“[…] a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.”
“[…] traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud…must be able to rely on the legality of these transactions.”
“[…] 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 connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”
“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 then 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.”
“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. Thus, it includes those who should have known from the circumstances, which surround their transactions that they were connected to fraudulent evasion.”
“If it is established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT.”
“[…] Tribunals should not unduly focus on the question whether a trader has acted with 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 that his transactions have been or will be connected with fraudulent evasion of VAT […].”
“However, Mobilx does not purport to change the test in Kittel’s case. The requirement as to the taxpayer’s state of mind squarely remains “knew or should have known”
“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 telephones 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.”
“One strand of the cord might be insufficient to sustain the weight, but three stranded together may be quite of sufficient strength. Thus, it may be in circumstantial evidence – there may be a combination of circumstances, no one of which would raise a reasonable conviction, or more than a mere suspicion: but the whole taken together may, create a strong conclusion of guilt, that is, with as much certainty as human affairs can require or admit of.”
“…the holding of Moses LJ does not mean that the trader has to have the means of knowing how the fraud that actually took place occurred. He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge. This is apparent from paras 56 and 61 of Kittel cited above. Paragraph 61of Kittel formulates the requirement of knowledge as knowledge on the part of the trader that 'by his purchase he was participating in a transaction connected with fraudulent evasion of VAT'. It follows that the trader does not need to know the specific details of the fraud.”
“1. Between7 May 2018 and22 March 2019 , Rizwan Mahmood Butt (Mr Butt) caused or allowed Trade Lynx (London) Ltd (TLL) to participate in transactions which related to the fraudulent evasion of VAT, such connections being something which he either knew or should have known about; and 2. Mr Butt caused or allowed TLL to wrongfully claim input VAT of£203,306 from HMRC on its 06/18, 09/18, 12/18 and 03/19 VAT returns.”
“There is no doubt in my mind that Guston is a blocking buffer engaged in fraudulent activities designed to secure a tax advantage for other traders or individuals. Its main role was to block the activities of tracing the deals to an ultimate defaulting trader.”
‘fraudulent with no intention, at any time, of ever paying the VAT due.’
“Based on the evidence held by HMRC such as sale invoices issued by Mirandina, imports made by Mirandina and no VAT returns, it is reasonable to conclude that the assessed amount of£573,358 was a tax loss derived from Mirandina’s fraudulent evasion of VAT for a period between01 May 2020 and30 April 2021 . A VAT assessment was raised including for the VAT charged by Mirandina from sales to Mega Foods, transactions connected with four of the listed purchases made by Quantum London.”
“Dealing with other businesses, how to make sure the integrity of your supply chain.” “6.1 Checks to undertake to help make sure the integrity of your supply chain The following are examples of indicators that could alert you to the risk: • that VAT would go unpaid • of a connection with missing trader fraud 1) Legitimacy of customers or suppliers. For example: • what is your customer’s or supplier’s history in the trade? • has a buyer and seller contacted you within a short space of time with offers to buy or sell goods of same specifications and quantity? • has your supplier referred you to a customer who is willing to buy goods of the same quantity and specifications being offered by the supplier? • does your supplier offer deals that carry no commercial risk for you , for example, no requirement to pay for goods until payment received from customer? • do deals with your customer or supplier involve consistent or predetermined profit margins, irrespective of the date, quantities or specifications of the specified goods traded? • does your supplier (or another business in the transaction chain) require you to make third party payments or payments to an offshore bank account? • are the goods adequately insured? • are they high value deals offered with no formal contractual arrangements? • are they high value deals offered by a newly established supplier with minimal trading history, low credit rating? • can a brand-new business obtain specified goods cheaper than a long established one? • has HMRC specifically notified you that previous deals involving your supplier had been traced to a VAT loss or had involved carousel movements of goods? • has HMRC specifically notified you that HMRC date stamps have been present on goods offered for sale by your supplier, or that there is evidence of HMRC date stamps being removed from packaging, this would strongly suggest that the goods had been subject to carousel movement, which should alert you to a significant risk that the transactions entered into with that supplier may be connected with the non-payment of VAT • has HMRC specifically notified you that other Missing Trader VAT fraud characteristics (such as third-party payments) have occurred in transaction chains involving your supplier? 2) Commercial viability of the transaction. For example: • is there a market for this type of goods, such as superseded or outdated mobile phone models or non-UK specific models? • what research have you done to test whether these goods are available as described and in the quantities being offered? • is it commercially viable for the price of the goods to increase within the short duration of the supply chain? • have normal commercial practices been adopted in negotiating prices? • is there a commercial reason for any third party payments? • are normal commercial arrangements in place for the financing of the goods? 3) Viability of the goods as described by your supplier. For example: • do the goods exist? • have they been previously supplied to you? • are they in good condition and not damaged? • do the quantities of the goods concerned appear credible? • do the goods have UK specifications yet are to be exported? • is your supplier unwilling to provide IMEI or other serial numbers? • what recourse is there if the goods are not as described? Make sure that sufficient checks are carried out in each of these categories to make sure that you’re not caught in a fraudulent supply chain. 6.2 Checks carried out by existing businesses The following are examples of specific checks carried out by businesses that took part in the consultation exercise in 2003 when these rules were introduced. These may also help you to decide what checks you should carry out, but this list is not exhaustive and you should decide what checks you need to carry out before dealing with a supplier or customer: • obtain copies of certificates of incorporation and VAT registration certificates • verify VAT registration details with HMRC • obtain signed letters of introduction on headed paper • obtain some form of written and signed trade references • obtain credit checks or other background checks from an independent third party • insist on personal contact with a senior officer of the prospective supplier, making an initial visit to their premises whenever possible • obtain the prospective supplier’s bank details, to check whether: ◦ payments would be made to a third party ◦ in the case of an import, the supplier and their bank shared the same country of residence • check details provided against other sources, for example website, letterheads, BT landline records Paperwork in addition to invoices may be received in relation to the supplies you buy and sell. This documentation should be kept to support your view of a transaction’s legitimacy. The following are examples of additional paperwork that some businesses keep: • purchase orders • pro-forma invoices • delivery notes • Convention Merchandises Routiers (CMRs) or airway bills • allocation notification • inspection reports This is not an exhaustive list, but does show some of the more common subsidiary documentation. 6.3 What HMRC looks out for when considering the extent of your checks In each case, HMRC will be seeking to identify what actions or precautions you took in response to any indicators of risk. This will focus on the due diligence checks you undertook and, most importantly, the actions taken by you in response to the results of those checks. In each case, HMRC will consider: • what due diligence checks were performed, this includes any checks designed to address the specific risks of a specific case • to what extent were your checks appropriate, adequate and timely in relation to addressing the risks identified • what the results of the checks indicated • whether you took appropriate action in response to the results of the checks If you have genuinely done everything you can to check the integrity of the supply chain, can demonstrate you have done so, have taken heed of any indications that VAT may go unpaid and have no other reason to suspect VAT would go unpaid, the joint and several liability rules will not be applied. These are only guidelines for the kind of checks you could make to help you avoid participating in a fraudulent supply chain. The checks you will need to make, and the extent of them, will vary depending on the individual circumstances of your trade and it’s for you to consider what questions you need to ask to protect yourself in the particular circumstances of your individual transactions.”
