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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> 4 Distribution Ltd v Revenue & Customs [2009] UKVAT V20931 (20 January 2009) URL: http://www.bailii.org/uk/cases/UKVAT/2009/V20931.html Cite as: [2009] UKVAT V20931

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20931

VAT – MTIC fraud – input tax - Preliminary hearing – Whether the Tribunal has jurisdiction to consider the question of whether HMRC have unlawfully discriminated against the Appellant in subjecting its claim for repayment of input tax to "extended verification" and refusing it, as opposed to considering the question of the amount of input tax of which the Appellant is entitled to repayment – held, it has not such jurisdiction – Whether any question of Community law is raised by the Appellant's discrimination argument, which should be referred to the ECJ – the Tribunal will not make a reference at this preliminary stage – the Tribunal comments that it might consider it necessary to make a reference after the substantive hearing of the appeal if it found on the facts that the Appellant had objective knowledge of the fraud and that the requirement for equal treatment for domestic transactions and intra-Community transactions had been breached – in that case a reference might be necessary to determine whether such breach was justified, and, if it was not, whether that fact affected the Tribunal's duty to apply the law as stated in Axel Kittel at para [61] according to its terms – Findings of fact made in relation to HMRC's policy in combating MTIC fraud.

LONDON TRIBUNAL CENTRE

4 DISTRIBUTION LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: JOHN WALTERS QC (Chairman)

SANDI O'NEILL

Sitting in public in London on 5, 6, 7, 10 and 11 November 2008

Andrew Young and M. Gnaesan, Counsel, instructed by Devereaux, Solicitors, for the Appellant

Philip Singer QC, Rory Dunlop and Peter Mant, Counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009


 


DECISION

The preliminary issue

1. At a Directions hearing in this appeal, held on 17 October 2008, the Chairman of this Tribunal directed that the issue raised by 4 Distribution Limited ("the Appellant") that the Respondents ("HMRC") have unlawfully discriminated against the Appellant would be heard by the Tribunal as a preliminary issue. The Tribunal directed the parties to define the issue more precisely by agreement, if possible, and HMRC have formulated two broad questions for the Tribunal's determination (with which formulation we understand the Appellant to be content), as follows:

"(1) Does the Tribunal have jurisdiction to consider the Appellant's discrimination argument? and

(2) If so, is there any question of European Community law raised by the Appellant which it would be appropriate for the Tribunal to refer to the Court of Justice of the European Communities ["the ECJ"]?"

2. In this Decision we address, and answer, these two questions as a preliminary issue in the appeal. In order to answer the second question we must consider whether (without prejudice to the answer to the first – jurisdiction – question) we can determine the Appellant's discrimination argument without making a reference to the ECJ. To enable us to do this, we have heard full argument on the issue raised by the Appellant.

The context in which the preliminary issue arises

3. First, we set the preliminary issue in context.
4. The appeal is against HMRC's refusal to make payment(s) of the amount(s) of the credit for input tax which the Appellant claims is allowable under section 26 Value Added Tax Act 1994 ("VATA") for the monthly VAT accounting periods 05 and 06 of 2006. The Appellant claims to be entitled to such payment(s) under section 25 VATA.
5. HMRC's refusal to make the payment(s) claimed is based on their interpretation of the single judgment of the ECJ in the joined cases of Axel Kittel v État Belge (C-439/04) and État Belge v Recolta Recycling SPRL (Case C-440/04) – hereinafter "Kittel" – at paragraph 61, which is as follows:

"… where it is ascertained, having regard to objective factors, that the supply [in relation to which credit for input tax is claimed] 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."

