Calltel Telecom Ltd & Anor v HM Revenue and Customs

A trader loses the right to deduct input VAT where, having regard to objective factors, it knew that its purchase formed part of a transaction connected with fraudulent evasion of VAT. The principle can apply to a trader remote from the original defaulting importer and does not require contractual privity or a direct causal contribution to the fraud. A trader may aid the fraud by supplying liquidity to the chain while knowingly continuing to trade. Refusal of repayment in respect of the tainted purchase is not a penalty, even if the amount withheld exceeds the tax loss caused by the original default.

Calltel Telecom Ltd and Opto Telelinks (Europe) Ltd appealed against the VAT and Duties Tribunal’s decision refusing repayment of input tax claimed for January to March 2006. HMRC alleged that the companies’ mobile-phone transactions formed part of MTIC fraud and that they knew, or should have known, of the connection.

The appellants challenged the Tribunal’s factual findings, its application of the Kittel test to knowledge, proximity and participation, and its conclusion that withholding repayment did not amount to excessive recovery or a penalty. The High Court had to determine whether the Tribunal had made an error of law warranting intervention.

1. Appeal dismissed. The Tribunal’s decision to refuse repayment of the input tax was upheld.
2. An appeal under section 11(1) of the Tribunals and Inquiries Act 1992 is confined to points of law. The High Court may intervene where there was no evidence to support a finding, the evidence was to the contrary, or the tribunal was not entitled to reach the conclusion. It may not rehear the evidence merely because it might have reached a different conclusion.
3. The Tribunal was entitled to find that the appellants’ business was artificial and fraudulent. Its conclusion did not depend solely on general scepticism about the high-volume secondary mobile-phone market. It was supported by the absence of recognised manufacturers or distributors in the chains, unexplained split-free consignments, evasive evidence concerning phone specifications, artificial intra-company transactions, inadequate due diligence, unusual turnover and long chains of intermediaries.
4. The relevant finding was that the appellants knew they were dealing in goods used as an instrument of fraud and that their transactions were arranged for no other purpose. The Tribunal was entitled to make that finding on the evidence. The unnecessary description of Mr Gohir as a ringleader did not undermine the operative finding.
5. The Kittel principle applies where a trader knowingly participates in a transaction forming part of a chain whose purpose is fraudulent evasion of VAT. Direct contractual relations with the original fraudster and a causal contribution to the original default are unnecessary. A purchaser may aid the fraud by supplying liquidity to the chain, rewarding the fraudster and helping maintain the trading structure.
6. Fiscal neutrality and proportionality do not require HMRC to repay input tax on the tainted purchase merely because the amount withheld exceeds the tax loss caused by the original default. The relevant analysis concerns the individual transaction, not the net tax position across the whole chain. Withholding repayment prevents the trader from obtaining the tax benefit of a purchase made with knowledge of the fraud; it is not a penalty.

1. High Court (Chancery Division): appeal from the VAT and Duties Tribunal dismissed. The Tribunal’s refusal of repayment was upheld.