Apollo Communications Centre Ltd (In Liquidation) & Ors v Rahmann & Ors

A pleading alleging fraudulent VAT arrangements is not liable to be struck out merely because the transactions may have been dishonest, unauthorised or void under domestic law. The VAT question is whether the objective criteria for economic activity and a supply are satisfied. Fraudulent purpose, breach of duty, lack of authority or domestic invalidity do not necessarily prevent economic activity for VAT purposes. Where goods were acquired and apparently sold on, with payment directions implemented, the pleaded facts could support a taxable supply. Difficult factual questions, including whether there was a full carousel fraud, whether loss was suffered and whether the transactions were authorised, should ordinarily be addressed by defence and evidence. A pleading may sufficiently allege dishonesty where the dishonest conduct is identified, even if alternative negligence is also pleaded.

The liquidators of Apollo Communications Centre Ltd brought claims against its former director and companies and individuals involved in a chain of mobile-phone transactions. The ninth defendant applied to strike out the claims against him on the grounds that they disclosed no reasonable cause of action or constituted an abuse of process.

The claim alleged breach of fiduciary duty, dishonest assistance and fraudulent trading arising from directions that sale proceeds, including VAT, be paid to offshore third parties. The central issues were whether the pleaded transactions could constitute economic activity and taxable supplies despite their alleged fraudulent purpose, whether domestic invalidity or lack of authority affected that conclusion, and whether the allegations of fraud and loss were adequately pleaded.

1. The strike-out application was dismissed. The claimants were permitted to amend the pleading, including to allege that Gara was unable to discharge its debt. Costs were awarded to the claimants in the sum of £14,000 inclusive of VAT.
2. For VAT purposes, the relevant inquiry is objective. The concepts of economic activity, taxable person acting as such and supply are not generally altered by the purpose or result of the transaction. The reasoning in Optigen Ltd v Customs and Excise Commissioners and Halifax plc v Customs and Excise Commissioners supported that approach.
3. A transaction may remain economic activity even where it forms part of a scheme intended to evade VAT, or where the transaction is alleged to have been entered into in breach of a director’s duties. Domestic law treating a contract as void, or treating an apparent agent as unauthorised, does not itself answer the VAT question.
4. The pleaded acquisition of goods by Apollo, their apparent onward sale and the implementation of payment directions were sufficient, in the absence of contrary factual material, to support the pleaded existence of economic activity. If the goods had remained in Apollo’s possession and control, the objective criteria might instead indicate that no supply had occurred.
5. The court declined to treat Total Networks as requiring a different result. The apparent tension between that decision and Hashash showed that cases of this kind were fact-dependent.
6. Arguments concerning a full carousel fraud, repayment by HMRC, double recovery, loss, authority and the effect of any lack of delivery were matters capable of being raised in the defence and tested at trial. They did not justify striking out the claim.
7. The allegations of dishonesty were sufficiently clear. The dishonest conduct relied upon was identified principally as the payment directions. The alternative allegation of negligence did not convert the pleading into the type of ambiguous allegation considered defective in Armitage v Nurse.