6. HMRC's case is that the Appellant knew or should have known that, by its 8 identified transactions for the purchase of Nokia mobile telephones in May and June 2006, almost all from a purchaser called Owl, but also from a purchaser called Grovner Trading, it (the Appellant) was participating in transactions connected with fraudulent evasion of VAT. We refer in this Decision to the state of fact where a taxable person, who receives a supply by purchasing goods, knew or should have known that, by his purchase, he was participating in a transaction connected with the fraudulent evasion of VAT, as that taxable person's "objective knowledge" of his participation in the fraud. Obviously, we intend the term "objective knowledge", so used, to include actual or subjective knowledge.
7. This case is a type of MTIC fraud case – that is, a type of "Missing Trader Intra-Community" fraud case. HMRC have investigated the chains of transactions of sale and purchase of the mobile telephones which include the Appellant's purchases, and their investigations have shown that all the relevant chains of transactions include intra-Community imports into the UK of the mobile telephones and onward domestic supplies of them by entities which have defaulted on their obligations to account to HMRC for the output VAT due on those onward domestic supplies ("Defaulters"). (These Defaulters are "missing traders" involved in intra-Community trade and, so HMRC contend, have fraudulently evaded VAT. Mr. Young accepts that the cause of the loss of VAT is "most likely" fraud. We do not understand this point to be in issue in this appeal.)
8. The Appellant does not deny that its purchases feature in chains of transactions which included intra-Community imports into the UK by Defaulters. Its case on the substantive Kittel issue is that it neither knew nor should have known that, by its purchases, it was participating in transactions connected with fraudulent evasion of VAT. That is, the Appellant denies objective knowledge of the fraud.
9. In all the relevant chains of transactions there are supplies of the mobile telephones to and by UK entities (other than Defaulters), all of which are registered for VAT, before the mobile telephones are supplied (by Owl or Grovner Trading) to the Appellant. These entities are referred to by HMRC and, for convenience, by us in this Decision, as "Buffers".
10. Thus, all the chains of transactions identified feature intra-Community imports into the UK of mobile phones by Defaulters, purchases and sales of them by Buffers, and eventual purchases of them by the Appellant from Buffers (Owl and Grovner Trading).
11. In all cases the Appellant sold on the mobile telephones to entities established in other Member States. In fact there were only two such entities involved, Dantec Enterprises (established in Spain) and Evolution (established in France). These intra-Community supplies (referred to by Mr. Roderick Stone, the officer of HMRC with relevant experience who gave evidence to the Tribunal, as "dispatches" rather than "exports", because they were supplies outside the UK to other Member States rather than to territories outside the EU) are zero-rated for UK VAT purposes pursuant, we assume, to section 30(8) VATA and regulation 134 of the VAT Regulations 1995.
12. This zero-rating treatment of the Appellant's onward supplies of the mobile telephones prima facie opens the way to the Appellant's entitlement to claim payment from HMRC of the amount of the credit for input tax (VAT on the supplies to it by Owl and Grovner Trading of the mobile telephones) which it claims is allowable under section 26 VATA.
13. The cash loss which HMRC suffers from this type of MTIC fraud case occurs when it makes payment of input tax credit to an entity in the position of the Appellant in chains of transactions which include a Defaulter (and, commonly, one or more Buffers). The entity in the Appellant's position in such chains is referred to by HMRC and, for convenience, by us in this Decision, as the "Broker".
14. We record that Mr. Young, for the Appellant, submitted that HMRC's use of the terms "Broker" and "Buffer" were prejudicial. The entities so described by HMRC are, he rightly said, simply "taxable persons" as defined in the VATA. In particular, the Appellant is properly described as a taxable person engaged in intra-Community trade. We accept that all the entities involved are properly described as taxable persons and that the Appellant is engaged in intra-Community trade, but we use the terms "Broker" and "Buffer" (as we have said) simply for convenience. Our use of them, of course, in no way denotes any prejudice or preconception on our part in our approach to the central issue in the appeal, which is whether or not the Appellant had objective knowledge of the connection of the transactions entered into by it with the fraudulent evasion of VAT.
15. The fraud exhibited by this type of MTIC fraud case is the evasion of its liability to output tax by the Defaulter who goes missing. It is the Defaulter's evasion which causes a loss to HMRC, because HMRC is thereby deprived of the value of HMRC's entitlement to require the Defaulter to account to HMRC for the output tax.
16. However in a case of this type of MTIC fraud, the cash loss suffered by HMRC occurs (as we have already said) when HMRC makes payment of input tax credit to the Broker.
17. That is why Mr. Stone in his evidence referred to the fraud "crystallising" at this point.
18. We consider that it is more correct to say that the fraud "crystallises" when the Defaulter goes missing, but that the cash loss to HMRC consequent on the fraud "crystallises" when HMRC makes payment to the Broker.
