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Ultracell (UK) Ltd v Revenue & Customs [2006] UKVAT V19508 (24 March 2006)

19508

VALUE ADDED TAX — input tax — Appellant alleged to be unknowing participant in carousel fraud — single consignment of 2500 mobile phones bought in UK and sold to Spanish trader — whether carousel established — yes — relevance in light of ECJ judgment in Optigen, Bond House — Appellant's input tax claim rejected while preceding traders' input tax claims accepted and declared output tax collected — whether Respondents' actions discriminated against intra-Community trade — Sixth VAT Directive art 22(8) — even if discrimination demonstrated no breach of art 22(8) — ECJ judgment followed — appeal allowed provisionally

MANCHESTER TRIBUNAL CENTRE

ULTRACELL (UK) LIMITED

Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

Tribunal: Colin Bishopp (Chairman)

Marjorie Kostick BA FCA CTA

Sitting in public in Birmingham on 24 and 25 November 2005

Andrew Young, counsel, instructed by Vincent Curley & Co, for the Appellant

Nigel Poole, counsel, instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Introduction

This is an appeal by Ultracell (UK) Limited ("Ultracell") against the Respondents' refusal to pay to it the sum of £139,343.75 claimed by Ultracell as recoverable input tax in its VAT return for its prescribed accounting period for the month of February 2003. That input tax (if it is properly so regarded) was incurred by Ultracell in the purchase from another trader, UK-based and VAT-registered like itself, of a single consignment of 2500 mobile telephones which it then sold to a VAT-registered trader in Spain. In the ordinary way, the VAT incurred by a registered trader in those circumstances would be recoverable input tax while a sale to a registered trader in another Member State would be zero-rated. Ultracell treated its transactions in that fashion and included them in its return accordingly. The Respondents say, however, that the purchase and sale in fact occurred in the context of what is commonly referred to as a carousel fraud. Relying on the decision of this tribunal Bond House Systems Limited v Customs and Excise Commissioners [2003] V & DR 210, they contend that what Ultracell says is input tax is not in fact input tax since the transaction, being undertaken in the course of perpetrating a fraud (even if one of which Ultracell was unaware), does not amount to an economic activity and that Ultracell neither received nor made a supply as that term is understood for the purposes of VAT.

Three distinct issues arise:

Whether, as a matter of fact, the transactions in which Ultracell was involved did form part of a carousel;

If so, whether, as a matter of law, such transactions are devoid of economic substance;

Whether, by treating Ultracell's transactions as devoid of economic substance while dealing with the VAT affairs of other identifiable traders in the chain of supply in the normal way (that is, by giving credit for claimed input tax and accepting payment of declared output tax) the Respondents have offended the provisions of article 22(8) of the Sixth VAT Directive (77/388/EEC), which (Ultracell argues) prohibits differential treatment of domestic trade and trade carried out between Member States.

We were not asked to determine the second issue since it was, at the time of the hearing, the subject of the combined reference to the European Court of Justice of Optigen and another and Bond House Systems Limited v Customs and Excise Commissioners (Joined Cases C-354/03, C-355/03 and C-484/03). The Court's judgment was given on 12 January 2006. It was determined that transactions must be considered individually, on their own merits. If a trader such as Ultracell engages in transactions which form part of a carousel but it is not itself involved in, and has no "means of knowledge" of, the fraud, those transactions are to be regarded as having economic substance, and are to be treated correspondingly for the purpose of VAT. In this case, the Respondents, at paragraph 23 of their amended statement of case, say that they "do not allege that the Appellant was knowingly a party to any fraudulent activity". They do not go to far as to disavow any contention that Ultracell had no "means of knowledge" that, elsewhere in the claim of supply, there were transactions which were undertaken for fraudulent purposes, and we were not addressed on that argument, whose possible relevance did not emerge until the judgment of the European Court was delivered, and heard no evidence directed to it. Whether it is open to the Respondents, even at this late stage, to advance such an contention is not an issue currently before us.

