Davis & Dann Ltd & Anor v HM Revenue and Customs

In determining whether a trader ought to have known that a purchase was connected with VAT fraud, the tribunal must assess the totality of objectively probative circumstances, including the trader’s prior knowledge. The absence of any allegation that intermediate traders were fraudulent does not make their characteristics irrelevant.

The no-other-reasonable-explanation standard may be met where a trader fails to use available means of knowledge. A finding that transactions were ordinary market transactions must be supported by evidence and must address the trader’s own ordinary course of business, not merely the wider market. The categorisation of facts by reference to the governing legal standard can raise an appealable question of law.

HMRC refused the respondents’ claims for repayment of input VAT exceeding £4.15 million on purchases of razor blades which they exported. It was undisputed that an upstream buyer, Leeming Distribution Ltd, had deliberately failed to account for VAT and that the respondents’ purchases were connected with that fraud.

The First-tier Tribunal found that the respondents ought to have known of the connection. It relied on the cumulative effect of their earlier HMRC warning about MTIC fraud, the exceptional quantity and value of the transactions, unsolicited and closely timed approaches, warning signs concerning the supplier, and unusually generous credit terms. It dismissed the respondents’ appeals.

The Upper Tribunal allowed the respondents’ appeal in [2013] UKUT 374 (TCC). It held that the transactions were explicable as ordinary grey-market transactions and that the requisite knowledge had not been established. HMRC appealed. The central issue was whether the Upper Tribunal had erred in law by setting aside the First-tier Tribunal’s evaluation.

1. Appeal allowed. Arden LJ, with whom Tomlinson and Lindblom LJJ agreed, held that the Upper Tribunal had erred in law. The First-tier Tribunal’s decision dismissing the taxpayers’ appeals from HMRC’s refusal of repayment claims was restored.

2. The applicable threshold was the high no-other-reasonable-explanation standard in Mobilx Ltd v HMRC, [2010] STC 1537. The First-tier Tribunal was entitled to assess the cumulative effect of all relevant evidence. The Upper Tribunal instead compartmentalised the factors, including the exceptionally large repayment position, and gave insufficient weight to the respondents’ prior warning about the recognised characteristics of MTIC fraud.

3. The First-tier Tribunal was not confined to circumstances suggesting that Bristol, CEMSA or GR Distributions had themselves participated in the fraud. The relevant question was whether a reasonable person, knowing all the circumstances, should have concluded that the transactions were connected with upstream fraud. A trader’s failure to deploy available means of knowledge could satisfy the objective knowledge requirement; the issue was not limited to what further enquiries might have revealed.

4. The Upper Tribunal also erred in treating the transactions as ordinary market transactions without evidential support. For that conclusion to rebut the required knowledge, it had to concern both the grey market generally and the respondents’ own ordinary business. The First-tier Tribunal had found that the transactions were outside that ordinary course. Bristol’s generous credit terms, given its limited apparent trading history, were commercially improbable. They shifted an evidential burden to the respondents to show that the terms were normal market terms, which they had not discharged.

5. The court further held that categorising facts as relevant to the statutory knowledge standard could raise a question of law on a tribunal appeal. However, the weight given to probative facts ordinarily remained a factual matter. There was no cross-appeal against the First-tier Tribunal’s primary findings, and its careful evaluation disclosed no error of law.

• Court of Appeal (Civil Division). Allowed HMRC’s appeal and restored the First-tier Tribunal’s dismissal of the taxpayers’ appeals: [2016] EWCA Civ 142.
• Upper Tribunal (Tax and Chancery Chamber). Allowed the taxpayers’ appeal, holding that the transactions were explicable as ordinary grey-market transactions and that the requisite knowledge had not been proved: [2013] UKUT 374 (TCC).
• First-tier Tribunal. Dismissed the taxpayers’ appeals from HMRC’s refusal of their VAT repayment claims, finding that they ought to have known that the purchases were connected with fraudulent VAT evasion.