Red 12 Trading Ltd v Revenue & Customs

In an MTIC fraud case, denial of input-tax deduction does not require HMRC to prove that the defaulting trader was the original importer. It is sufficient to establish an importation without payment of VAT, a defaulting trader, an export generating a repayment claim, and the taxpayer’s knowing participation in a transaction connected with fraudulent evasion.

HMRC may rely on circumstantial, similar-fact and subsequently obtained evidence. Transactions must be assessed on their own merits, but not in isolation from their surrounding circumstances or the taxpayer’s dealings as a whole. The burden remains on HMRC to establish the taxpayer’s actual or constructive knowledge. An appeal from the VAT tribunal is not a rehearing on fact.

Red 12 appealed from the VAT and Duties Tribunal’s decision of 16 December 2008, which dismissed its appeal concerning the refusal of input-tax deductions on 45 of 46 mobile-phone transactions. The transactions were said to form part of missing-trader intra-community fraud, involving 12 defaulting traders and input tax of approximately £2.67 million.

The appeal challenged the tribunal’s findings that HMRC need not prove that the defaulter was the importer, that HMRC could rely on evidence unavailable to Red 12, that the relevant inferences were not impermissible presumptions, that ex post facto evidence was admissible, that the transactions need not be considered in isolation, and that the tribunal’s factual findings were legally challengeable.

1. Nature of MTIC fraud. The denial of input-tax deduction is not conditional on proof that the defaulting trader was the original importer. What is required is an importation without payment of VAT, a trader who defaults without accounting for output tax, an export generating an entitlement to repayment, and proof that the taxpayer knowingly participated in a transaction connected with fraudulent evasion. The defaulter will commonly be the importer, but that is not a legal necessity.
2. Evidence and burden. HMRC may rely on evidence obtained during its investigations, including deal-chain records, third-party payments, freight-forwarder documents, banking evidence, circumstantial evidence and similar-fact evidence. The taxpayer must have a fair opportunity to challenge the evidence. The burden remains on HMRC to establish the taxpayer’s actual or constructive knowledge. The tribunal may draw an inference from the evidence and from inadequate precautions, but an irrebuttable presumption or system of strict liability is impermissible.
3. Individual transactions and context. Each transaction must be assessed on its own merits, but that does not require it to be viewed in isolation. The tribunal may consider the surrounding circumstances, the pattern and characteristics of the taxpayer’s other transactions, and the totality of the evidence in determining both the transaction’s true nature and what the taxpayer knew or ought to have known.
4. Ex post facto evidence and appellate scope. An appeal to the VAT tribunal is on law and fact and constitutes a rehearing of entitlement to reclaim VAT. The tribunal may consider evidence obtained after HMRC’s original decision. An appeal to the High Court under section 11(1) of the Tribunals and Inquiries Act 1992 is confined to errors of law. The court may intervene where findings lack evidential support, contradict the evidence, or reflect a conclusion which the tribunal could not properly reach, but it must not substitute its own assessment of the facts.
5. Disposition. The tribunal was entitled to find that Red 12’s transactions were wholly artificial and that it knew, or deliberately closed its eyes to the fact, that its transactions were connected with fraudulent VAT evasion. The appeal was dismissed.

• High Court (Chancery Division): appeal from the VAT and Duties Tribunal dismissed.
• VAT and Duties Tribunal: decision released 16 December 2008; appeal dismissed in respect of 45 transactions and allowed in respect of deal 32.