Absent a late argument that Ultracell had the "means of knowledge" of any fraud which might have been perpetrated by those preceding it in the chain of traders, the first (factual) issue before us might now be regarded as academic; if Ultracell was not a party to, and had "no means of knowledge", of any fraud, it is immaterial whether the transactions in which it was engaged formed part of a carousel, since they must be treated, for the purposes of VAT, upon the basis that they had economic substance whatever the intentions of others in the chain of supply might have been. And if Ultracell's claim for the payment of its input tax credit is to be met, it can have no complaint, beyond having been kept out of its money for a period (for which it can be compensated in interest), that the Respondents have discriminated unlawfully against it. Nevertheless, we heard evidence about the factual background to the transactions, and it is appropriate that we set out our findings on that evidence. The contention that the Respondents have discriminated unlawfully against traders such as Ultracell may be relevant in other cases, particularly those in which "means of knowledge" are alleged, and will be relevant here if the Respondents should after all seek and obtain permission to pursue such an argument. We have therefore concluded that we should deal with that argument as well.

Before us, the Appellant was represented by Andrew Young and the Respondents by Nigel Poole, both of counsel. We heard evidence from Anna Malone, Allistair Strachan, Laurence Smith, Timothy Reardon, Sonia Hopwood and Richard Saxon, all officers of HM Revenue and Customs, and from Michelle McGuinness, a director of Ultracell. Mr Saxon, whose decision it was to refuse payment of the sum claimed, analysed the material obtained by the other officers. Since their role in the context of this case was, almost entirely, limited to obtaining documents and information, at Mr Saxon's request, from the other traders (apart from the Spanish trader) involved in the transactions, and to seeking information from the tax authorities in Spain and the Netherlands and passing on what they obtained to Mr Saxon—though in the event nothing had been received from the Spanish authorities by the time Mr Saxon's decision was made—we shall not set out their evidence individually but shall instead merely summarise the effect of the documents and information they obtained. Some information was obtained from a trader whose identity, if the Respondents are correct, was improperly used, or "hijacked", by a fraudster. We were provided with a bundle of the documents obtained by the officers, with some others, skeleton arguments and various authorities.

The facts

The Respondents' belief is that 2500 Nokia model 8910 telephones, which were the subject of Ultracell's transactions, were traded in a series of deals, which took place over the space of a few days in early February 2003. If they are right, the consignment was first sold by Total Networks SL, the Spanish trader, to Celltech Distribution Limited ("Celltech") which was, or purported to be, a trader based and registered for VAT in the United Kingdom. They accept that there may possibly have been one or more other traders interposed between Total Networks and Celltech, though our own view is that this is unlikely. Celltech then sold the goods to Thunderdraw.com Limited ("Thunderdraw"), also a trader registered for VAT in the UK, which in turn sold them to GAK Limited ("GAK"). GAK sold the phones to The Accessory People Plc ("TAP"), which sold them to Ultracell. GAK, TAP and Ultracell too are, or were, all registered for VAT in the UK. Ultracell then sold the goods to Total Networks.

That series of deals, if the Respondents have correctly identified it, is obviously circular. It might be a coincidence, explained perhaps by movements in the market value of mobile telephones, that Total Networks repurchased goods it had previously sold, but the Respondents say that the prices paid by the various participants, the manner in which their payments were made and some other features of the transactions show that there was no coincidence: it was, they say, always intended that the goods should proceed in a circle. There is no suggestion that the goods were not what they were claimed to be, nor that they did not enter the country at the beginning of the sequence we have described and leave it at the end.

If Mr Saxon's analysis is correct a person claiming to represent Celltech sold the telephones to Thunderdraw at £314 plus VAT per unit, charging therefore a total of £922,375. Thunderdraw was asked to pay the entirety of that sum to an account in the name of Total Networks. The Respondents say that that instruction not only establishes that Total Networks was the source of the phones, but also demonstrates (since the payment was of the whole amount) that Total Networks and the person claiming to represent Celltech were acting in concert. Celltech is a genuine trader, but the Respondents' enquiries show that it was not involved in the transactions. Stationery bearing its name and VAT registration number (though an incorrect address) was used, but the owners of Celltech denied any knowledge of the goods, and inspection of their records revealed no dealings of any kind with Thunderdraw.

