RS Global Limited & Anor v The Commissioners for HMRC [2025] UKFTT 332 (TC)

[2025] UKFTT 00332 (TC)Case No TC09460
FIRST-TIER TRIBUNAL
TAX CHAMBER
Date Judgment date: 12 March 2025
Appeal reference: TC/2021/02297
TC/2021/03184
TC/2022/00480
Value added tax – MTIC case - application by appellants to debar – whether respondents have reasonable prosect of success? yes – whether, if any VAT is due on the supplies, it is the liability of the first appellant- yes - appeal dismissed.
Heard by video on: 11 October 2024
Before
TRIBUNAL JUDGE KELVAN SWINNERTON
Between
R S GLOBAL LIMITED (1)AppellantAKSHAY AGARWAL (2)AppellantTHE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMSRespondentMr M Firth, KC (instructed by Morgan Rose Solicitors). for AppellantsMr B Hayhurst, counsel (instructed by HM Revenue and Customs’ Solicitor’s Office. for RespondentsDECISION

Introduction

[1]The Appellants apply under rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 to debar HMRC from taking further part in these proceedings and for the appeal to be summarily determined in the Appellants’ favour on the basis that there is no reasonable prospect of HMRC’s case succeeding. This is a MTIC (Missing Trader Intra Community Fraud) case relating to three consolidated appeals.[2]The Appellants have appealed against:(i) a decision dated 27 October 2020 denying zero-rating on supplies by the First Appellant totalling £35,537,398 for the periods March 2017 to November 2019 and a consequential assessment charging £5,922,899.67 issued in November 2020.(ii) a penalty assessment dated 2 December 2020 issued in November 2020 against the First Appellant (“RS Global”) under s.69C of the Value Added Tax Act 1994 (“VATA 94”) charging a penalty of £1,460,101.50.(iii) a personal liability notice issued on 13 September 2021 to the Second Appellant under s.69D of VATA 94 purporting to make him liable for 100% of the penalty.[3]The Appellants submit that HMRC’s case has no reasonable prospect of success and does not justify the cost and effort of a full trial for two reasons:(i) on the basis of the evidence produced by HMRC, they have no reasonable prospect of discharging their burden of proof in relation to the questions of fraud and connection to fraud (“the reasonable prospects of success issue”) and(ii) as a matter of law, any VAT in relation to the supplies on which HMRC have purported to deny zero-rating is not the First Appellant’s liability (“the reverse charge issue”).[4]HMRC state that the decision of 27 October 2020 was made in accordance with the principles adumbrated by the European Court of Justice’s (ECJ) judgment in Mecsek-Gabona Kft v Nemzeti Ado-es Vamhivatal Del-dunantuli Regionalis Ado Foigazgatosaga [2012] C-273/11 (“Mecsek”) and supported by Schoenimport ‘Italmoda’ Mariano Preveti [2014] EU-ECJ C-131/13) (“Italmoda”). The ECJ stated that, where a taxable person knew or should have known that his transaction was part of a tax fraud committed by his customer and if the taxable person had not taken every reasonable step within his power to prevent his own participation in that fraud, zero-rating of dispatches and exports could be denied.[5]The Mecsek case, as is well known, involved a Hungarian company engaged in the wholesale supply of cereals, tobacco, seeds and fodder. It concluded a contract with an Italian company for the sale of rapeseed. The Italian company undertook to arrange the means of transportation of the goods. Subsequent to dispatch of the goods, the Italian company went missing. The Hungarian tax authorities denied the Hungarian company relief from VAT on the export of goods to the Italian company who was alleged to be fraudulent.[6]Both parties agreed that the reverse charge procedure issue is suitable for summary determination.

The hearing and evidence

[7]I considered all of the documentation provided which comprised of a hearing bundle of 2769 pages, an authorities bundle of 757 pages, a supplementary authorities bundle of 322 pages, a short authorities addendum and skeleton arguments from both parties. I heard opening statements and submissions from the parties.