19. However, that distinction lacks much significance because of the fact that all the transactions in the chains concerned are completed in a very short time, often within a single day, and well before HMRC have had any opportunity to intervene to prevent their completion.
20. This type of MTIC fraud exhibits a situation where mobile telephones are imported into the UK from another Member State and later exported (or dispatched) from the UK to another Member State without any sale of them to a final consumer in the UK. Such a situation ought to be completely neutral so far as UK VAT is concerned (and would be where no fraud was involved). HMRC should receive output VAT from the importer (an honest trader in the position of the Defaulter), with additional output VAT of relatively small amounts from the Buffers involved, and should make a payment of input tax credit to the Broker which would be equal in amount to the aggregate of output tax received.
21. Where the importer is dishonest, and, so, a Defaulter, HMRC do not receive the output VAT due from it. They may, however, receive relatively small amounts of output tax from the Buffers involved. They wish to prevent the cash loss to the revenue, which would be involved in making payment of input tax credit to the Broker, by withholding such payment. HMRC relies on Kittel as the legal basis for withholding payment in these circumstances.
22. In the nature of things it is not obvious to HMRC which, among the very many claims for payment of input tax credit to exporters and intra-Community traders, are claims which they would wish to refuse on Kittel grounds. The vast majority of claims for payment of input tax credit to exporters and intra-Community traders are honest claims to which no-one would suggest that Kittel applies.
23. HMRC see the need to investigate claims for payment of input tax credit which they consider may be suspicious and susceptible to a refusal on Kittel grounds. Again, in the nature of things, such investigation needs to be painstaking. The chains of transactions resulting in the export or intra-Community supply (dispatch) giving rise to the (in HMRC's view, suspicious) claim for payment of input tax credit need to be identified to see whether or not they include a supply by a Defaulter.
24. If a relevant supply by a Defaulter is identified, HMRC need to take a view as to whether or not the Broker in the chain had objective knowledge of the fraud.
25. This process of investigation is known as "extended verification" of the claim for payment of input tax credit.
26. Where a claim is subjected to "extended verification", HMRC will not pay it unless and until they reach a conclusion that it should be paid, or, presumably, where this Tribunal or a higher court, on an appeal, decides that it should be paid. This leads to a long delay in all cases, and to a final refusal to pay in very many cases. There are many appeals of this type pending in these Tribunals.
27. The Appellant asserts that it had no objective knowledge of the frauds to which the transactions to which it was a party were connected. From the Appellant's viewpoint, HMRC's conduct is oppressive and discriminatory in that it (the Appellant) is being targeted by HMRC as the entity in the chain of transactions which makes the intra-Community supply (dispatch) and treated much more disadvantageously than any of the Buffers. HMRC are, on the Appellant's view of the matter, seeking to recoup from it (the Appellant) the loss which HMRC has suffered by reason of the disappearance of the Defaulter and the non-payment of the output tax due from it (the Defaulter). The Appellant's view is that HMRC's refusal of its (the Appellant's) claim for payment of input tax credit, to which it is entitled (taking full account of Kittel), together with the obligations and inconvenience entailed by "extended verification" of its claim, is onerous and unlawful as a matter of Community law.
28. The Appellant submits that HMRC's refusal of its claim for payment of input tax credit and its "extended verification" of its claim in these circumstances is unlawful and that its proper remedy is that its appeal should be allowed by this Tribunal. (Mr. Young made clear that it was no part of his submission that this Tribunal could or should make a declaration to the effect that HMRC's "extended verification" and refusal of the Appellant's claim for payment of input tax was unlawful: the remedy he sought was our decision that the Appellant was entitled to have its claim met.)
29. The Appellant's submission, if correct, would avoid the need for the Tribunal on this appeal to determine as a question of fact whether or not the Appellant had objective knowledge of the frauds to which the transactions to which it was a party were connected.
30. Because the point has the "threshold" nature just described, HMRC submitted at the Directions hearing on 17 October 2008 that it could conveniently be heard as a preliminary issue. We record that Mr. Young indicated at that hearing that the Appellant was content with that proposal.
31. In order to decide whether HMRC's "extended verification" and refusal of the Appellant's claim for payment of input tax was unlawful – which is a "threshold" objection to HMRC's actions - we would have to assume, without deciding, that the Appellant had objective knowledge of the frauds to which the transactions to which it was a party were connected. It is only by doing so that we could effectively test the Appellant's argument. Therefore it is clear that the Appellant is effectively arguing that HMRC should meet its claim for payment of input tax credit even if (which the Appellant denies) the claim could, or should, be refused by HMRC on Kittel grounds.

