Blue Sphere Global Ltd v HM Revenue & Customs

In a contra-trading case, HMRC may deny repayment of input VAT only if it proves that the claimant knew, or ought to have known, that its purchase was connected with fraudulent evasion of VAT. A connection arising from the common trader’s accounting offsetting may be sufficient, but it does not itself establish the required knowledge. The burden remains on HMRC throughout. It is insufficient to show merely that transactions might have undesirable associations, or that the claimant should have known of an accounting connection. HMRC must prove that the claimant ought to have known that the connected transactions involved fraudulent evasion. Where the relevant fraud was subsequent and was neither inevitable nor part of a pre-existing conspiracy involving the common trader, that requirement may be incapable of proof.

Blue Sphere Global Ltd claimed repayment of input VAT arising from purchases of mobile phones from Infinity Holdings Ltd and subsequent intra-Community sales. HMRC alleged that the transactions formed part of contra-trading chains connected with fraudulent VAT defaults by A.S.Genstar Ltd and Wade Tech Ltd.

The VAT and Duties Tribunal accepted that there had been fraudulent evasions, found a connection between the clean and dirty chains, and concluded that Blue Sphere ought to have known of that connection. It dismissed the appeal on 17 December 2008. Blue Sphere appealed to the High Court under section 11 of the Tribunals and Inquiries Act 1992 on points of law. The central issues were whether the necessary connection existed and whether the evidence justified the conclusion that Blue Sphere ought to have known of the relevant fraud.

1. Appeal allowed. The Tribunal’s findings of fact were not challenged. However, its application of the legal test was wrong.

2. The governing principle, derived from Optigen Ltd v Commissioners for Customs & Excise [2006] Ch 218 and Kittel v Belgium [2008] STC 1537, is that repayment may be refused where, having regard to objective factors, the taxable person knew or ought to have known that the purchase was participating in a transaction connected with fraudulent evasion of VAT.

3. In contra-trading, transactions in clean and dirty chains may be connected through a common trader’s VAT accounting and offsetting, even where the goods differ and the dirty-chain transactions occur later. That connection does not alter the character of the individual transactions and is not, by itself, inconsistent with legal certainty, fiscal neutrality, proportionality or freedom of movement.

4. The connection alone is insufficient. HMRC must prove both knowledge, or imputed knowledge, of the connection and knowledge, or imputed knowledge, that the connected transactions involved fraudulent evasion. The Tribunal’s formulation that the trader had to be sufficiently protected against transactions which might have undesirable associations was misleading. It reversed the burden and applied a lower threshold than the law required.

5. The Tribunal had rejected any conspiracy involving Blue Sphere or Infinity, rejected manipulation of Blue Sphere, and acquitted Infinity of fraud. On those findings, the later dirty-chain fraud was neither inevitable nor shown to have been pre-planned. Due diligence concerning Infinity, Universal Handels and Allimpex could not have revealed a fraud which had not yet occurred and which Infinity was not shown to have anticipated or assisted. Blue Sphere therefore ought not to have been found to possess the requisite knowledge.

• VAT and Duties Tribunal: The Tribunal dismissed Blue Sphere’s appeal on 17 December 2008, finding that the transactions were connected with fraudulent VAT evasions and that Blue Sphere ought to have known of that connection.
• High Court (Chancery Division): On an appeal limited to points of law under section 11 of the Tribunals and Inquiries Act 1992, the Chancellor allowed the appeal.