Powa (Jersey) Ltd v HM Revenue and Customs

In VAT fraud cases, the connection between a transaction and fraud earlier in the supply chain, and the trader’s state of mind, must be assessed transaction by transaction. That does not prevent the tribunal from considering all surrounding circumstances when deciding whether the trader knew or ought to have known of the fraud. Knowledge, or the means of knowledge, of fraud at an earlier stage may cause the trader to lose the right to deduct. Later European authority should not be read as narrowing that principle unless it clearly changes the law. Whether a trader must have known or ought to have known is fact-sensitive.

This was a renewed application for permission to appeal after Lloyd LJ had refused permission in writing. The applicant challenged a decision of the Upper Tribunal (Tax and Chancery Chamber), given by Roth J, arising from findings by the First-tier Tribunal concerning VAT fraud in contra-trading. The applicant argued that later European Court of Justice decisions, particularly Mahageben and Toth, showed that the Court of Appeal’s reasoning in Mobilx was wrong. The central issue was whether those authorities gave a realistic prospect of establishing that fraud higher in a chain of transactions could not be relevant to the right to deduct.

Application refused. Moses LJ held that the applicant had no realistic prospect of showing that later European authority had displaced the Court of Appeal’s decision in Mobilx v Revenue and Customs Commissioners [2010] STC 1436.

1. Permission would have been appropriate if Mahageben and David v Nemzeti Case C-80/11 or Toth v Nemzeti Case C-324/11 realistically falsified the reasoning or conclusion in Mobilx. The issue was sufficiently important to justify permission if that threshold were met.
2. The references in Mahageben to fraud committed by another trader at an earlier stage, including the use of the singular, did not cut down the principle in Kittel & Anr v Belgium Case C-439/04. Read in context, the decision confirmed that a taxable person who knew, or had the means of knowing, that fraud was being carried out earlier in the chain participated in the fraud and lost the right to deduct.
3. The connection between the particular transaction and earlier fraud, and the trader’s state of mind, had to be judged transaction by transaction. That requirement did not prevent the First-tier Tribunal or Upper Tribunal from considering all surrounding circumstances, including the trader’s knowledge of the wider circumstances and the ability to make unusually large profits over a short period.
4. The reasoning in Optigen Ltd and Others v Customs and Excise Commissioners C-484/03, including the Advocate General’s opinion, concerned the distinct argument that viewing the chain as a whole eliminated economic activity. It did not prevent consideration of the trader’s knowledge of fraud elsewhere in the chain.
5. The meaning and application of must have known or ought to have known were fact-sensitive. In light of the strong factual findings, the proposed arguments could not give rise to a reasonable prospect of success. The formal order was: application refused.

• Court of Appeal (Civil Division): Moses LJ refused the renewed application for permission to appeal.
• Upper Tribunal (Tax and Chancery Chamber): Roth J determined the appeal identified as TC/26/2010.
• First-tier Tribunal: made the underlying findings concerning the applicant’s knowledge or means of knowledge of VAT fraud in the transaction chains.