Had the purported Celltech been a genuine trader, it should have accounted for acquisition tax on the phones, since it obtained the goods from a VAT-registered trader in another Member State, although it would have been entitled to an input tax credit of the same amount had it accounted correctly for VAT on its sale. In net terms, it should have paid to the Respondents the output tax it charged, or purported to charge, to Thunderdraw, namely £137,375. It did not do so, and the Respondents say (although somewhat inconsistently with their claim that transactions of this kind do not amount to economic activities within the VAT system) that £137,375 is the measure of the tax loss. They also say that it is significant that £137,375 exactly equals the aggregate gross profit of all the participants in the chain of transactions.

Thunderdraw did not in fact pay the purchase price of the goods to Total Networks, as requested, but instead, the Respondents say, passed on the instruction to its own customer, GAK, asking that GAK pay £922,375 to Total Networks and the balance of the purchase price (its profit of £2500 plus VAT of £437.50) to itself. Those payments seem to have been made. So far as we are aware, Thunderdraw sought and was allowed credit for the input tax it incurred on its purchase, and accounted to the Respondents for the output tax it had charged to GAK; its net liability was only £437.50. TAP paid the entirety of the price it had agreed to GAK and we understand it too claimed and was allowed input tax credit, while accounting to the Respondents for the output tax due on its sale to Ultracell, which also paid the entire price to TAP. However, Ultracell arranged with TAP that TAP would insure the goods while they were in transit from the UK warehouse in which they had been stored to Total Networks' nominated warehouse in the Netherlands. Its doing so necessarily resulted in its revealing the identity of its customer: that fact, the Respondents say, is not consistent with a normal pattern of dealing.

Information received from the Dutch tax authorities showed that Total Networks sold the phones to a French company, but they were not transported from the Netherlands to France. Instead, the French company sold them to yet another UK-based trader, and they travelled back to the UK. We have no information about any subsequent transactions.

The evidence available to us was entirely consistent with the Respondents' beliefs as we have summarised them. Although, as Mr Young pointed out, other interpretations may be possible, the test is the balance of probabilities and we are satisfied that the Respondents have met the test. The "audit trail" of evidence about the transactions which the HMRC officers, between them, had obtained from the enquiries they made of the various traders (including evidence obtained from the genuine Celltech that it had not been a party to any of the transactions we have described) leave us in no real doubt that the same telephones were sold by Total Networks to "Celltech", by "Celltech" to Thunderdraw, by Thunderdraw to GAK, by GAK to TAP, by TAP to Ultracell and by Ultracell to Total Networks. We recognise that the documents themselves have not been formally proved, and that we have heard no direct evidence from any officer or other representative of Thunderdraw, GAK, TAP or the genuine Celltech, but there is no reason to suppose that the documentation produced to us has been falsified or manufactured in any way, nor did Mr Young seek to challenge its authenticity. We are satisfied that it is reliable, and that Mr Saxon has drawn the right conclusions from it.

The last two of the transactions—Ultracell's purchase and sale—were, of course, undisputed, and there was good evidence in the form of purchase orders, invoices, shipping instructions and other documents to support them. There also seems to be no room for any doubt that the phones sold by TAP to Ultracell were precisely the same as those acquired by TAP from GAK (rather than another consignment of the same model and quantity), since the Respondents were able to obtain a copy of an instruction by TAP to the warehouse at which they were stored, referring to their acquisition by TAP from GAK, and releasing them to Ultracell. That document is supported by another release, in favour of TAP, addressed by GAK to the same warehouse. The Respondents also obtained a release from Thunderdraw in favour of GAK, addressed to the same warehouse, of the same number and model of phone, although in this case the source of the goods is not specified.

