LEGAL UPDATE 

VAT FRAUD

Bluepshere Global Ltd v. The Commissioners for H.M. Revenue & Customs[2009] EWHC 1150 (Ch), 22 May 2009 This recent judgment of the Chancery Division in the fast moving legal landscape of VAT and MTIC fraud is a controversial one. Bluesphere Global Limited (“Bluesphere”) appealed to the Chancery Division from a decision of the Value Added Tax Tribunal to uphold a decision by HMRC to deny the repayment of input tax credit on the basis that Bluesphere had knowledge that its supplies from Infinity Holdings Limited (“Infinity”) were connected to fraud.  The Appeal was allowed on the basis that HMRC had failed to prove that Infinity had knowledge of fraud and therefore could not prove that Bluesphere knew or had the means of knowing of that fraud. HMRC conceded the burden of proving fraud on the part of the defaulting traders, contra-traders and repayment traders.  The Chancery Division effectively asked itself two questions: (1) What test should be applied by the tribunal to determine if the repayment trader is connected with fraud when a contra-trader is the connection between the repayment and the tax loss?The Court held that the “clean” chain and “dirty” chain are connected by an accounting connection as a result of the VAT system itself (para 44).  “The control mechanism”, to prevent every taxable person in the clean chain(s) being connected with a fraudulent tax loss is the knowledge or means of knowledge of the repayment trader (para 46). (2) What must the repayment trader have knowledge of to be denied his input tax when a contra-trader is the connection between the repayment chain and the tax loss chain?The Court held that HMRC must prove that the contra-trader had knowledge of the fraud in the tax loss chain to the extent that the contra-trader is a co-conspirator with the defaulter(s) (para 55).  Only then can HMRC attempt to prove that the repayment trader knew or should have known of the contra-trader’s fraud or the defaulter’s fraud. It is highly likely this case will find itself before the Court of Appeal on a number of different points in the forthcoming months, but not before the appeal from the Chancery Division of Mobilx Limited is heard.

 Calltel Telecom Limited and Opto Telelinks Europe Limited v. The Commissioners of H.M. Revenue & Customs [2009] EWHC 1081 (Ch), 21 May 2009 Judgment was handed down by the Chancery Division in the long-running dispute between mobile phone traders Calltel Telecom Limited (“Calltel”) and Opto Telelinks Europe Limited with H.M. Revenue & Customs.  Both companies had been denied the right to deduct input tax credit by H.M. Rvenue & Customs and that decision was upheld by the Tribunal in the first means of knowledge case (post Kittel) to be litigated in the VAT Tribunal. The Appeal failed on all three grounds:

1. The Court was not (a) persuaded that the Tribunal found as a matter of fact that the grey market was corrupt, but they did find Mr Gohir (the director of both Appellant companies) to be part of a scheme and (b) that the finding of fact that Mr Gohir was the ringmaster in a fraud, did not affect the decision the Tribunal made, which was the right decision: a finding of actual knowledge of a fraud.
2. The Court held that in the Mr Justice Burton has, in the case of Just Fabulous, dealt with the application of the Kittel test to contra-trading and found that, providing a trader satisfies this test vis another trader, there is no requirement that there be any privity of contract.  Mr Justice Floyd stated: “It will be recalled that the rationale in Kittel for refusing repayment where the purchaser knows that he was taking part in a transaction connected with fraudulent evasion of VAT was that he “aids the perpetrators of the fraud and becomes their accomplice”.   For my part I have no difficulty in seeing how the purchaser who is not in privity of contract with the importer aids the perpetrators of the fraud.”

3.   The Court held that the taxpayer who has the knowledge or means of knowledge of a fraud has no right to recover incremental VAT, because his actions are abusive and cannot lead to a gain. 

SENTENCING UPDATER. v. Daniel James [2009] EWCA Crim 1261, 25 June 2009Daniel James (“DJ”), the Appellant, was a corporal in the Territorial Army and acted as an interpreter for General Richards of the British Army, in Afghanistan.  He was convicted in November 2008 at the Central Criminal Court because on 5^th November 2006, for a purpose prejudicial to the safety or interests of the State, he communicated to another person information that was calculated to be or might or was intended to be directly or indirectly useful to an enemy. On 28 November he was sentenced to 10 years' imprisonment, and an appropriate order was made under section 240 of the Criminal Justice Act 2003.The Lord Chief Justice gave the judgment of the Criminal Division of the Court of Appeal and upheld the sentence of 10 years.  His Lordship endorsed the words of the first instance judge, who stated that “the sentence to be imposed on the appellant was required properly to reflect the true criminality and culpability of the single offence of which he was convicted.”  His Lordship added that “the crucial feature of this particular conviction is that the appellant was trusted to work in a highly sensitive environment, while serving abroad in the context of an active and continuing armed conflict which involved this country, the men and women who serve in its armed forces, and this country's allies. That context provides the significant aggravating feature of the offence.”It was found that DJ had made communications to the Iranian Military attaché in Afghanistan, but that no damage was caused to military operations.  However, actual damage was caused to the relationships between NATO, the United Kingdom and the Afghan government and there was the potential for very serious damage to the operations of the allied forces in Afghanistan.The first instance judge had identified two further aggravating features, the “gravest” of which “was the fact that [the offence] occurred while the appellant was serving in a war zone” and that “his belief at the time that the Iranians were supporting those in Iraq who were attacking British and American forces serving there.” The Court of Appeal found that such an approach was consistent with the authorities to which they had been directed, particularly where the spy was a traitor, as DJ was.In mitigation it was submitted that “there was no evidence that the lives of any British soldiers was put at risk … and that … the appellant was not a "professional" spy.”The Court dismissed the Appeal and stated “The element of intended betrayal of serving colleagues makes this a very serious offence indeed … there must be no doubt that even if the information disclosed is not proved to have caused any actual damage, and was brought to a halt before any such damage may have occurred, the deterrent element in the sentence is absolutely fundamental.”  His Lordship further added: “The court has a duty to those members of the Armed Forces risking life and health and safety through loyal service to the interests of this country to provide such protection as can be provided in the fortunately very rare cases indeed of possible treachery from those working alongside them and who are treated as trusted colleagues. The sentence imposed after the trial in this case was not manifestly excessive. In our judgment it properly reflected the deterrent element which necessarily must govern every sentencing decision in cases of treachery.”