This case recently resolved in favour of Blue Sphere in a conjoined appeal involving Mobilx, Calltell Telecom and Optotelelinks and has resulted in a restatement of the law by the Court of Appeal in cases where traders have become mixed up in a series of transactions that at some point involve a fraudsman.
The pattern is familiar in what are known as “carousel frauds”. Here, the fraudsman devises a system to defraud the tax authority of substantial VAT by setting up a series of transactions involving cross border sales of goods within the EC where a fraudulent participant disappears when owing large amounts of tax in his own jurisdiction. Difficulty has arisen for legitimate traders caught up in a chain of transactions where the fraudsman is at some far remove. Habitually, HMRC has refused rebate of VAT to such legitimate traders resulting in appeals to the VAT Tribunal, which usually refuses a rebate in such circumstances. Here, Blue Sphere was an innocent trader which fell foul of this, suffering refusal of rebate of some £1.5m. This decision was reversed by the Chancellor on first appeal but then was the subject of a further appeal to the CA by HMRC.
The CA ruled that HMRC may refuse rebate to an innocent trader of the of tax deducted in circumstances where that trader has means of knowing that his purchase is connected with fraudulent evasion of VAT but only if HMRC can prove that he knew or should have known of that connection. The test hitherto employed by HMRC – to refuse rebate where the innocent trader knew that it was “more likely than not” that his transactions were connected with fraud was wrong.
HMRC indicated during submissions the importance of this litigation. Whilst the ruling tightly circumscribes the circumstances in which an appeal can succeed, a figure of £10bn was quoted as the tax loss estimated resulting from missing trader fraud in y/e 2006.
Colin Challenger of Lamb Chambers appeared as Counsel for Blue Sphere.
/ 3rd Oct 2010
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