One apparent oddity, which might suggest that there were two batches of phones, is that the documents relating to GAK's sale to TAP and the latter's sale to Ultracell are all dated 5 February 2003, yet bear fax timing marks suggesting they were sent on 10 February—the date on which TAP sold to Ultracell, and Ultracell to Total Networks (although the goods were shipped to the Netherlands on the following day). The Thunderdraw release is also dated 5 February, but bears no fax timing mark. Thus it is conceivable that there were two consignments of 2500 Nokia model 8910 mobile telephones changing hands between some of the same participants on both 5 and 10 February 2003 (but not all of the participants, since Ultracell was not involved in the first supposed series), but we think that unlikely and even if it were the case, it does not explain why documents dated 5 February appear to have been faxed on 10 February. More probable, we think, is that the documents were sent in confirmation of transactions which had been agreed orally; we think it rather less likely that they were manufactured in order to provide evidence of transactions which had, in truth, not taken place at all. In short, and despite the oddity, we have little doubt that there was a single consignment which took the course we have described.

As we have already said, it might in some circumstances be possible that Total Networks repurchased goods it had already sold because of movements in the market price of the goods. However, we agree with the Respondents that that possibility is eliminated here, because of the prices at which the phones changed hands, and because of the instructions which were given by Thunderdraw and "Celltech" to make payments to Total Networks. There is no plausible explanation—certainly Mr Young suggested none—of the purported Celltech's sale of the goods at a loss (£314 per unit, compared with the £368.95 per unit—2500 phones at an aggregate price, net of tax, of £922,375—it had supposedly paid for them only hours previously); we say "supposedly" since the evidence shows that "Celltech" made no payments at all, but merely used other traders' money. The only explanation of such conduct which comes to mind is that, as we accept from the evidence of Mr Saxon, "Celltech" did not and (we are content to infer) did not intend to account for the VAT, or purported VAT, it had charged to Thunderdraw. In short, we are satisfied that there was a carousel of transactions designed to obtain by deception so much of the payment due from Thunderdraw (though in fact paid by GAK) as was described in the invoice provided by Celltech to Thunderdraw as VAT. Mr Young sought to cast doubt on the reliability of the evidence and to suggest that other conclusions might be drawn but in these efforts he was, in our judgment, unsuccessful; the only plausible conclusion to be drawn is that there was a circular series designed and executed for fraudulent purposes.

Mrs McGuinness told us that this sale represented the only export that Ultracell had ever made and, indeed, the transaction was also the only bulk purchase and sale in which it had engaged. It had an associated company, Ultracell Batteries Limited, which, despite its name, had been engaged in the business of buying and selling mobile phones for some time. It was decided that Ultracell should deal in mobile phones in place of the associated company since it made monthly VAT returns and it could therefore expect to recover input tax more quickly. Mrs McGuinness and her fellow director were familiar with the procedures which bulk dealers in mobile phones were expected to follow and (as we accept) Ultracell had followed those procedures on this occasion. Ultracell Batteries Limited had dealt with TAP on several previous occasions, often acting as its broker or agent, since TAP was unable itself to finance some of its deals. Ultracell had been trying to effect sales to Total Networks for some time, hitherto without success, and when TAP asked Ultracell to become involved in an intended sale to Total Networks, Mrs McGuiness seized the opportunity. It was therefore, she said, no matter for surprise, and of no significance, that TAP knew the identity of Ultracell's customer. The result of Ultracell's being deprived of the input tax it believed to be due was, she said, that it had been forced to cease trading in mobile phones altogether.

We have recorded Mrs McGuinness's evidence but, since the Respondents have not alleged any complicity by Ultracell in the organisation of the carousel, nor any actual knowledge on its part that elsewhere in the series there was fraudulent activity, it is of little relevance to the issues we must decide. Unless there should be a successful application to argue that Ultracell had the "means of knowledge" of the fraudulent designs of other traders, it seems to us necessarily to follow from the judgment of the European Court of Justice in Optigen and another and Bond House Systems Limited that the Respondents were wrong to refuse Ultracell's claim, and that the appeal must be allowed on this ground.