Background facts

[8]The background facts are not disputed and come principally from HMRC’s evidence.[9]RS Global was incorporated on 31 May 2006. The nature of the business as listed in its Companies House records is ‘47411 – Retail sale of mobile telephones’.[10]It was registered for the purposes of VAT from 26 March 2007 and has submitted monthly VAT returns since July 2011. It stated its business activities in its VAT 1 Form as ‘import/export mobile telephones and accessories and computer accessories’.[11]The registered office address of RS Global is Unit 4, Forum House, Empire Way, Wembley, Middlesex, HAP 0AB. This has been the registered office address from 25 March 2010 to present. It is the principal place of business of RS Global.[12]RS Global has two current directors. Mr Ramesh Sawarthia is the company secretary and a director and was appointed on 31 May 2006. He resides and works in Hong Kong.[13]Mr Akshay Agarwal was appointed as a director on 3 July 2013 and is based in London, UK. Mr Agarwal is a director of a number of international companies and other companies based in the UK.[14]Mr Ravi Kanodia is a past director of RS Global having been appointed on 31 May 2006 and resigning on 3 July 2013.[15]Mr Mahesh Karamchandani is the other past director of RS Global having been appointed on 31 May 2006 and resigning on 24 May 2007.[16]RS Global deals predominantly in the wholesale of mobile phones. The models that RS Global deals in are Samsung, Apple, LG, Nokia and Sony. The business model of RS Global involves buying stock in bulk amounts from Europe, Asia and sometimes in the UK. The stock is shipped to RS Global’s warehouse in Wembley. The stock is then offered to its customers in Europe. Those customers principally are resellers, online retailers and shops.[17]RS Global has five employees including Mr Agarwal. It is Mr Agarwal who runs RS Global on a day-to-day basis. Mr Sawarthia is not involved actively in the running of the business.[18]The first MTIC visit by HMRC to RS Global took place on 11 September 2009 between officers of HMRC and Mr Kanodia. The purpose of the visit was to confirm an intra-community supply from RS Global to a Belgian company named Teleksim. The visit report states that Mr Kanodia was advised that the due diligence and fraud prevention checks made by RS Global were insufficient.[19]RS Global was put onto Comprehensive Spending Review (CSR) monitoring and received its first monitoring visit in November 2011.[20]Subsequently, a number of other visits were made by HMRC to RS Global. The witness statement of Higher Officer Toynbee refers to RS Global having been visited by HMRC on numerous occasions between 2009 and 2019.[21]RS Global was removed from CSR monitoring in September 2017.[22]RS Global was issued with 82 veto/deregistration letters with respect to counterparties between November 2010 and July 2021. A Notice 726, referring to the scope for HMRC to recover one taxable person’s deliberately unpaid output tax from another taxable person, was issued to RS Global on numerous occasions.[23]Between 1 December 2010 and 13 April 2022, the Central Coordination Team (CCT) of HMRC processed hundreds of SCAC (Standing Committee for Administrative Cooperation) enquiries relating to RS Global. A number of these SCAC enquiries are exhibited to the statement of Higher Officer Toynbee.[24]On 21 February 2019, Higher Officer Toynbee visited RS Global (with MITC officer Becky Nunn). Following that visit, Higher Officer Toynbee wrote to RS Global summarising the points made at the visit and stated that: “If, after the date of my visit (21st February 2019) it is found that RS Global has sold to another missing trader and the 3 arms of the test above can be proved I will deny its zero-rating and raise an assessment”.[25]On 2 June 2019, tax loss letters (missing trader letters) were issued to RS Global in relation to the eight companies relevant to this application.[26]The denial of zero-rating relates to sales to those eight companies in the EU between March 2017 and November 2019. Seven of those companies are located in Portugal and one company is located in Belgium.[27]The seven companies located in Portugal are:• Alfabeto do Tempo Unipessoal LDA (Alfabeto)• Bonus Subtil Unipessoal LDA (Bonus)• Dicas Portateis Unipessoal LDA (Dicas)• Exemplo Magnifico Unipessoal LDA (Exemplo)• Frenetic Detail Unipessoal LDA (Frenetic)• Sombra Vedeta Unipessoal LDA (Sombra)• Telebabilonia Unipessoal LDA (Tele)[28]The company located in Belgium is BVBA DB Bruxelles (DB).[29]The transactions in issue amount to approximately £35.5 million and relate to a period over two years and nine months.[30]Between January 2019 and December 2020, RS Global bought from 161 companies in 21 different EU countries totalling £179,362,434 and sold to 184 different companies in 23 different EU countries totalling £157,737,652.[31]Subsequent to the decisions of HMRC of 27 October 2020 and 2 December 2020 and the personal liability notice referred to above, the Appellants made representations in response and a review was requested.[32]The review conclusion letter of HMRC was issued on 1 April 2021.[33]On 14 May 2021, HMRC’s upheld the penalty issued to the First Appellant.[34]The Appellants served consolidated Amended Grounds of Appeal dated 8 June 2022 and the Respondents served an Amended Statement of Case on 1 November 2023.[35]The Appellants applied on 23 January 2024 to debar HMRC from taking further part in these proceedings and for the appeal to be summarily determined in the Appellants’ favour. The reasonable prospects of success issue The test.

The reasonable prospects of success issue

[36]In respect of reasonable prospects of success, the case of Mediability Limited v HMRC [2023] UKFTT 315 (TCC) referred to the detailed statement of principles set out by Lewison J (as he then was) in Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch) at [15] which was endorsed by the Tax and Chancery Chamber of the Upper Tribunal (Henry Carr J and Upper Tribunal Judge Sinfield) in The First De Sales Ltd Partnership and others v Revenue and Customs Commissioners [2018] UKUT 396 (TCC) at [33]:
“(i) The court must consider whether the claimant has a ‘realistic’ as opposed to ‘fanciful’ prospect of success: Swain v Hillman [2001] 1 All ER 91. (ii) A ‘realistic’ claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8]. (iii) In reaching its conclusion the court must not conduct a ‘mini-trial’: Swain v Hillman. (iv) This does not mean that the court must take at face value and without substance everything that a claimant says in his statements before the court. In some cases, it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Liquid Products v Patel at [10]. (v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550. (vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63. (vii) On the other hand, it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent’s case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant’s case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give a summary judgment because there would be a real, as opposed to fanciful, prospect of success. However, it is not enough to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725.”
[37]In this case, the burden of proof lies with the Appellants who are seeking to debar HMRC. The standard of proof is on a balance of probabilities.[38]I have borne in mind also the comments about the approach to be taken to debarring (or striking out) stated in HMRC v. Tasca Tankers Ltd [2022] UKUT 88 (TCC). In that case, HMRC applied to strike out the defence of an MTIC appeal by the taxpayer. The Upper Tribunal decided that the FTT had adopted an erroneous approach and, in respect of the appropriateness of such appeals for summary determination, stated at [72] that:
“It may be that the Judge concluded, from his decision that the question of knowledge or means of knowledge in an MTIC case requires a careful consideration of all the evidence and relevant circumstances of that case, that it necessarily followed that Issue (4) was unsuitable for summary determination in the present case. If however this was the Judge’s reasoning, and we accept that we are speculating, we do not think that can be supported. As Mr Carey pointed out, if this was the correct approach, it would never be possible to exercise the power of summary determination in Rule 8(3)(c) in an MTIC case. We agree with Mr Carey that this cannot be correct. It may be, where Issue (4) is concerned, that the evidential inquiry which is required is not one which lends itself easily to summary determination; see Davis & Dann above. This must however be a case sensitive question, depending upon the facts of the particular case in which summary determination is sought”
.

