England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
[APPEAL No: TC/26/2010]

		Royal Courts of Justice Strand, London, WC2A 2LL
		30th January 2013

Lord Justice Moses:

1. This is a renewed application for permission to appeal following refusal in writing by Lloyd LJ. Powa (Jersey) Limited were found to have been in the position that they should have known that elsewhere in a chain of transactions or in parallel chain of transactions fraud had taken place in the process of what customs has described as contra-trading.
2. As Roth J in the Upper Tribunal in its decision remarked, the argument that it is impermissible to consider knowledge of fraud taking place higher up the chain of transactions was conclusively determined against the taxpayer in Mobilx v Revenue and Customs Commissioners [2010] STC 1436, a decision of the Court of Appeal. But Mr Patchett-Joyce contends that the reasoning in Mobilx has been shown to be wrong by subsequent decisions of the European Court of Justice, particularly Case C-80/11 Mahageben and David v Nemzeti ECJ in the judgment of the court of 21 June 2012.
3. Mr Patchett-Joyce has a number of points on which he relies in which he says he ought to be given permission to appeal to show that Mobilx was wrong and thus the decision of Roth J was wrong and therefore the decision of the First-tier Tribunal in his case, but he accepts that he must show, by reference to Mahageben and Case C-324/11 Toth v Nemzeti ECJ, a subsequent case, that the European court has shown in its decision that the reasoning and conclusion of the Court of Appeal in Mobilx was wrong.
4. Thus, very sensibly, this application has focussed upon that point. He was right to do so, because if there is a realistic prospect of showing that subsequent authority in the European Court of Justice falsifies the reasoning and conclusion in Mobilx, then it is plain that permission ought to be given. There would be no question that is a significant point of principle. It affects many, many other cases as Mr Patchett-Joyce has successfully demonstrated. It is therefore necessary to focus upon the reasoning of Mahageben.
5. Like Lloyd LJ the eye focusses upon a number of paragraphs in Mahageben in which at first blush the court seems to be accepting that the fact that the fraud was previously committed by another trader at an earlier stage in a chain of transactions does not mean that the principles in Case C-439/04 Kittel & Anr v Belgium ECJ do not apply and thus, if the taxable person knew or ought to have known of that fraud committed by a trader at an earlier stage in the chain of supply, that would mean that the taxable person lost the right to deduct what he would otherwise have had.
6. The paragraphs, which I need not read out in full, refer at paragraph 45 to:

"...taxable person to whom were supplied the goods or services which served as the basis on which to substantiate the right to deduct,knew, or ought to have known, that that transaction was connected with fraud previously committed by the supplier or another trader at an earlier stage in the transaction."

Mr Patchett-Joyce refers to the fact that the court used the singular.

7. At paragraph 47 the court referred to the decision in C-484/03 Optigen Ltd and Others v Customs and Excise Commissioners [2006] ECR I-483, which took place before the decision in Kittel and the reference to:

"…could not have known, that the transaction concerned was connected with fraud committed by the supplier, or that another transaction forming part of the chain of supply prior or subsequent to that transaction carried out by the taxable person was vitiated by VAT fraud…"

In paragraph 49 the court said:

"Given that the refusal of the right to deduct in accordance with paragraph 45 of the present judgment is an exception to the application of the fundamental principle constituted by that right, it is for the tax authority to establish, to the requisite legal standard, the objective evidence which allows the conclusion to be drawn that the taxable person knew, or ought to have known, that the transaction relied on as a basis for the right to deduct was connected with fraud committed by the supplier or by another trader acting earlier in the chain of supply."