The first question: Does the Tribunal have jurisdiction to consider the Appellant's discrimination argument?

32. It became clear at the hearing that the Appellant's main case is that by subjecting its claim for payment of input tax to "extended verification" HMRC is directly in breach of the mandatory provisions of article 22(8) of the Sixth VAT Directive 77/388/EEC (which remained in force at all times relevant to this appeal). Article 22(8) is as follows:

"Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.

The option provided for in the first subparagraph [i.e. in the text cited above] cannot be used to impose additional obligations over and above those laid down in paragraph 3 [requirements for the issue of invoices, etc.]."

33. Specifically, the Appellant submits that, by subjecting its claim for payment of input tax to "extended verification" and refusing it, HMRC have breached the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons, and have imposed "additional obligations" in terms of the second indent of article 22(8) on the Appellant. HMRC's approach in targeting the Appellant in this way, simply because it is the Broker in the identified chains of transactions, is, the Appellant argues, unequal and discriminatory to the disadvantage of the Appellant, and to the relative benefit of the parties (Buffers) carrying out domestic transactions in the chains.
34. The Appellant's attack is thus against the procedure adopted by HMRC in relation to its claim for payment of input tax, which has led to a refusal to meet that claim.
35. The Appellant asserts that this Tribunal has jurisdiction to consider and adjudicate on these submissions pursuant to section 83(c) VATA, or alternatively that subsection read together with section 84(10) VATA.
36. Section 83(c) VATA confers jurisdiction on these Tribunals to hear and determine an appeal "with respect to … the following matter: (c) the amount of any input tax which may be credited to a person". Section 84(10) VATA provides that: "where an appeal is against a decision of the Commissioners which depended upon a prior decision taken by them in relation to the appellant, the fact that the prior decision is not within section 83 shall not prevent the tribunal from allowing the appeal on the ground that it would have allowed an appeal against the prior decision".
37. Mr. Young, for the Appellant, submits that section 83(c) - and, for that matter, section 84(10) - must be interpreted in conformity with the Community law principles of equivalence and effectiveness, which require that national procedural rules must not render virtually impossible or excessively difficult the exercise of rights conferred by Community law.
38. He says that so interpreted, section 83(c) confers jurisdiction on this Tribunal to adjudicate on the validity (lawfulness) of HMRC's decision to refuse to meet the Appellant's claim for repayment of input tax, because the "matter" in relation to which we have jurisdiction under section 83(c), although in terms "the amount of any input tax which may be credited to" the Appellant, must be taken to be whether the Appellant is entitled to be paid the input tax which it has claimed.
39. His alternative argument, based on section 83(c), read together with section 84(10), is that we can allow the appeal on the ground that we would have allowed an appeal against the relevant "prior decision", which he describes as HMRC's decision to take steps which he submits are discriminatory and/or in breach of article 22(8). The Tribunal understands that his submission is that the steps concerned are the subjection of the Appellant's claim to "extended verification".
40. In support of these submissions Mr. Young cited a number of authorities including in particular Peterbroek v Belgian State (C-312/93), Amministrazione delle Finanze dello Stato v Simmenthal SpA (C-106/77) and Van Schijndel v Stichting Pensioenfonds voor Fysiotherapeuten (C-430/93 and C-431-93) [1996] All ER (EC) 259. He also referred the Tribunal to the decision of this Tribunal (Chairman: H.H. Stephen Oliver QC) in Thomas Anthony Hodgson v Commissioners of Customs and Excise [1996] V&DR 200.
41. Mr. Singer QC, for HMRC, submitted that the process by which HMRC refused the Appellant's claim for repayment of input tax had to be distinguished from the refusal itself. The refusal was a proper subject matter for an appeal to this Tribunal pursuant to section 83(c) VATA, being an appeal with respect to the amount of any input tax which may be credited to the Appellant. The process by which the decision to refuse the claim was arrived at was, he submitted, not within this Tribunal's jurisdiction under section 83(c) either read alone or together with section 84(10) VATA.