The case of the Appellants in summary

[39]The Appellants submit that HMRC have, on the basis of the evidence that they have produced, no reasonable prospect of discharging their burden of proof in relation to the questions of fraud and connection to fraud. The Appellants state that HMRC have put forward a single witness (Higher Officer Toynbee), that this witness knows nothing more about the alleged fraud than what is set out in the documents that she has collated, and that none of the authors of those documents (or anyone else) is going to attend the hearing to give evidence on the question of fraud. Accordingly, it is stated that this is an issue that depends entirely upon the documents that HMRC have served with no prospect of a fuller investigation or further evidence at trial.[40]The Appellants state that the evidence in relation to each of the Portuguese companies is very similar and consists of:(i) a request for information from the Portuguese tax authority(ii) a request for information by HMRC(iii) replies to HMRC’s requests for information and(iv) an intelligence report. The evidence in relation to the Belgian company consists of a request for information from Belgium and a response to a request for information from HMRC.[41]The Appellants submit that there are two fundamental problems with this evidence. Firstly, the nature of the evidence is not such that the Tribunal can reasonably conclude that serious allegations of fraud are made out. Secondly, the content of the evidence, taken at its highest, does not establish what HMRC need to establish.[42]In relation to the first point, it is stated that this evidence consists of unsubstantiated assertions by anonymous individuals entirely lacking in any useful detail with nothing to back them up, no context or explanation given and no opportunity for the Appellants to challenge the assertions.[43]In respect of the second point, it is stated that the evidence does not:(i) identify any tax loss in relation to the company to which it relates(ii) quantify any tax loss in relation to the company to which it relates(iii) connect any tax loss to the transactions of the First Appellant(iv) identify that any such tax loss was fraudulent in relation to the company to which it relates.

The response of the Respondents in summary

[44]HMRC state that they have served a witness statement of 126 pages with 398 exhibits comprising of more than 2500 pages. HMRC refer to criminal proceedings brought against supplier companies that have resulted in convictions and financial penalties for serious tax fraud. It is stated that foreign tax authorities have provided information in respect of registered business addresses, attempts to contact foreign companies, non-submission of VAT declarations and deregistration status with reference made to M & M (Cambridge) LLP v. HMRC [2020] UKFTT 107 (TC) in which the factual evidence in SCAC reports was accepted. HMRC refer also to having another round of evidence to come.[45]HMRC submit that Annex A (to the skeleton argument of the Respondents) provides a summary of the evidence and can clearly establish a connection to fraud with respect to the eight customers of RS Global relevant to these appeals. It is submitted that all eight companies either failed to declare or account for acquisition tax on their purchases from RS Global and/or did not submit VAT returns and did not thus declare and account for the VAT on the onward sales of the goods purchased from RS Global.[46]HMRC state that the Tribunal, when considering whether or not the connection to fraud is established, is also entitled to take into account evidence which shows that the transactions of RS Global with the eight companies were part of an overall fraudulent scheme. HMRC refer also to RS Global having been issued with 17 tax loss letters since 2013, to HMRC having received 63 enquiries from other EU members states concerned about their company’s trade with RS Global (between 1 December 2010 and 13 April 2022), and to HMRC having processed hundreds of SCACs relating to RS Global which is the largest amount of SCACs where fraud is suspected for any one company in the whole of the UK.

Discussion

[47]As referred to above, I must not conduct a mini-trial in reaching a conclusion. However, this does not mean that I should take at face value and without analysis everything put forward by a party. That said, as stated in HMRC V Tasca Tankers Limited [2022] UKUT 88 (TCC) at [97]: “We agree with Mr. Carey that it was not necessary or appropriate to go into the evidence in detail. Such a process was not appropriate to an application under Rule 8(3)(c) and, if such a process was required, that might have been a good reason for concluding that the case was unsuitable for summary judgment…”.[48]The question of whether or not a trader should have known that its actions were connected with fraud has been considered by the Court of Appeal in Mobilx Ltd v Revenue and Customs Comrs [2010] EWCA Civ 517 (“Mobilx”) and in Davis & Dunn Ltd and another v Revenue and Customs Commissioners [2016] EWCA Civ 142.[49]It is clear that the burden lies with HMRC to show, in short, that the relevant fraud has taken place, that the Appellants by their actions were participating in that fraud and that the Appellants knew or should have known that they were doing so. The standard of proof is on the balance of probabilities. The Appellants might be relieved from liability by showing that they had nonetheless taken every reasonable step within their power to prevent their participation in the fraud. In that respect, the burden lies with the Appellants to do so.[50]It is common ground that, when assessing whether or not a trader should have known of the connection with fraud, it is relevant to consider the transactions in question and all of the surrounding circumstances in which they took place. It is not sufficient that the trader should have known that there was a risk that its transactions were connected with fraud. It has to be shown that the trader should have known that the transactions were connected with fraud.[51]It does not appear to be in dispute between the parties that the evidence relied upon by HMRC in relation to the seven Portuguese companies is very similar. Consequently, I will consider principally the evidence relied upon by HMRC in relation to Alfabeto. I have sought to group together different aspects of the evidence for ease of reference. Alfabeto HMRC visits, public notices, veto/deregistration and tax loss letters.