8. Mr Patchett-Joyce contends, first of all, that one has got to be careful with the English translation because the French suggests "involved with" rather than "connected". Like Roth J that does not seem to me to take Mr Patchett-Joyce anywhere. The more substantial point on which he relies is the use of the singular at an earlier stage in the transaction in paragraph 45 and indeed the subsequent reference to an earlier stage of a transaction, in particular paragraph 59. He explains that the use of the singular was quite deliberate, in contrast with a number of other occasions where the plural is used, because what is being referred to there is the issue of supply, which constituted the particular transaction in respect of which the taxable person is seeking to exercise his right to deduct.
9. It is explained because in Mahageben and indeed in the subsequent authority, Toth, the consignor or the supplier, the physical supplier of the goods, was different to the person who supplied the invoice containing the tax charge in other words the taxable supplier, so that another trader at an earlier stage is explicable by reference to the invoice supplier as opposed to the supplier of the physical goods. In those circumstances, submits Mr Patchett-Joyce, the principle that you must look at each transaction on its own without regard to earlier transactions higher up the chain or for that matter lower down is not breached. In support of the existence of that principle he refers to the Advocate General's opinion in Optigen in which the Advocate General specifically emphasised the importance of not looking at the chain of transactions as a whole and, on the contrary, that the essential feature of VAT was that each transaction must be considered on its own (see in particular paragraphs 32 and 37 of his opinion in Optigen).
10. In my view none of these points is arguable let alone has a reasonable prospect of success in the Court of Appeal. It must be recalled that Kittel was the obverse of Optigen, and in Optigen, as the decision of this court in Mobilx made clear, the court explicitly referred to the chain of transactions (see in particular paragraph 55 in Optigen, cited at paragraph 31 in Mobilx).
11. Of course the question of connection or involvement must be judged transaction by transaction. The question must be asked whether a particular transaction was connected with fraud at an earlier stage in the chain of supply or whether that transaction was involved with, to use Mr Patchett-Joyce 's translation, an earlier transaction in the chain of supply. But it seems to me quite clear that, whilst it is true that from to time the court referred to another trader at an earlier stage in the transaction, it was accepting the principle that, so far as participation in the fraud was concerned, if a person had knowledge or the means of knowledge that fraud was being carried out at an earlier stage in the chain of supply, that would denote that he was a participant in the fraud and thereby loses his right to deduct. That is plain from Optigen; it is plain from Kittel; and the court in Mahageben was saying nothing different. Indeed those references on which Mr Patchett-Joyce relies at paragraph 45 and at paragraph 59 must be read in the context of what it clearly says in paragraph 49. If the court intended to cut down the principle it had identified in the case-law exemplified in Kittel and was changing the law, it would have said so. On the contrary it was not. It was merely applying it.
12. Mr Patchett-Joyce, in my judgment, gains nothing from citing those passages in the Advocate General's opinion in Optigen in which he rejected the notion that it could look at the chain of supplier as a whole. That was the Advocate General's answer and for that matter the court's answer subsequently to the argument that, looking at the chain of supply as a whole, there was no economic activity. That was the argument advanced by the United Kingdom Government and that was roundly rejected. But it simply has nothing to do with the quite separate question as to the state of knowledge of the trader who is seeking to deduct.
13. Mr Patchett-Joyce contends that there is a reasonable prospect of establishing in the Court of Appeal that the approach of the Court of Appeal in Mobilx which enjoined the fact finders, the First-tier Tribunal and for that matter the Upper Tribunal to look at all the surrounding circumstances was wrong because each transaction must be judged on its own. Of course the question of its connection with the transactions that were themselves fraudulent must be judged transaction by transaction and the state of mind of the trader must be judged transaction by transaction, but it simply does not follow that the court must not look at all the circumstances of the case, which include the state of knowledge of the trader as to all the surrounding circumstances and, in particular perhaps, as to how he is able to make over such a short period such enormous profits by the trade in particular types of goods. All of that, the Customs are entitled to rely upon in showing that he must have known.
14. Of course there remain arguments as to precisely what is meant by must have known or ought to have known, but they can only sensibly be determined by reference to the facts of a particular case and, having regard to the very strong findings of fact in this case, they could not possibly avail Mr Patchett- Joyce, let alone give rise to any reasonable prospect of success even if they raise a point of general principle deserving of a second appeal. And thus, while I congratulate Mr Patchett-Joyce on the extremely hard work he has put in to seeking to show that this case affords a window of opportunity to show that the Court of Appeal is wrong, I am afraid I reject his application.

Order: Application refused