Mobilx Ltd & Ors v HM Revenue & Customs

A taxable person loses the right to deduct input VAT under the Sixth Directive only where he knew, or should have known, that his purchase was connected with fraudulent evasion of VAT. The test is not met merely because fraud was more likely than not, or because the trader failed to exercise reasonable diligence.

A trader should be treated as having the requisite knowledge where he should have known that the only reasonable explanation for the circumstances of the transaction was its connection with VAT fraud. The issue is whether the statutory objective criteria for the right to deduct are met, not whether a civil penalty should be imposed. HMRC bears the burden of proving the relevant state of knowledge.

Three conjoined appeals concerned HMRC’s refusal of input-tax repayment claims arising from missing-trader intra-Community VAT fraud. The appeals followed decisions of the VAT tribunal and the Chancery Division.

• Calltel and Opto: Floyd J had dismissed the traders’ appeals, holding that the tribunal was entitled to find actual knowledge of fraud: [2009] EWHC 1081 (Ch).
• Mobilx: Floyd J had upheld HMRC’s refusal because Mobilx should have known that its transactions were more likely than not to be implicated in fraud: [2009] EWHC 113 (Ch).
• Blue Sphere Global: the Chancellor had allowed the trader’s appeal, holding that knowledge of a possible association with fraud was insufficient: [2009] EWHC 1150 (Ch).

The common issue was the meaning of the knew or should have known test stated in Axel Kittel v Belgium; Belgium v Recolta Recycling, and whether knowledge of a risk, assessed as more likely than not, sufficed.

1. All three appeals were dismissed. The court upheld the refusals affecting Calltel, Opto and Mobilx, and upheld the Chancellor’s dismissal of HMRC’s appeal in the Blue Sphere Global case.
2. Kittel develops, rather than displaces, the objective-criteria approach in Optigen Ltd v Customs and Excise Commissioners. The right to deduct is ordinarily integral to the VAT system, but a trader who knew or should have known that his purchase was connected with fraudulent evasion is treated as a participant in the fraud. His transaction then fails to meet the objective criteria defining the scope of VAT and the right to deduct.
3. The phrase should have known has the same practical meaning as having the means of knowledge. It does not create a domestic-law accessory liability, nor does it impose a penalty for negligence. The Value Added Tax Act 1994 had to be interpreted consistently with the Sixth Directive; no further domestic legislation was required.
4. Knowledge that a transaction was more likely than not to be connected with fraud is insufficient. The essential inquiry is whether the trader should have known that the only reasonable explanation for the circumstances of the transaction was its connection with fraudulent evasion of VAT. A tribunal must not substitute an inquiry into whether the trader exercised due diligence.
5. On the tribunal’s findings, actual knowledge in Calltel and Opto was unchallengeable. The evidence concerning Mobilx—repeated notification that every traced chain led to defaulters, knowledge that the trade was rife with fraud, and continued trading on the same pattern—admitted only the conclusion that it should have known of the connection with fraud. The tribunal’s application of the wrong formulation therefore made no difference. In Blue Sphere Global, the findings did not compel that conclusion and HMRC’s appeal failed.
6. HMRC bears the burden of proving the trader’s knowledge. Circumstantial evidence and the whole pattern of dealings may establish it; individual transactions need not be assessed in artificial isolation.

• Court of Appeal (Civil Division): dismissed the appeals of Mobilx, Calltel and Opto, and dismissed HMRC’s appeal in Blue Sphere Global: [2010] EWCA Civ 517.
• High Court (Chancery Division): Floyd J dismissed the Calltel and Opto appeals: [2009] EWHC 1081 (Ch); upheld HMRC’s decision affecting Mobilx: [2009] EWHC 113 (Ch); and the Chancellor allowed Blue Sphere Global’s appeal: [2009] EWHC 1150 (Ch).