Do the Respondents' actions infringe article 22(8)?

Article 22 of the Sixth VAT Directive, as it is now, was introduced by Council Directive 91/680/EEC, and replaced the original, much shorter, version. It has since been amended slightly, but neither the amendments nor the original version of the article are relevant; the current text, save for one minor and immaterial exception, was in force during Ultracell's 02/03 accounting period. Articles 22, 22a and 23 together constitute Title XIII of the Directive, entitled "Obligations of persons liable for payment"; article 22, as its own title, "Obligations under the internal system", suggests, deals with intra-Community trade, and article 23 with imports. Article 22a is a purely administrative measure.

Article 22 is very long, and we do not propose to set it out in full, but instead to summarise it. Paragraph 1 deals with the requirements of registration by taxable persons; paragraph 2 with the keeping of accounts; paragraph 3 (in considerable detail) with the issue of invoices; paragraph 4 with the making of periodic returns; paragraph 5 with the date of payment of tax due from registered traders; paragraph 6, permissively, with annual recapitulative statements; and paragraph 7 with the liabilities of tax representatives and those subject to joint and several liability. Paragraph 8 is in these terms:

"Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.

The option provided for in the first subparagraph cannot be used to impose additional obligations over and above those laid down in paragraph 3."

The second subparagraph is not immediately relevant here, since (as we have mentioned) paragraph 3 is concerned with formal requirements relating to VAT invoices, but we shall nevertheless need to return to it.

Mr Young's argument was that article 22(8) permitted Member States to impose "other obligations" which related to the collection of tax, as long as they did not differentiate between domestic and intra-Community transactions in a manner which hindered the latter but not the former. Here, the Respondents had treated Ultracell, which was undertaking intra-Community trade, in one, adverse, way while treating the other identified UK traders in the chain in another. The Respondents' policy of targeting (by refusing their input tax claims) those traders involved in what the Respondents perceived to be carousel transactions who made sales to traders in other Member States, while treating those involved in purely domestic transactions normally, was a straightforward breach of the prohibition in article 22(8): if other traders, in the instant case TAP, GAK and Thunderdraw, were to be allowed input tax deduction, the refusal of Ultracell's claim necessarily infringed article 22(8).

It was, he said, impossible to argue, as Mr Poole's skeleton did, that if the tribunal should agree that there was a carousel of transactions, the Respondents would take steps to treat the other identified UK traders in the chain in the same way, that is by retrospectively refusing their input tax claims and (by implication) refunding the output tax for which they should not have accounted, since the time limits within which the Respondents must raise the necessary assessments had expired. (A similar argument was touched upon, before the tribunal, in the Bond House Systems case, but it was not pursued to a conclusion as the time limits there had not then expired.) The position was that the Respondents, if only by their inactivity, had made it impossible to treat the other traders in the same manner as that in which they had treated, or had sought to treat, Ultracell and the breach of article 22(8) could not be remedied otherwise than by allowing Ultracell's input tax claim. Moreover, the Respondents' approach lacked proportionality since it was directed at a trader which, as they conceded, was innocent of any blame.

Mr Poole focused on three points. First, there are the practical difficulties for the Respondents of tracing every trader involved in a carousel (most of which are, he said, much more complicated than the chain of transactions in this case), in order that all might be treated in the same way. Second, he drew our attention to the conundrum to which Mr Young's contention gave rise: he was arguing that the Respondents should assess traders in a manner which, if his other arguments were correct, would be contrary to the law. If, later, it should be decided by the European Court of Justice that the Respondents' view of the law was incorrect, they would have to undo the assessments they had made, yet there were a number of difficulties in the way of their adopting that course (on which, for reasons we will explain, we do not propose to elaborate). Third, he argued that article 22(8) prohibits the imposition of discriminatory obligations, but no obligation was being imposed; the Respondents were merely treating a transaction as one devoid of economic substance.

