input tax by E, this must imply that E is a participant in the fraud and, unless he is the puppet master, is presumably sharing the tax recovered with someone else. … “6. The nature of contra-trading is easy to state in the above way but the problem in real life is that there is no logical connection between the clean and dirty chains. First, the VAT accounting periods for C and E will not coincide; E may be on a monthly accounting as it is a habitual exporter, but C may be on a three-monthly period, and C need only arrange that the net tax is nil during that three-month period by entering into transactions after E’s transactions. Secondly, the goods dealt in may be different in the two chains. Thirdly, for a particularly C there may be many different equivalents to and A and E, and for a particular E there may be many equivalent C, each with more than one equivalence to A. Fourthly C may not have deliberately entered into imports in the clean chain in order to cancel the input in the dirty chain; C may merely be an importer and an exporter with outputs in relation to the former happen roughly to cancel its inputs in relation to the latter. Fifthly, there may be many B’s and D’s in between the importer and exporters.”
“5. … in such schemes the first contra-trader (“Contra 1”) operates in the same way as in a single contra-trading scheme. However, it uses an additional source of supply for the goods it sells to its EU customers. The additional source is the second contra-trader (“Contra 2”) which also follows the normal single contra-trader pattern of trading in that a net input tax in a third chain is offset against the net output in tax in a fourth chain. Contra 1 takes the position of broker for Contra 2’s UK suppliers. That results in Contra 2’s repayment claim arising from the third chain “shifting up” the chains to Contra 1. However, because Contra 1 is not acting simply as a broker, the claim does not remain there. Contra 1 is itself offsetting the tax liabilities on different types of supply (input tax in the first and fourth chains against output tax in the second chain). Because of the relative values of the first and fourth chains against the second chain, the bulk of the repayment claim is further shifted to the broker sourcing goods from Contra 1. In such scheme the repayment claim made by the broker is linked partly to the tax loss at the defaulter in the first chain (Contra 1) and partly to the tax loss of the defaulter in third chain (Contra 2).”
“This he did and he established two companies eventually, Asylum ... and Red House International Ltd ...”
“With great regret I have to inform you we are cancelling the above mentioned order. Unfortunately my customer is not keeping his end of the bargain. I have not been able to find a new customer for the ordered stock.”
“There were no indications either through my due diligence, nor when purchasing from them, that fraud would be present in my supply chains.”
“One of Mr de Bolle’s company’s (sic) has previously been suspected of MTIC fraud.”
“Officers have always told me to do everything that I can to avoid fraudulent supply chains”, and he referred to rejecting two companies on the basis of visits by CTM to those companies (see above paragraph 121). Despite this, Marcello Auletta later states: “It took HMRC until after my 06/06 transactions to warn me about fraud. After which time I held meetings with each supplier to say that, unless I could be sure about the integrity of the supply chain, I couldn’t trade with them. In fact Asylum dealt with both BIP and JPC in July and August, despite seven joint and several liability letters having been sent in respect of both companies to Asylum on 6 July concerning earlier deals with them. Mr Smith’s evidence shows that the earliest veto letter was sent on17 May 2005 and warned Asylum about inherent problems in the industry. In a visit on2 August 2005 three MTIC officers visited Asylum and discussed the repayment return for 05/05 and Marcello Auletta asked questions about joint and several liability on that occasion. RHI was also visited in August 2005 and Marcello Auletta confirmed that he had received and read Notice 726 about joint and several liability. That Notice also contains a description of the prevalence of MTIC fraud. There were three HMRC visits prior to March 2006 and on18 May 2006 Asylum was informed that a transaction undertaken in 11/05, where its customer was HLT, had been traced to a tax loss. 138. In respect of a visit on16 June 2006 by Officers Simmons and Smith, Marcello Auletta states: “I asked Mr Simmons what I should do if fraud was detected in one of my supply chains ... as I didn’t believe that a small number of occasions would necessarily mean that I had to cease trading. I knew there were risks but I believed they could be managed. As Mr Smith rightly points out, we would have discussed due diligence checks, because my Officers always told me that I need to conduct good due diligence to avoid fraud. If, as Mr Smith appears to be saying now, that it didn’t mater how much due diligence I did, I still wouldn’t have avoided the alleged fraud, why were the officers telling me to do due diligence and why didn’t they simply say at an early stage (eg in January 2006) ‘fraud is so rife in your industry, you are unlikely to avoid it’. Providing me with literature, such as Public Notice 726, only enhanced my belief that I could avoid fraud. The suggestion I put to Mr Simmons (and in effect Mr Smith) was that, if fraud was detected in a supply chain, I would ask my trusted supplier to cease trading with its supplier in order to break the chain to the fraud. I could resume my healthy business relationship and the link to that fraud would have been broken. Mr Simmons agreed that it would be acceptable (presumably he meant acceptable to HMRC) to break the link in that way and to continue trading with my supplier. To me it was endorsement of the industry I operated in. The only conclusion that could possibly be drawn from this is that fraud was not rife and that I could avoid it by taking remedial action. This is what I understood Mr Simmons to mean and this assisted with my decision making and due diligence process.”
“… the ultimate question is not whether a 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 the VAT. The Tribunal might have concluded that Mr Peters should have known that the transactions into which he entered were connected with fraud, by reference to the unconventional nature of those circumstances (a finding it came close to making at para 2 – 8) but it was not the only decision within the bounds of reasonable conclusion.”
“In my judgment in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest co-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.”
“But a trader must 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.”
“16. Complete absence of evidence, or the evidence being to the contrary effect, are two of the grounds on which it may be said that a Tribunal was not entitled to reach a conclusion of fact. It is also well settled that a Tribunal is not entitled to find serious allegations established against the party who calls relevant witnesses unless those allegations are clearly formulated and put in cross-examination. As Briggs J said in HMRC v. Dempster : “… it is a cardinal principle of litigation that if serious allegations, in particular allegations of dishonesty are to be made against a party who is called as a witness it must be both fairly and squarely pleaded, and fairly and squarely put to that witness in cross-examination.”
“… proof that the fact in issue more probably occurred than not.”
“The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase. If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase. That trader’s knowledge brings him within the category of participant. He is a participant whatever the stage at which the evasion occurs.”
“It is not arguable that the principle of fiscal neutrality, legal certainty, free movement of goods and proportionality were infringed by the Court itself, when they were at pains to preserve those principles.”
“The Kittel principle is not concerned with penalty. It is true that there may well be no correlation between the amount of output tax of which the fraudulent trader has defrauded HMRC and the amount of input tax which another trader has been denied. But the principle is concerned with identifying the objective criteria which must be met before the right to deduct input tax arises. Those criteria are not met, as I have emphasised, where the trader is regarded as a participant in the fraud. No penalty is imposed his transaction falls outwith the scope of VAT and, accordingly, he is denied the right to deduct input tax by reason of his participation.”
“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. … “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 principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase. If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase. That trader’s knowledge brings him within the category of participant. He is a participant whatever the stage at which the evasion occurs.”