Alfabeto

[52]HMRC maintain that, since 2007, RS Global has been made aware of the VAT fraud risks in their chosen sector and the need for robust diligence by way of numerous visits, public notices, and letters from HMRC. That does not appear to be in dispute between the parties. Between 2009 and 2019, RSG was visited on 13 occasions by HMRC. A Notice 726 was issued on at least 8 of those visits. Mr Akshay Agarwal, having been an employee of RS Global prior to his appointment as a director in 2013, was present at a number of those visits by HRMC. As mentioned earlier, 82 veto/deregistration letters were issued to RS Global up to 2021.[53]I agree with HMRC that RS Global has been made well aware since 2007 of the VAT fraud risks involved and the need for due diligence in its chosen trade sector in view of the numerous visits, public notices and letters from HMRC. I agree also with HMRC that Mr Agarwal has been made well aware of the VAT fraud risks involved in the chosen trade sector of RS Global given that he was previously an employee of RS Global prior to be becoming a director in 2013 and after taking into account that he has been the main point of contact with HMRC for a significant period of time, was present at many of the visits from HMRC and has received directly much of the information from HMRC.[54]Mr Agarwal was the director of RS Global seen at the HMRC visits on 2 October 2013, 18 November 2014, 10 November 2015, 5 April 2016, 16 November 2016, 18 May 2017, 14 September 2018, and 21 February 2019. The majority of these visits took place prior to the point in time when RS Global started to trade with Alfabeto and all of the other relevant companies in this case.[55]It is clear that the tax loss letters also made both RS Global and Mr Agarwal aware of the VAT fraud risks in its chosen trade sector and the need for robust due diligence. The first tax loss letter was sent to RS Global on 26 February 2013. This stated, amongst other points, that:
“You should satisfy yourself that you have the requisite evidence to support zero rating for supplies made to overseas customers and taken all reasonable measures to ensure your company’s transactions do not lead to your involvement in transactions connected with the fraudulent evasion of VAT”
. Between March 2013 and January 2016, RS Global received 4 similar tax loss letters prior to receipt of the tax loss letter dated 2 June 2019 to RS Global (from Specialist Investigator Miss D Toynbee) relating to Alfabeto.

The SCAC evidence

[56]The salient parts of the SCAC evidence relating to Alfabeto are set out below. The Appellants do not submit that the SCAC evidence is inadmissible but state that the contents of the SCAC evidence consist, in summary, of vague and unsubstantiated assertions. HMRC maintain that most, in not all, of the evidence given within the SCAC reports is factual as opposed to opinion evidence.[57]I was referred by Mr Hayhurst to a number of cases in which FTT judges have placed reliance upon assertions by foreign authorities in SCAC reports with respect to establishing connection to fraud in Mecsek and other cases. These included: “We accept the evidence above from the SCAC report, but give no weight to expressions of opinion therein. We are mindful that this evidence is hearsay and we were not able to interrogate the relevant authors, but note in particular that no evidence has been adduced to contradict the assertions contained therein” (Judge Zaman in M&M (Cambridge) LLP V HMRC [2020] UKFTT 0107 (TC) at [196] which was a Mecsek case). “We bore in mind that the information set out in the SCAC report from the ITA was hearsay evidence in considering the appropriate weight to give it. We were satisfied on the material before us that Mr O’Kelly was a defaulting trader for the following reasons….” (Judge Dean in Vanrooyen (Elite Prestige Supercars) Limited v HMRC [2023] UKFTT 00388 at [141] which was another Mecsek case). “Had our decision depended on a conclusion whether goods were new we consider that it would have been appropriate to have regard to the SCAC report responses. We acknowledge that the responses represent the view reached by an overseas tax authority by reference to the investigations they consider appropriate. However, on the basis that the strict rules of evidence do not apply we would not have excluded or ignored the evidence but may have placed less weight on those which expressed an opinion rather than recited a fact. Where there was evidence referenced that the goods were either new or used we would have been prepared to accept that evidence” (Judge Amanda Brown KC in Ancient and Modern Jewellers Limited v HMRC [2024] 00774 at [202] in respect of a second hand margin scheme).[58]The approach that I have taken to the SCAC reports is to consider it in the balance and then to determine the weight, if any, that might be attached to it.[59]Exhibit DJT146 to the statement of Higher Officer Toynbee is the SCAC request by the Portuguese authorities in respect of Alfabeto. It was a Category 5 General SCAC Request with a deadline date of 3 September 2019. In section 2 of the SCAC Request (Verification Request) under the heading ‘Details of Request’, it is stated:
“A SCAC request for information has been received from the Portuguese authorities. Please arrange an announced visit to obtain the information requested below. The Portuguese authorities have advised the following: We have an ongoing investigation of a VAT fraud scheme that caused high amounts of losses to PT. The manager/associate of ALFABETO DO TEMPO UNIPESSOAL LDA was born in The Netherlands on 13/01/1976 and his declared address is in The Netherlands. The PT trader only sent VAT declarations related to the 1Q, 2Q and 3Q of 2017 with ICA declared only in the VAT declaration of 1Q 2017 in the amount of €315.017. No VAT declarations for 2018 and 2019. It was impossible to contact the company or a representative, the alleged head office was closed and with no signs of activity, and therefore we do not have access to any documents. VIES shows that R S GLOBAL LTD declared supplies to the PT trader”
.

The Portuguese authorities have advised the following:

[60]Exhibit DJT151 to the statement of Higher Officer Toynbee is a SCAC referral to the Portuguese authorities. In Section C under the heading ‘Reason for Request’, reference is made to recently received requests from the Portuguese authorities relating to the seven Portuguese companies relevant in this case. It is stated: “You explained that you have an ongoing investigation of a VAT fraud scheme that caused high amounts of losses to PT for all the above companies who all bought goods from my trader – RS Global. I am considering [to] deny RS Global’s zero-rating to these companies using the Mecsek ruling. To do this I will need to prove that there was: a) a tax loss b) that any tax loss was fraudulent and c) that RS Global knew or should have known that when it sold to these companies. Can you confirm that when RS Global sold to Alfabeto do Tempo there was a tax loss and that you consider your trader to be part of a fraudulent VAT scheme and why you think that is? On 26/02/2019, RS Global asked Alfabeto do Tempo for more due diligence. Did this coincide with the Portuguese investigation”?[61]Exhibit DJT158 to the statement of Higher Officer Toynbee contains the response of the Portuguese authorities to the questions posed in Exhibit DJT151. I set out the salient parts in full: “1. The PT tax administration made an investigation of a VAT fraud that caused high tax losses to Portugal. 2. ALFABETO DO TEMPO declared the activity of wholesale of telecommunications equipment and its sole associate since 09-05-2017, is MUHSIN KARABELA, born on 1976-01-13 in the Netherlands, and living there at ALKMAR 2017 KOELMALAAN 39 1812 PR ALKMAAR, whose tax representative is JASWANT SINGH, born in India on 1980-01-11 and living in Germany at DORNBREITE 166 A – 23556 LUBECK. 3. The former associate (from 25-11-2016 to 09-05-2017) was JOSE ALEXANDRE PIRES whose name appears in the invoices from RS GLOBAL. 4. It was impossible to contact the company or a representative, the alleged head office was closed with no signs of activity. 5. In terms of tax compliance, the tax trader does not send any VAT declarations since the last quarter 2017 (included). 6. He only declared intracommunity acquisitions in the 1st quarter 2017 and amounting to only around 0.5% of the total of his acquisitions. 7. In terms of activity, his entire sales turnover consisted in invoicing to traders suspected and indicted as belonging to a VAT fraud network in Portugal. 8. The address mentioned in the invoices issued by RS GLOBAL was the old address of the company, TRAVESSA ERMELINDA TAVARES N 6 1 ESQ BOBADELA LOURES BOBADELA 2695-080 BOBADELA LRS, which is the home address of JOSE ALEXANDRE PIRES. 9. Also, the delivery address on the invoices, RUA DE ARROIS N 52 R/C DT, is a completely different address from the known addresses. 10. According to the documents you sent, one of the suppliers by RS GLOBAL was a French conduit (BLUETOOTH, FR-55480060839), registered also in PT (PT507094280), and the goods appear to go from PT to GB (and then to PT again). 11. At present the fraud network is under a criminal investigation and so all the documents were apprehended and we cannot say more than what we already have informed you”.[62]In respect of VAT declarations, the response from the Portuguese authorities, as detailed above, states that no tax declarations have been sent by Alfabeto since the last quarter of 2017 such that no tax declarations were sent for 2018 and 2019 when the majority of the sales to Alfabeto from RS Global took place. I was referred by Mr Hayhurst to the case of Turkswood Limited v HMRC [2021] UKFF 166 (TC) which related to whether or not the Appellant knew or should have known that the relevant transactions were connected to VAT fraud. In that case, one of the decisions involved a situation in which HMRC were alleging that the fraud in question took place not in the UK but in Poland and was perpetrated by the Appellant’s customers rather than traders in the chain of supply leading up to it.[63]HMRC made a number of requests of the Polish VAT authorities for information concerning a company named Nectel. It is stated that one of the responses from the Polish authorities contained a statement that Nectel had been deregistered on 5 July 2013 with the reason for this being: “No contact with trader. The trader did not submit VAT returns”.[64]It is stated in Turkswood that HMRC were clearly conscious of the need to establish the existence of a link between the Appellant’s supplies to Nectel and the apparent VAT fraud committed by that company. A further request was made to the Polish authorities which stated at [219]: “In order to deregister Turkswood Ltd, HMRC needs to be able to directly link this company to assessed tax losses in other member states. Have tax losses been assessed or raised against your trader or its Officers? If so, have these assessments been raised against trades with Turkswood”?[65]The decision in Turkswood refers to the Polish authorities having somewhat dodged the question in their response and to one further attempt being made to follow up the point in a further information request with the Polish authorities playing a straight bat in response by stating at [222]: “We are not able to provide you with more information that this sent to you in the above mentioned replies…”.[66]The decision in Turkswood went on to state at [223-4]:
“Thus whilst no direct link was specifically confirmed by the Polish authorities between the supplies made to Nectel by the Appellant and Nectel’s issue of “empty”
VAT invoices, they did confirm that no VAT return was ever made to them by Nectel which included details of the acquisition VAT which it ought to have accounted for on the supplies to it. In the nature of things when a trader goes missing and does not provide any cooperation to the VAT authorities, it is not possible to build up a completely clear and certain picture of its activities…We consider however on a balance of probabilities that Nectel was engaged in VAT fraud throughout the period June to October 2012”.[67]I was referred again by Mr Hayhurst to the case of Vanrooyen (Elite Prestige Supercars) Limited inwhich the failure to submit any VAT returns showing the transactions with the Appellant was one of the reasons given by Judge Dean for finding that there was a defaulting trader at [141].[68]In respect of Alfabeto, the response from the Portuguese authorities does contain relevant factual information to which I give weight. It does not, though, directly address the questions raised by HMRC as to whether or not there is a tax loss and as to whether or not that tax loss is fraudulent. I do not consider, though, that the absence of a direct link being specifically confirmed by the Portuguese authorities in the SCAC response leads to the conclusion that the case of HMRC has no realistic prospects of success.

Alfabeto’s registered address, RS Global’s contact at Alfabeto and due diligence

[69]The total sales of RS Global connected to Alfabeto are stated to be £11,465,570 ranging from minimum monthly sales of £214,500 (in December 2017) to maximum monthly sales of £1,117,673 (in June 2018) apart from the final month when sales made were £30,417 (in November 2018). The VAT assessed for these supplies is £1,910,928.[70]The statement of Higher Officer Toynbee details (at paragraph 183) that the due diligence of RS Global amounted to 6 documents. Further, that Mr Agarwal sent an e-mail on 26 February 2019 to Alfabeto stating that their files were being updated and they were, therefore, seeking more information. That request by RS Global for further information came after the visit of Higher Officer Toynbee to RS Global on 21 February 2019 and, significantly in the view of HMRC with which I agree, three months after RS Global had ceased trading with Alfabeto.[71]The address mentioned on the invoices of RS Global was an old address of Alfabeto and was the residential address of Jose Alexandre Pires. The SCAC evidence states that Jose Alexandre Pires was a director of Alfabeto up until 9 May 2017, shortly after RS Global commenced trading with RS Global, but that from then on Muhsin Karabella became the director of Alfabeto.[72]In summary, I accept what HMRC allege in that it appears that RS Global was invoicing the old address of the company, there is no evidence that RS Global enquired about Alfabeto’s history or experience in the trade, carried out a financial credit check or any other type of background credibility check, or took up any references.

