Court of Appeal: Fraudulent VAT input reclaims
An important VAT case was heard recently by the Court of Appeal. There were three appeals before the court, two by taxpayers and one by HMRC. All the appeals concerned HMRC’s refusal to repay VAT input tax claims.
HMRC was refusing to repay the input tax on the basis that the transactions were the result of a sophisticated missing trader intra-community (MTIC) fraud. All the taxpayers in this case were involved in the trade of mobile phones and computer chips which were well known to have been susceptible to fraudulent transactions.
The Court of Appeal’s decision was based on a European Court of Justice (ECJ) ruling which established what has become known as the ‘Kittel principle’. The decision rests on what the ECJ meant when it ruled that the right to deduct input tax may be refused if
“it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT”.
The Court of Appeal held that to look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. In determining what it was that the taxpayer knew or ought to have known, the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.
Traders cannot expect to be dealt with leniently if they choose to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time. Thus, taxpayers need to be careful to look at all the features of a transaction from a holistic perspective to help determine whether or not a transaction is more likely than not connected with fraud. In a nutshell if a transaction seems to good to be true it probably is.