42. There was, he submitted, in this case no rule of procedure which made it difficult for the Tribunal to apply Community law, and Simmenthal and Peterbroek could be distinguished as they were in the Advocate-General's Opinion in Van Schijndel at paragraph 23. If the Appellant was right in its submissions on the jurisdiction of the Tribunal, it would follow that since the passage of the European Communities Act 1972 it would have been open to these Tribunals to investigate the administrative acts and procedures giving rise to the decisions or matters in relation to which jurisdiction was expressly conferred by section 83 VATA. The improbability of this consequence was a strong indication that the basis for Mr. Young's submissions on jurisdiction was misconceived.
43. He submitted that in targeting the Broker in MTIC fraud cases of this type, HMRC were merely protecting the revenue and combating fraudulent tax loss. He contended that article 22(8) of the Sixth VAT Directive was irrelevant to the issues raised in this preliminary hearing, because the use by HMRC of the "extended verification" procedures was not an exercise of discretion in the administration of VAT which could be discriminatory as between one taxable person and another, but was instead a procedure undertaken by HMRC to protect the revenue in establishing the validity of claims to repayment of input tax.
44. There was a clear allocation of jurisdiction between these Tribunals and the High Court, which was achieved by domestic law and was entirely compliant with Community law and proportionate, pursuant to which questions relating to the lawfulness, rationality or fairness of the process by which the decision to refuse the Appellant's claim could not be considered by these Tribunals and could (subject to the relevant rules of procedure) be considered by the High Court.
45. The circumstances of the present case were different from those in Hodgson. In that case the Tribunal had assumed jurisdiction because if it had not done so there would have been no remedy to the taxpayer on the merits. That was not the position in this case.
46. Mr. Singer relied on Commissioners of Customs and Excise v National Westminster Bank plc [2003] EWHC 1822 (Ch), a decision of Jacobs J (as he then was). Similar arguments on jurisdiction to those advanced in this case by Mr. Young were advanced in that case by the bank. Jacobs J held that the bank's attempted recourse to the Community law principles of effectiveness and equivalence and the right to equality of treatment could not enlarge the statutory jurisdiction of these Tribunals either by reference to section 83 VATA alone or by reference to section 83 read together with section 84(10) VATA. He said (at [54]): "EU law does not prescribe how these rights are to be implemented, it simply requires that they be. There is no EU requirement that there be VAT tribunals, or administrative law courts. The EU perspective is simply to ask whether the Member State has proper machinery for safeguard [sic] the rights." He went on to say that there is machinery in the Administrative Court which was not suggested to be inadequate or ineffective.
47. Mr. Singer submitted that the two decisions of HMRC relevant in this case, viz: (a) the decision to subject the Appellant's claim for payment of input tax to "extended verification"; and (b) the decision to refuse to make payment(s) of the amount(s) of the credit for input tax which the Appellant claimed under sections 25 and 26 VATA, were independent, and that the decision at (b) did not depend on the decision at (a) in terms of section 84(10) VATA.
48. This was because the decision ultimately taken by HMRC on the Appellant's claim as that it had, as a matter of Community law, lost its right under sections 25 and 26 VATA. HMRC's case was that the circumstances of the case were such that, applying Kittel, a right to repayment of input tax had never arisen to the Appellant, rather than that such a right had existed and had been withdrawn. HMRC's decision was not one to refuse to exercise a discretion in the Appellant's favour, it was simply one to apply the law in the Appellant's case.
49. Mr. Singer also relied on R (on the application of UK Tradecorp Ltd.) v Customs and Excise Commissioners [2005] STC 138, a decision of the Administrative Court (Lightman J), for the following propositions: first, that the Tribunal has no jurisdiction to adjudicate or review HMRC's decision-making process; secondly, that the present distribution of jurisdiction between these Tribunals and the Administrative Court complies with Community law; and thirdly, that an entitlement to deduction and payment (if the deduction exceeds the tax due) of input tax arises when "a claim is in whole or in part admitted or established" (ibid. at [21]) and not before.
50. He also cited, amongst other authorities, Dorsch Consult Ingenieurgesellschaft mbH v Bundesbaugesellschaft Berlin mbH (Case C-54/96) and R (on the application of Teleos plc and others) v Commissioners of Customs and Excise (Case C-409/04).
51. Our conclusion on the first issue is that this Tribunal does not have jurisdiction to consider the Appellant's discrimination argument. We accept Mr. Singer's submissions and reject Mr. Young's submissions.
