Revenue and Customs v Dempster (t/a Boulevard)

A transaction is not a sham merely because it is artificial, uncommercial or arranged to obtain a tax advantage. The relevant question is whether the rights and obligations recorded in the documents, so far as relevant to VAT, differ from those intended by the parties. A claimant’s knowledge must relate to that relevant discrepancy, subject to the wider exception where the claimant knowingly participates in, or is wilfully blind to, a VAT fraud.

Serious allegations of dishonesty must be pleaded and put fairly and squarely to the witness. On appeal, a specialist tribunal’s factual conclusions will not be disturbed for mere disagreement with its assessment of probabilities.

HMRC appealed from a decision of the London VAT Tribunal, which had allowed Noel Dempster’s appeal against the refusal of an input VAT credit of £156,998.89. The credit related to two alleged purchases of computer software from Abacus Business Systems Ltd and onward zero-rated supplies to Spectrum Enterprises Corp.

HMRC alleged that the transactions were shams and that the invoices inadequately described the goods. The Tribunal rejected both grounds. The central issues were whether the Tribunal had erred in its approach to sham and knowledge, and whether its conclusion that the invoices sufficiently described the goods was irrational.

1. The appeal was dismissed. The Tribunal had made no error of law and its conclusions were not perverse.
2. Following Snook v London and West Riding Investments Ltd [1967] 2 QB 786, a sham requires acts or documents intended to give third parties or the court the appearance of legal rights and obligations different from those the parties intend to create. The relevant comparison is confined to the rights and obligations material to the VAT consequences. An artificial or commercially unattractive transaction is not thereby a sham.
3. The exception discussed in Hitch & ors v Stone (Inspector of Taxes) [2001] STC 214, concerning multi-party transactions, did not apply on these facts. The distinction between artificiality and sham, also reflected in Ensign Tankers v Stokes [1992] STC 226, was accepted.
4. Where a claimant seeks an input VAT credit, knowledge must ordinarily concern the relevant respect in which the documents fail to record the parties’ intended transaction. If the claimant actually knows, or is wilfully blind to the fact, that he is participating in a tax fraud, the precise extent of his knowledge of the documentary discrepancy becomes irrelevant.
5. The Tribunal was entitled to refuse to find the necessary knowledge. Allegations of dishonesty must be fairly and squarely pleaded and put to the witness in cross-examination. The absence of such questioning meant that the Tribunal’s conclusion was a conventional application of that principle.
6. Under Regulation 14(1)(g) of the VAT Regulations, an invoice must contain a description sufficient to identify the goods or services supplied. Whether that requirement is met involves fact and law. Applying the appellate restraint described in Able (UK) Ltd v HMRC [2006] EWCA Civ 1207, the Tribunal was entitled to conclude that the descriptions were sufficient and that any misdescription was improbable.
7. The conclusion was consistent with Kittel v Belgium (2006) Case C 439/04: an innocent participant in another person’s fraud is not deprived of VAT consequences where the transaction is otherwise effective for VAT purposes.

• High Court (Chancery Division): [2008] EWHC 63 (Ch) dismissed HMRC’s appeal.
• London VAT Tribunal: allowed Mr Dempster’s appeal against HMRC’s refusal of the input VAT claim; decision promulgated 3 May 2007.