Criminal proceedings

[73]In respect of criminal proceedings relating to Alfabeto, the witness statement of Higher Officer Toynbee details that Jose Alexandre Pires (referred to above) was given a suspended prison sentence of 18 months and a fine of 8000 euros for serious tax fraud. The SCAC reports state that the other six Portuguese companies also formed part of a criminal investigation by the Portuguese authorities and that this criminal investigation resulted in four of the contacts of RS Global at those companies being given prison sentences for serious tax fraud (with three of those sentences being suspended) and six of the Portuguese companies being fined for serious tax fraud. That said, it is acknowledged by HMRC that it is not stated that the prison sentences or fines related to the supplies of RS Global. Mr Firth also questioned how serious the tax fraud could have been if it resulted in a fine of only 8000 euros in the case of Mr Pires.[74]The statement of Higher Officer Toynbee refers also to a request from the Hungarian authorities to provide evidence in relation to criminal proceedings involving an organised criminal gang. The gang was purported to have traded with three companies in the UK during the period from 2017 to 2019 with one of those companies being RS Global. The request, by way of a European Investigation Order, was made on 20 June 2019 and Higher Officer Toynbee provided a witness statement dated 22 September 2020 in connection with that request. HMRC do not, though, claim that there is any link between the Hungarian criminal investigation and the 8 companies relevant in this appeal such that it does not appear to be relevant when assessing the transactions in question.

The other six Portuguese companies

[75]The evidence relied upon by HMRC relating to the other six Portuguese companies, as summarised in Annex A to the skeleton argument of HMRC, follows a similar pattern to that relied upon by HMRC in respect of Alfabeto. I will not, therefore, repeat the points that I have already made above in respect of Alfabeto which would appear to apply in relation to the other six Portuguese companies. In short, it appears that the due diligence failings of RS Global are consistent across all of the Portuguese companies, that there is a suspicious and irregular trail of invoicing to residential addresses or to a non-current address, and that all companies were part of a criminal investigation by the Portuguese authorities.

The Belgian company

[76]In relation to BVBA DB Bruxelles (DB), HMRC state that DB was registered for VAT on 1 April 2017 and deregistered on 14 November 2019. DB had a turnover of 107,160 euros in 2017 and a turnover of zero euros in 2018. DB contacted RS Global for the first time on 9 July 2019 and started buying from RS Global two days later. That is a number of months after the February 2019 visit of HMRC to RS Global. It is maintained by HMRC that, two weeks after that, DB’s purchases from RS Global had reached £674,520 and within five months had reached £5,401,119.[77]HMRC, with reference to examining a sample of supply chains, state that the goods supplied to DB by RS Global were sourced by RS Global from EU traders such that the supply chains for the goods were EU-UK-EU and that RS Global was the sole supplier in the UK to DB as was the case with all of the seven Portuguese companies.[78]Additionally, in brief, HMRC state that the delivery address for the goods sold by RS Global to DB was a small, terraced house on an estate in the Netherlands and that there is no evidence of DB providing RS Global with the due diligence requested by RS Global.[79]I accept that the increase in the level of purchases of DB from RS Global is very substantial in a very short space of time having increased eightfold in a period of five months. I accept also that the increase in the scale of the purchases by DB is very substantial when considered against the turnover figure of DB for 2017 and zero euros in 2018.[80]HMRC received a SCAC request from the Belgian authorities on 13 January 2020 and, in March 2020, HMRC received information that the Belgium authorities stating that the goods sold to DB had been sold on to a missing trader in the Netherlands and that the information received from the UK had led to a fraud investigation.[81]In short, I accept what HMRC allege in that it appears that there is no evidence that RS Global enquired about DB’s ability to support the level of trade, carried out a financial credit check or any other type of background credibility check, took up any references in connection with carrying out due diligence, or enquired into why more than £5 million of phones were delivered to a small house during a period of 5 months.

Other evidence to be provided by HMRC

[82]Mr Hayhurst referred at the hearing to another round of evidence to be provided by HMRC. Mr Firth, in respect of the possibility of further evidence, stated that there was no other round of evidence and referred in his skeleton argument to HMRC V Tasca Tankers Limited [2022] UKUT 88 (TCC) at [61]:
“Equally, if Tasca wished to adduce further evidence at the trial of the Second Appeal it was incumbent upon Tasca to explain what that evidence would be, and how it would affect the position, in terms of the evidence and the arguments in the Second Appeal. In fact, Tasca did make such an application, in the course of the FTT Hearing, which was refused by the Judge; see [FTT85-89].”
[83]The application to debar by the Appellant was made on 23 January 2024 which was prior to the deadline for HMRC to serve on the Appellants any further witness or other evidence upon which they intend to rely with exhibits. I asked Mr Hayhurst at the hearing to elaborate, in relation to any other evidence in another round of evidence, what that evidence would be but no detail was provided.

Decision on the reasonable prospects issue

[84]On balance, I do not consider that the Appellant has met the threshold for me to dismiss HMRC’s case in relation to fraud and connection to fraud. Based upon a consideration of the totality of the evidence, there is a realistic prospect of HMRC proving their case. In short, it would not be fair or just to determine the appeal without a fuller investigation of the facts.[85]In summary, I dismiss the application of the Appellants to debar HMRC from taking further part in these proceedings and for the appeal to be summarily determined in the Appellants’ favour on the basis that there is no reasonable prospect of HMRC’s case succeeding.