“If you knew or should have known that your transaction was connected with fraud then HMRC may refuse your VAT claim in respect of that transaction. In determining whether you knew or should have known HMRC will consider all of the circumstances relating to the transaction, including whether you took reasonable steps to verify the integrity of your supply chain.”
“It is in your interest to check carefully who you are dealing with. It is good commercial practice for businesses to carry out checks to establish the credibility and legitimacy of their customers, suppliers and supplies. These checks may need to be more extensive in business sectors that are commercially risky or vulnerable to fraud and other criminality. HMRC does not expect you to go beyond what is reasonable. However, HMRC would expect you to make a judgement on the integrity of your supply chain and the suppliers, customers and goods or services within it.”
“In each case HMRC will seek to identify what actions or precautions you took in response to any indicators of risk. This will focus on the due diligence checks you undertook and the actions taken by you in response to the results of those checks. In each case HMRC will consider: • the due diligence checks that were performed, including any checks designed to address the specific risks of a particular transaction • the extent to which your checks were appropriate, adequate and timely in relation to addressing the risks identified • the results of those checks and what action was taken, if any, in response.”
“65…It is true that there may well be no correlation between the amount of output tax 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.”
“94. The principle for which the Appellants contend is, as it seems to me, a quite different one. It is that the right to repayment of input tax can continue to be exercised, notwithstanding knowledge of the fraud of the importer, to the extent that the claim for repayment exceeds the loss to the Revenue. 95. The possibility for such an excess arises in the following way. In a non-fraudulent chain HMRC ought to recover the VAT on the importer's selling price, and VAT on the markups of the various intermediate traders. They would then repay the total of that VAT to the exporter. By contrast, in a fraudulent chain HMRC only recover VAT on the markups. Nevertheless, if they withhold repayment of VAT to the exporter, it can be said that HMRC are better off than they would have been in the case of the non-fraudulent chain, by an amount equal to the VAT on the markups, and that this sum, at least, should be repaid to the Appellants. 96. In my judgment there is no principle which requires HMRC to acknowledge a claim to repayment to the extent that the claim exceeds HMRC's tax loss. Firstly, as Mr Cordara emphasised in other connections, the correct unit of fiscal analysis is not the entire chain but the individual transaction. This proposition was emphasised in both Optigen and Kittel (supra). The question is accordingly whether the taxpayer has or does not have the right to deduct or reclaim his input tax in respect of an individual transaction. Consideration of this question does not justify recourse to the overall fiscal impact on HMRC of all the transactions in the chain. 97. Secondly, none of the statements in Kittel suggest that the right is lost only to the extent that tax is lost elsewhere in the chain. It is true that measures adopted by Member States to combat MTIC fraud must be proportionate: see e.g. Netto (supra) at [18]-[23]. Thus irrebuttable presumptions of illegality, for example, are not permitted: Garage Molenheide Joined Cases C-286/94; C-340/95; C-401/95 and C-47/96:[1998] STC 126 at [52]. But, once it is established that a taxpayer has, by his purchase, participated in the fraudulent evasion of VAT, it seems to me to be impossible to argue that, by withholding repayment of VAT in respect of that very purchase the taxpayer is being subjected to a disproportionate remedy. In fact, to use the VAT legislation to achieve any benefit from such a purchase seems to me to be wrong in principle. 98. Thirdly, although fiscal neutrality is a fundamental feature of the system of VAT, and the right of any trader to deduct input tax is an important feature of the system of ensuring fiscal neutrality (see e.g. Kittel at [48]), the fiscal neutrality of an individual transaction will, as Kittel shows, have to give way to the objective of combating fraud. 99. It seems to me that the objective of not recognising the right to repayment is not simply to ensure that the exchequer is not harmed by fraud: the objective includes combating fraud and discouraging taxpayers from entering into transactions of this nature. In that context, considerations of fiscal neutrality of the impugned transaction are, it seems to me, beside the point. 100. For those principal reasons I reject the grounds of appeal concerned with penalty and excess recovery.”