Mobilx Ltd v HM Revenue & Customs

A trader may lose entitlement to deduct or recover input VAT where, assessed by objective factors, it knew or should have known that its transactions were connected with VAT fraud. Reasonable due diligence on immediate suppliers is relevant but is not a complete defence. Once repeated information shows that transactions are likely to follow fraudulent chains, reasonable precautions may require a trader to change its trading methods or stop trading in the relevant goods. The trader must exercise its own judgment and cannot rely on HMRC’s continued repayment of claims or other administrative decisions as a shield.

Mobilx appealed against the VAT and Duties Tribunal’s dismissal of its appeals concerning HMRC’s refusal to repay input tax claimed for April, May and June 2006. The case concerned missing trader intra-Community fraud involving mobile phones and computer components.

Mobilx accepted that all 85 transactions in the relevant period led back to fraudulent traders, but denied knowing involvement. The issues were whether the Tribunal had applied the correct Kittel test and whether it was entitled to conclude that Mobilx knew or should have known that its transactions were connected with fraud.

1. The appeal was dismissed. The Tribunal had applied the correct legal test. The relevant question was whether, having regard to objective factors, Mobilx knew or should have known that its transactions were connected with fraudulent evasion of VAT, as stated in Axel Kittel v Belgium; Belgium v Recolta Recycling [2006] ECR 1-6161; [2008] STC 1537. The precautionary observations in paragraph 51 of that judgment did not create a safe harbour for a trader that had carried out due diligence on its immediate supplier.

2. An appeal from the VAT and Duties Tribunal is confined to points of law. Applying the four-stage approach in Georgiou v Customs and Excise Commissioners [1996] STC 463 CA, the High Court could not reweigh evidence merely because it might have reached a different conclusion.

3. The Tribunal was not entitled to rely on findings that Mobilx had lacked candour about its intended CPU trade, or that its profits were a badge of fraud or had caused its directors to ignore warning signs. Those serious allegations had not been properly put to the relevant witnesses in cross-examination. The principles stated in HMRC v Dempster [2008] EWHC 63 (Ch) and Zipher v Markem [2005] EWCA Civ 267 applied.

4. Those errors did not affect the result. The Tribunal was entitled to find that, by April 2006 at the latest, Mobilx should have realised that all its supply chains were likely to lead to defaulting traders unless it radically changed its trading methods or stopped trading in the relevant goods. Repeated HMRC notifications, the prevalence of MTIC fraud in the relevant markets, and the failure of Mobilx’s existing checks to protect its supply chains constituted sufficient objective factors. The reasoning in Commissioners for HMRC v Livewire and Olympia [2009] EWHC 15 (Ch) supported the distinction between what the company actually knew and what a competent company should have known.

5. Mobilx could not delegate its judgment to HMRC. HMRC’s continued repayment of claims and grant of monthly returns did not excuse compliance with the Kittel test. The Tribunal’s conclusion that Mobilx had forfeited its right of deduction was therefore upheld.

1. High Court (Chancery Division) — The appeal from the VAT and Duties Tribunal was dismissed.
2. VAT and Duties Tribunal — On 20 May 2008, the Tribunal dismissed Mobilx’s appeals against HMRC’s refusal to repay input tax claimed for April, May and June 2006.