The reverse charge issue

[86]As stated above, both parties are in agreement that the issue of the reverse charge involves a distinct and narrow legal argument, that it is an issue that is suitable for summary determination and one in respect of which the Tribunal should grasp the nettle. Mr Firth emphasised that, if the Appellants were correct on this issue, it had the potential to dispense with the need for any extensive trial. I agree that this issue gives rise to a short point of law or construction. I am satisfied that I have before me all the evidence necessary for the proper determination of the question and also that the parties have had an adequate opportunity to address it in argument.

Overview

[87]The reverse charge shifts (or reverses) the responsibility of reporting and paying VAT from the supplier to the recipient.[88]The Appellants, in summary, assert that either the supplies of RS Global were zero-rated in which case no VAT was due or the supplies were not zero-rated in which case VAT was due not from RS Global but from the customer of RS Global because the reverse charge applies. It is stated that the condition that zero-rating does not apply where the trader knew/ought to have known that they were participating in fraud is a condition imposed by HMRC and means that the supply is not zero-rated in those circumstances.[89]HMRC, in short, assert that the argument of the Appellants is an experimental one and wholly misconceived. If correct, it would mean that a number of decisions decided in line with the Mecsek-Gabone Kft judgment would be wrong. HMRC state that the reverse charge procedure set out by section 55A VATA94 is not applicable to the sale of goods from a UK company to an EU customer. HMRC maintain that supplies of relevant goods and services remain subject to the reverse charge until they are exported outside the UK when the reverse charge no longer applies and that this is how the reverse charge has operated without dispute for the last 17 years. It is asserted that, whilst RS Global has been denied the right to zero-rate in accordance with the judgment in Mecsek-Gabona Kft, the supplies themselves remain zero-rated for the purpose of section 55A VATA94.

The law

[90]Section 55A VATA94 (Customers to account for tax on supplies of goods [or services] of a kind used in missing trader…fraud) provides the following:(1) Subsection (3) applies if- (a) a taxable (but not a zero-rated) supply of goods [or services] (“the relevant supply) is made to a person (“the recipient”), (b) the relevant supply is of goods [or services] to which this section applies (see subsection (9)), (c) the relevant supply is not an excepted supply (see subsection (10)), and (d) the total value of the relevant supply, and of corresponding supplies made to the recipient in the month in which the relevant supply is made, exceeds £1,000 (“the disregarded amount”).(2) For this purpose a “corresponding supply” means a taxable (but not a zero-rated) supply of goods [or services] which- (a) is a supply of goods [or services] to which this section applies, and (b) is not an excepted supply.(3) The relevant supply, and the corresponding supplies made to the recipient in the month in which the relevant supply is made, are to be treated for the purposes of [Schedules 1 and 1A]- (a) as taxable supplies of the recipient (as well as taxable supplies of the person making them), and (b) is so far as the recipient is supplied in connection with the carrying on by him of any business, as supplies made by him in the course or furtherance of that business, but the relevant supply, and those corresponding supplies, are to be so treated only in so far as their total value exceeds the disregarded amount. … (6) If- (a) a taxable person makes a supply of goods or services to a person (“the recipient”) at any time, (b) the supply is of goods or services to which this section applies and is not an excepted supply, and (c) the recipient is a taxable person at that time and is supplied in connection with the carrying on by him of any business, it is for the recipient, on the supplier’s behalf, to account for and pay tax on the supply and not for the supplier.