52. The most that can be said for the Appellant's submissions was said by Lightman J in UK Tradecorp Ltd. with reference to the similar arguments he was considering in that case on the respective jurisdictions of the High Court and these Tribunals. He said, at [25], that "there is much to be said for the proposition that the supervisory jurisdiction of the Administrative court in regard to [HMRC] could more conveniently, expeditiously and economically be exercised by the tribunal as an adjunct to its appellate function". However, he went on to say in the same paragraph that he "[could not] think that the present procedure in any way falls short of the standard required by the principle of proportionality". He stated (ibid. at [11]) that "the general principle must be that the tribunal's jurisdiction is limited to that conferred on it by statute and that issues outwith that jurisdiction must fall to be determined by the High Court".
53. We also respectfully adopt the reasoning of Jacobs J in National Westminster Bank plc to support our decision that the Appellant's attempted recourse to the Community law principles of effectiveness and equivalence, and the right to equality of treatment, cannot enlarge the statutory jurisdiction of these Tribunals by any possible or permissible interpretation of section 83(c) VATA, whether read alone or together with section 84(10).
54. The judgment of the ECJ in Peterbroek cannot assist the Appellant in its contention that these Tribunals' jurisdiction can be enlarged by the process of conforming interpretation which it urged on us. The ECJ in Peterbroek expressly respected the function of the domestic legal systems of Member States to designate the courts and tribunals having jurisdiction to safeguard Community law rights (see: [12]). Further, the decision that the national court must be empowered to consider of its own motion whether a measure of domestic law is compatible with a provision of Community law is expressly circumscribed by the ECJ to apply to the consideration by the national court of a matter within its jurisdiction – see: [21] and the dispositif.
55. Likewise, the judgment of the ECJ in Simmenthal states plainly that the principle of effectiveness is to operate when a national court is called upon "within the limits of its jurisdiction" to apply provisions of Community law – see: [24] and the dispositif.
56. We note that in Hodgson the Tribunal did, by a process of conforming interpretation (adopting the Marleasing approach, cf. [1990] ECR 1-4135), effectively enlarge our statutory jurisdiction to include a right of appeal to enable a person's Community law right under the Excise Directive 92/12, to bring tobacco not held for a commercial purpose into the UK without payment of duty here, to be tested on its merits. The Tribunal did so, however, only because it concluded that judicial review provided no adequate remedy - because the review would be confined to an examination of the reasonableness of the Commissioners' decision that the tobacco was held for a commercial purpose and would not extend to the merits of the person's claim to be exercising his Community law rights - see: ibid. at [14]. As we have said above, this is a different case where judicial review offers an adequate and effective opportunity to the Appellant to put forward its case that the process by which HMRC refused its claim for repayment of input tax did not give effect to its Community law rights.
57. We also accept Mr. Singer's submissions in relation to article 22(8) of the Sixth VAT Directive. The "obligations" referred to in article 22(8) are obligations inherent in the operation of VAT by taxable persons, principally the obligations relating to invoices and returns. This is clear from the language of article 22(8), particularly the reference to "other obligations" the opening words, which indicates that the obligations concerned are of the same type as the obligations referred to previously in article 22 (whose title heading is "Obligations under the internal system"), and the reference to "additional obligations over and above those laid down in paragraph 3" in the second indent, which confirms that indication.
58. "Extended verification" seems to the Tribunal to be more aptly described as a procedure implementing conditions for the refund of input tax which Member States may determine in accordance with article 18(4) of the Sixth VAT Directive. As Lightman J said in UK Tradecorp Ltd. at [30]: "there is no right to a refund, and no right to a refund is triggered, unless the right to deduct is exercised in respect of taxes actually due … The commissioners' investigations are the appropriate means to verify whether or not there exists a valid claim to deduction. Until the claim is accepted or established, there is no right to payment." A right to payment of the excess of authorised deductions over the amount of tax due therefore arises at a later time than the right to deduct, which, pursuant to article 17(1) of the Sixth VAT Directive, arises at the time when the deductible tax becomes chargeable.

