Just Fabulous (UK) Ltd, R (on the application of) v Revenue and Customs

Where a taxable person knew or should have known that a purchase was connected with fraudulent evasion of VAT, the right to deduct input tax may be refused, even if the transaction concerns different goods from those in the original defaulter chain. The relevant connection is participation in a transaction connected with the fraud; membership of the same chain or dealings in the same goods are not necessary.

The issue is determined on objective evidence. Questions about the precise consequences of refusal, including possible double recovery or penalty, should generally be addressed after the facts have been established by the VAT tribunal.

Three companies sought judicial review after HM Revenue and Customs withheld substantial VAT repayments on returns involving mobile-phone or other contra-trading transactions. The Revenue had not yet made appealable decisions, but was investigating whether the transactions were deliberately connected with missing-trader or carousel fraud.

The common issue was whether the Revenue could lawfully refuse repayment where the goods in the claim were different from those in the defaulter chain. Delay and reasons issues were resolved during the hearing. The remaining question was whether the principle in Kittel applied to the assumed contra-trading facts.

1. Common issue. The court treated the challenge as a strike-out application. The facts were assumed against the claimants at their highest. It was therefore assumed that the relevant trader knowingly entered into a camera transaction to enable an associated broker to recover VAT which could not have been recovered directly from HM Revenue and Customs.
2. Application of Kittel. The Court of Justice’s formulation was not confined to a defaulter chain or to the same goods. It asks whether, on objective evidence, the taxable person knew or should have known that the purchase was part of a transaction connected with fraudulent evasion of VAT. On the assumed facts, the contra-trader was participating in that fraud. The Revenue could therefore refuse the input-tax repayment claimed on export.
3. Limits and consequences. The fundamental character of the right to deduct under the common VAT system did not protect a trader deliberately participating in fraudulent abuse. The court did not decide hypothetical questions of double or multiple recovery or whether refusal might amount to a penalty. Those matters depended on the facts and could be considered by the VAT Appeal Tribunal.
4. European reference and orders. A reference was inappropriate. There was no sufficient doubt about applying Kittel to the assumed facts, and the consequential issues were better addressed after factual findings. The first issue was resolved for the Revenue, and the application for a reference was refused. The Revenue agreed, subject to material unforeseen circumstances, to decide the claims by 30 April 2007.

First-instance judicial review proceedings. The judgment records that the three claims had been permitted by Dobbs J, Davis J and Sullivan J respectively. No prior substantive decision is stated.