Revenue & Customs v Livewire Telecom Ltd

HMRC may refuse repayment of input VAT where an exporter knew or should have known, on objective facts, that its transaction was connected with VAT fraud. The test is not dishonesty. A trader who takes every precaution reasonably required and remains unaware of the connection is protected, but failure to take every such precaution does not automatically forfeit the right to deduct.

In contra-trading, the relevant fraud may be either the missing trader’s dishonest default or the contra-trader’s dishonest cover-up. The claimant need only have known, or should have known, of a connection with one of them. Whether such an overarching scheme exists is a question of fact. For a company, the inquiry includes knowledge and evaluative ability attributable through directors and senior employees.

These were HMRC appeals from decisions of the VAT and Duties Tribunal, chaired by Dr John Avery Jones. The Tribunal had allowed appeals by Livewire Telecom Ltd and Olympia Technology Ltd against refusals to repay input VAT on exported goods.

The Tribunal found that neither company was dishonest or had actual knowledge of a VAT fraud. In Livewire, the alleged contra-traders were not knowingly involved in fraud. In Olympia, the Tribunal found that the alleged contra-trader was not knowingly involved, but applied an individual standard based on the knowledge, skill and experience of the particular director. The central issues were whether HMRC could advance the constructive-knowledge case on appeal and what legal test governed the refusal of input-tax repayment.

Lewison J held as follows.

1. HMRC had not abandoned reliance on the “should have known” limb of Kittel. It could therefore advance that ground on appeal.
2. The Kittel test is not one of dishonesty. It requires an assessment by reference to objective facts of whether the taxable person knew or should have known that its transaction was connected with VAT fraud. Reasonable precautions protect an honest trader, but failure to take every precaution does not automatically establish participation in fraud.
3. In a straight MTIC fraud, the relevant connection is with the missing trader’s dishonest failure to account for VAT. In contra-trading, the relevant fraud may be either that default or a dishonest cover-up by the contra-trader. Knowledge or means of knowledge of a connection with one is sufficient where the contra-trader is dishonest.
4. Whether the clean and dirty chains formed an overarching fraudulent scheme was a question of fact. The Tribunal’s findings in Livewire and Olympia showed that the contra-traders were not dishonest. The Tribunal’s over-high formulation therefore did not affect those conclusions.
5. In Olympia, however, the Tribunal applied too low a standard by focusing on the particular director’s knowledge, skill and experience. The inquiry concerned the company itself and included knowledge attributable through directors and senior employees, together with the ability to evaluate facts and draw appropriate conclusions. The appeal was allowed and remitted.
6. HMRC’s appeal in Livewire was dismissed because the Tribunal found that even perfect due diligence would not have revealed the missing-trader fraud.

• VAT and Duties Tribunal: Appeals by Livewire Telecom Ltd and Olympia Technology Ltd were allowed.
• High Court (Chancery Division): HMRC’s appeal in Livewire was dismissed. HMRC’s appeal in Olympia was allowed and remitted to the Tribunal.