The second question: If the first question is answered in the affirmative, is there any question of European Community law raised by the Appellant which it would be appropriate for the Tribunal to refer to the ECJ?

59. As we have answered the first question in the negative, there is strictly no need for us at this stage to proceed to consider whether the Appellant's discrimination argument raises a question of Community law which could appropriately form the basis of a reference to the ECJ.
60. Indeed we indicated in the course of the hearing of the preliminary issue our provisional view that we would not make a reference at this interlocutory stage. Mr. Singer, for HMRC, agreed with that provisional view, submitting that, in particular, because the facts have not yet been found (they will be at the substantive hearing of the appeal) it would be premature to consider making a reference.
61. We confirm our provisional view that we are not at this stage prepared to consider whether a reference could or should be made.
62. Nevertheless, since we heard full argument, and extensive evidence relating to HMRC's practice from Mr. Roderick Stone, we will comment briefly on the alleged difficulties of interpretation of Community law which have been raised by the Appellant.
63. Although (because we lack the necessary jurisdiction) we would not make a reference in order to determine whether by their procedures HMRC have unlawfully discriminated against the Appellant, the point(s) of Community law in relation to which these difficulties are said to arise may be germane to our consideration at the substantive hearing of the appeal of the question of how the ECJ's decision in Kittel is to be applied. We give general liberty to the parties to address us again at the substantive hearing on these points if they are (or either of them is) minded to do so. We hope that the comments which follow may assist in clarifying to the parties our understanding, as at present advised, of the points concerned.
64. Mr. Young made the submission that on a proper application of Kittel, the Member State is entitled to deny the right to deduct input tax in circumstances where it can be established that a taxable person had entered into a transaction with another taxable person in circumstances where the first taxable person either knew or should have known that the second taxable person had defaulted or would default. In support of this submission he referred to the French practice which is apparently to apply Kittel in this way, as between back to back transactions only.
65. We understand this submission to be that HMRC can lawfully only apply the rule in Kittel to refuse entitlement to the right to deduct input tax, to the Buffer with whom the Defaulter entered into a transaction directly. HMRC cannot apply the rule in Kittel to refuse that entitlement to any other party in the chain be it Buffer, or, as in the Appellant's case, Broker.
66. This submission was also made by the appellant in the Tribunal case of Honeyfone Ltd. v HMRC (Chairman: Mr. Charles Hellier, reference 20667). In that case the Tribunal held (as we have done) that it had no jurisdiction to set aside HMRC's decision to apply Kittel in a particular case (ibid. [22] to [24]). The Tribunal also held that the discrimination argument advanced in the submission cannot "act as a limitation of the Kittel derogation by providing a codicil thereto which reinstates the taxpayer's right to his input tax deduction if [HMRC] act[s] wrongly" (cf. ibid. at [21], [31] and [32]). That also is our view.
67. The Tribunal in Honeyfone also held that the discrimination argument cannot be a constraint on the application of Kittel by the Tribunal itself, because "where appeals are brought to the tribunal and they are determined by the tribunal in accordance with the law there could be no such discrimination" (ibid. [33] and [34]). However the Tribunal in Honeyfone stated that its decision was subject to any reference which the tribunal might decide to make and formally adjourned the appeal (ibid. at [138]). We were told that the Honeyfone appeal in fact settled and so the Tribunal never finally considered the reference issue.
68. This is the context in which it seems to us that there might be scope for a reference in this appeal. A necessary condition for us to make a reference would be that at the substantive hearing we had found on the facts that the Appellant had "objective knowledge" of its participation in identified frauds (that is, that the Appellant knew or should have known that, by its 8 identified transactions for the purchase of Nokia mobile telephones in May and June 2006, it (the Appellant) was participating in transactions connected with fraudulent evasion of VAT).
69. If in these circumstances we also found that the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons had been breached, then a reference might be necessary to obtain guidance as to (a) whether such breach was objectively justified; (b) if not, whether the fact that there was such a breach which was not objectively justified affected our duty to apply the law as stated in Kittel at [61] according to its literal terms.
70. We record that Mr. Young submitted that the application of the Kittel decision to the Appellant was in breach of articles 29 and 30 EC of the Treaty of Rome, was in breach of the principle of proportionality, was in breach of the principle of fiscal neutrality, was in breach of the principle of legal certainty, was in breach of the principle of the protection of legitimate expectations and amounted to State aid. Mr. Young cited authorities including Sosnowska v Dyrektor Izby Skarbowej we Wroclawiu Osrodek Zamiejscowy w Walbrzychu (Case C-25/07).
71. Mr. Singer's response was that where Kittel applied, the right to repayment of input tax was lost. If, on the facts, Kittel applied to the Appellant, then the Appellant lost its right to repayment of input tax and there could be no question of discrimination if HMRC acted to enforce the loss of that right – even, we understood, where HMRC did not enforce the loss of that right against other persons involved in the relevant chains (Buffers).
72. HMRC's actions, Mr. Singer submitted, were justified by its duty to protect the revenue in the most effective way, and that action against the Buffers was not possible, or, if possible, not likely to be fruitful. HMRC must, he submitted, take action against the only party in the supply chain, the Defaulter, against whom the revenue loss can be recouped. On that basis, provided the action is objectively justified (a matter for the main hearing), it cannot be said that such action goes further than necessary (i.e. is disproportionate).
73. He cited other authorities including Commissioners of Customs and Excise and Attorney General v Federation of Technological Industries and Others (Case C-384/04). Halifax plc v Commissioners of Customs and Excise (Case C-255/02), WHA Ltd. v HMRC [2007] EWCA Civ 728, R(Just Fabulous Ltd.) v HMRC [2007] EWHC 521 (Admin), and Calltell Telecom v HMRC (a decision of these Tribunals, Chairman: Colin Bishopp, Reference 20266), and Brayfal Limited v HMRC (a decision of these Tribunals, Chairman: David Demack, Reference 20781).