Discussion

[91]The Appellants,in their skeleton argument, assert that conditions (a), (b) and (c) of section 55(A)6 are met. It is asserted that the reverse charge does apply if the supply of goods is not zero-rated. Further, if the supplies were zero-rated, there was no error in the VAT return of RS Global such that there was no power to assess under s.73(1) and the assessment is invalid for that reason.[92]HMRC refer to the operation of the VAT reverse charge as set out in publicly available HMRC documents. Specifically, HMRC’s internal manual, VAT Reverse Charge (VATREVCHG12000 – Introduction: Background) which states: “The reverse charge procedure is a measure designed to counter some forms of criminal attack on the VAT system by means of fraud, such as Missing Trader fraud (see VATF23300). The reverse charge procedure results in, essentially, a business-to-business (b2b) tax-neutral chain of transactions, with the seller no longer having to account for VAT, so it removes the opportunity to steal VAT in b2b transactions within the UK …. Supplies of relevant goods and services remain subject to the reverse charge until they are excepted from the procedure or are exported outside the UK”.[93]VATREVCHG12000 makes reference to guidance contained in VAT Notice 735 when considering the reverse charge. VAT Notice 735 (Domestic reverse charge procedure) states, at paragraph 5 (How the reverse charge works), that the reverse charge “only applies to the sale and purchase of the specific goods and services…between UK taxable persons” and states also (at paragraph 7) that the reverse charge only applies to supplieswhere “your customer is registered or liable to be registered for UK VAT”.[94]I accept that the publicly available guidance documents of HMRC referred to above make clear, amongst other points, that the reverse charge procedure applies to the supply of relevant goods and services until they are exported outside the UK.[95]HMRC, in support of the point that the reverse charge is not applicable to the sale of goods by a UK company to an EU customer, refer to the case of Coast Telecom Ltd v HMRC [2019] UKFTT 0596 (TC). The Coast Telecom case involved an application for a preliminary issue to be heard and concerned the acquisition by the appellant of mobile phones from traders based in other EU member states which were then sold on to either a UK-based customer or to a trader based in another EU member state. It is stated [at 3]:
“The appellant would not have been expected to account for VAT on the sales of the phones because the sale was (if cross-border) ordinarily zero rated and (if within the UK) ordinarily caught by the UK’s reverse charge regime. Moreover, ordinarily a taxpayer acquiring cross-border taxable goods for resale would not expect to pay VAT on the purchase. Such a trader would be obliged to charge itself acquisition VAT on the acquisition of the phones but would off-set in its VAT books the same amount as input tax incurred on the taxable (albeit zero rated) sale. And this was how the appellant calculated its liability to VAT as nil.”
[96]I accept that the section cited by HMRC from the Coast Telecom Ltd case is in line with the approach to the reverse charge procedure set out in the publicly available guidance documents of HMRC considered above.[97]At the hearing Mr Hayhurst submitted that, if the reverse charge was to apply as asserted by RS Global, the consequence would be that the Mecsek principle would have no impact and its anti-fraud consequences would have no effect. Mr Hayhurst asserted that RS Global could be denied the benefit or advantage of zero-rating whilst the underlying nature of the goods remained zero-rated for the purpose of s.55A VATA94. In that respect, Mr Hayhurst relied upon various paragraphs from the Mecsek-Gabona case: “Consequently, in the event the purchaser in the case before the referring court has committed tax fraud, it is justifiable to make the vendor’s right to exemption from VAT conditional upon its good faith” (at [50]). “In the light of all the foregoing considerations, the answer to Questions 1 and 2 is that Article 138(1) of Directive 2006/112 is to be interpreted as not precluding, in circumstances such as those of the case before the referring court, refusal to grant a vendor the right to the VAT exemption for an intra-Community supply, provided that it has been established, in the light of the objective evidence, that the vendor has failed to fulfil its obligations as regards evidence, or that it knew or should have known that the transaction which it carried out was part of a tax fraud committed by the purchaser, and that it had not taken every reasonable step within its power to prevent its own participation in that fraud” (at [55]).[98]Mr Hayhurst referred also, in support, to the decision in the Italmoda case at [56]: “Accordingly, in so far as abusive or fraudulent acts cannot form the basis of a right under EU law, the refusal of a benefit under, in this case, the Sixth Directive does not amount to imposing an obligation on the individual concerned under that directive, but is merely the consequence of the finding that the objective conditions required for obtaining the advantage sought, under the directive as regards that right, have, in fact, not been satisfied …”.[99]Mr Firth directed me to the Amended Statement of Case in which it is stated (at paragraph 188) that:
“It is erroneous in law to assert that the reverse charge applies if goods are not zero-rated”
. It was acknowledged by Mr Hayhurst that this paraphrased the law perhaps mistakenly but that the position of HMRC was nonetheless clear on this point.[100]With respect to the applicability of s.55A VATA94, Mr Firth referred to the letter dated 22 May 2024 of HMRC to the representatives of the Appellants. That letter was in response to the assertions of the Appellants that HMRC had not fully explained why they stated that s.55A VATA94 is not applicable to the sale of goods from a UK company to an EU customer.[101]In that letter from HMRC, it is stated (amongst other points) that: “Whilst the First Appellant has been denied the right to zero rate in accordance with the judgment in Mecsek-Gabona Kft, the supplies themselves remain zero rated for the purpose of Section 55A. As such, none of the recipients of the supplies in this matter can be considered taxable persons for the purpose of VATA and therefore they do not meet the conditions required by s.55A6((c)”.[102]HMRC set out, in its skeleton argument, that a necessary condition for the recipient being liable to account for and pay tax on supplies is, according to section 55A(6)(c), that they are a “taxable person”. HMRC state that the 7 Portuguese and one Belgian company are not taxable persons. The Appellants state that they are taxable persons.[103]In support of their position, HMRC refer to section 3(1) VATA94 which states that:
“A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act”
. The requirement to be registered is set out in section 3(2) VATA94 and in Schedules 1 to 3A. With respect to the requirements for registration of a non-UK establishment, these are set out in Schedule 1A. Paragraph 1 of Schedule 1A (Registration in respect of taxable supplies: non-UK establishment) states that a person becomes liable to be registered under this Schedule at any time if conditions A to D are met. Condition A provides that a non-UK establishment will only be liable to be registered if they are making taxable supplies, or there are reasonable grounds for believing they would do so.[104]Taxable supplies, at section 4(2) VATA94, are defined as “…a supply of goods or services made in the United Kingdom other than an exempt supply”. HMRC emphasise that the supplies which are the subject of the decisions under appeal are supplies of goods made by RS Global to non-UK establishments and that the 7 Portuguese companies and the one Belgian company did not themselves make any supplies of goods or services in the United Kingdom.[105]With reference to section 55A(3) VATA94, HMRC note in their skeleton argument that it provides that “a relevant supply, and the corresponding supplies made to the recipient in the month in which the relevant supply is made, are to be treated as taxable supplies of the recipient (as well as taxable supplies of the person making them) for the purposes of [Schedules 1 and 1A]”. That said, HMRC emphasise that section 55A(1)(a) and section 55A(2) specifically exclude zero-rated supplies from applying to 55A(3). Given that HMRC’s argument is that the goods supplied by RS Global remain zero-rated for the purpose of section 55A, section 55A(3) does not assist RS Global in meeting the definition of a taxable person.[106]Consequently, it is asserted by HMRC that none of the recipients of the supplies in this matter can be considered to be “taxable persons” for the purposes of VATA94 and therefore they do not meet the condition required by s.55A(6)(c) such that the reverse charge does not apply.[107]Having considered the arguments of both parties, I prefer the arguments of HMRC in relation to why the reverse charge does not apply including that, were section 55A VATA94 to operate in the way put forward by the Appellants in these circumstances, the impact of the Mecsek principle and its anti-fraud effect would be negated. I do not accept that section 55A VATA94 can be construed in the manner asserted by the Appellants.

Decision on the reverse charge issue

[108]The reverse charge does not apply to the supplies of the First Appellant such that, if any VAT is due on those supplies, the First Appellant is liable.

RIGHT TO APPLY FOR PERMISSION TO APPEAL

[109]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release Date: 12th MARCH 2025