Mr. Roderick Stone's evidence

74. The following is a summary of what the Tribunal considers to be the most important points covered in Mr. Stone's evidence, and the Tribunal's general findings on the basis of that evidence. We found Mr. Stone to be an honest and credible witness.
75. Mr. Stone is a senior policy adviser to HMRC with technical oversight of VAT MTIC fraud. He told us that MTIC fraud gave rise to losses estimated at between £13bn. and £18bn. over the period from 2000 to 2006. He estimated that between 90% and 95% of these losses related to trade in mobile phones.
76. There was a surge in exports of mobile phones from the UK between 2005 (when the figures were £2bn. to £3bn.) to the first six months of 2006 (when the figure was £21bn.). There was also an increase in the number of businesses set up to export mobile phones, which had no significant previous history of trading in mobile phones. There was likewise an increase in VAT repayment claims.
77. HMRC made an initial selection of traders' repayment claims, which were sent for pre-credibility checks before payment. As a consequence of the results of those checks a decision would be made whether or not to conduct "extended verification" of the claims concerned to establish whether or not the transactions in respect of which the claims were made were connected with fraud.
78. It was however not always the case that "extended verification" was applied to cases where there was a repayment claim.
79. The criteria (characteristics of risk) according to which selection for "extended verification" was made by HMRC were as follows: (1) whether the trader had been verified as having been previously involved in transactions tainted by fraud; (2) whether there was a previous risk of involvement with companies who had bought from Defaulters; (3) The choice of commodity with which to trade; (4) the pattern of trading; (5) the parties with whom the trader chose to trade. The pattern of trade looked out for was one where there was a sudden large increase in turnover.
80. Another factor looked out for by HMRC as indicative of possible involvement in fraud was a bank account with First Curacao International Bank. That bank had featured in investigations relating to MTIC fraud. It had operated outside the reach of anti-money laundering regulations. That bank was being or had been investigated by the relevant overseas authorities.
81. Mr. Stone said there was no policy of targeting exporters for "extended verification". He said the target(s) were businesses displaying the characteristics of risk which he had identified.
82. He said that about 95% of traders who were engaged in exports and who were selected for "extended verification" had had their repayment claims denied because HMRC had formed the view that the transactions concerned were connected with fraud.
83. HMRC had not concluded in all those cases that they knew or should have known that they were accomplices in the fraud (as Mr. Stone put it). But all of those in relation to whom this conclusion had been reached had had their repayment claims denied. He estimated that in 5% of cases selected for "extended verification" this conclusion had not been reached. In those cases the repayment claims had been allowed.
84. Typically the chains of transactions take place in the course of one day.
85. Often the transactions include arrangements for payments by Buffers to persons other than their immediate suppliers, who are often outside the UK. In such cases the immediate suppliers are not in funds to meet a VAT assessment in relation to the denial of an input tax deduction.
86. The denial of a repayment claim to a Broker is an attempt by HMRC to prevent the loss to HMRC which results from the Defaulter not having paid the VAT for which it was liable. Mr. Stone regarded the repayment claim by a Broker as being the occasion when the MTIC fraud was crystallised, because it was the way in which the relevant VAT was extracted from HMRC.
87. Mr. Stone said that HMRC gave consideration to the principle of proportionality in dealing with MTIC fraud.
88. Mr. Stone said that if action was to be taken against all traders in a chain, there was a possibility of multiple recovery of VAT, but that HMRC had given an undertaking in the Just Fabulous case that it would avoid multiple recovery.
89. HMRC continued to try to identify Defaulters and to appoint provisional liquidators of them.
90. Mr. Stone said that HMRC had denied input tax claimed by Owl (a trader from whom the Appellant made purchases), which was a Broker in respect of other transactions. Owl had appealed to the Tribunal.
91. Regarding the approach of the French authorities, Mr. Stone said that they had introduced three measures. First, they had refused the right to zero-rate exports. Secondly, they had cancelled the right of the immediate purchaser from a Defaulter to deduct input tax. Thirdly, they had imposed joint and several liability for the VAT loss on all parties to a chain in relation to whom they could allege objective knowledge.
92. Mr. Stone denied that HMRC had a policy to disrupt trading activities as such. He said that as a consequence of intervention HMRC disrupted fraudulent trading.
93. He said that wherever "extended verification" indicated that an intra-Community trader had objective knowledge of the fraud, then HMRC would deny the trader's input tax repayment claim. He denied that HMRC made a routine presumption of objective knowledge against intra-Community traders. He stated that all decisions were based on the evidence gathered.
94. When asked by Mr. Young whether "inhibits" are applied to intra-Community traders, he replied that "inhibits" are applied to a trader who represents a risk to the Revenue and that it was an unfortunate characteristic of MTIC fraud that it required an EU acquisition and an export. That was the fraudster's choice.
95. He stated that he was aware of instances where Buffers in a chain had not been visited, because they have disappeared, or been less than cooperative or their records had not been available. He explained that enquiries could be made which did not involve visits. His view was that officers should take every opportunity to visit Buffers.
96. He said that Buffers are unlikely to be required to provide security. Exporters (Brokers) on the other hand were often required to provide security for repayments.
97. He denied that HMRC's approach acted as a deterrent to legitimate trade. He said that the approach taken by HMRC protects legitimate trade. Legitimate trade would, in his view, lack the characteristics of risk which HMRC concentrate on looking for. Legitimate traders are excluded from MTIC fraud investigations as soon as possible.
98. He said that there was no policy to deny input tax repayments to intra-Community traders. The policy (or strategy) was to protect the Revenue from MTIC fraud.
99. We conclude from Mr. Stone's evidence that HMRC do focus their efforts to counteract this type of MTIC fraud by investigating intra-Community traders, but they do this not because they are intra-Community traders as such, but because they are potentially Brokers, and their object is to deny repayment claims made by Brokers with objective knowledge of the MTIC fraud.
100. We accept that HMRC have a wide-ranging policy of countering MTIC fraud and that they will sometimes take steps against Defaulters and Buffers, when it seems to them that such steps might be worthwhile. But this does not detract from the fact that the main focus of their actions is on denying repayment claims to Brokers.
101. We also accept that repayment claims are denied on the basis of evidence which appears to HMRC to indicate that the Broker concerned had objective knowledge of the fraud.

JOHN WALTERS QC

CHAIRMAN

RELEASE DATE: 20 January 2009

LON/2007/1765