It would be fair to record that Mr Poole was labouring under some difficulty, reflecting that of the Respondents themselves, in that, until the judgment of the European Court of Justice was given, they must assume that their view of the law was correct while knowing that every time they sought to apply that view, their doing so would be challenged by an affected trader. Nevertheless, we can dispose of his first two points quickly, largely because they do not seem to us to address the argument Mr Young was advancing. The gravamen of that argument is not that the Respondents have failed to treat the other traders correctly (although he did embark on a discussion of the steps they might take in relation to those traders during the course of argument) but that they had treated Ultracell incorrectly, and in a discriminatory way. Difficulties in tracing and dealing with the other traders in the chain are irrelevant; if those traders who have been identified are treated in one way, with the exception of the trader in Ultracell's position which is treated in a different, and inconsistent, way, the remedy is not to change the treatment of the other traders, but to treat Ultracell, and those like it, in the same manner as those traders undertaking only domestic transactions. Alternatively the Respondents could, from the outset, have treated all the identified traders in the same way (that is, on the footing that their transactions lacked economic substance); an appellant such as Ultracell could have no legitimate complaint about the treatment of traders whose involvement in the carousel was undetected, or of traders which had not been identified at all. These arguments are, of course, somewhat academic now that the judgment of the European Court of Justice is available.

There is, we think, rather more substance to Mr Poole's third point. The first seven paragraphs of article 22 deal with the imposition on traders of obligations relating to the manner in which they account for VAT, and those obligations are all administrative in nature. In other words, they are relevant to the formalities with which taxable persons must comply, but they do not affect the underlying rights and duties, particularly the right to deduct input tax and the liability to pay output tax. The substantive provisions are to be found elsewhere. Article 22(8), not least by its reference to "other obligations", must be viewed in the same light: it permits Member States to add further regulatory, or administrative, obligations, but it cannot legitimately be read so as to allow Member States to impose obligations which affect the underlying rights and duties. That conclusion is, we think, reinforced by the second subparagraph, and its reference to tax invoices; it is clear that the draftsman had only administrative measures in mind. Thus a domestic provision which, for example, imposed more burdensome accounting record requirements on traders undertaking intra-Community trade than those to which traders undertaking only domestic trade were subject would offend the article.

Here, however, no additional administrative burden has been imposed on Ultracell; it has been required to keep precisely the same records and otherwise account, in the mechanical sense, for its VAT liabilities in exactly the same way as any other taxable person. The Respondents' error (as it must now be seen to be) was to was to regard its purchase and sale as transactions devoid of economic substance. Their doing so offended article 17 of the directive, but that article says nothing about discrimination between purely domestic and intra-Community trade. Nor need it do so, since the Member States' obligation to respect the right to deduct is mandatory: see article 17(2).

For those reasons we do not accept Mr Young's argument that article 22(8) has been offended, even if one accepts the view that the Respondents have discriminated between Ultracell on the one hand and the traders which preceded it in the chain on the other. The refusal of its input tax claim cannot be regarded as an "obligation" within the meaning of that provision. Ultracell's complaint can only be that there has been an infringement of article 17, but it is unable to obtain a remedy for that breach by reference to anti-discriminatory measures.

Conclusions

We have left open the possibility that the Respondents might advance the argument that Ultracell had the "means of knowledge" of the fraud because, as we have explained, the point was not argued before us. We express no view on their prospects of obtaining permission to raise that argument now, nor on their prospects of success in pursuing the argument if permission is granted. We merely direct that any application for permission must be made before the expiry of a calendar month after the release of this decision. In the absence of any such application, the appeal is allowed, by reason of the judgment of the European Court of Justice in Optigen and another and Bond House Systems, while we accept that the factual basis of the Respondents' case is made out, and reject the argument that there has been an infringement of article 22(8). We also give the parties permission to apply to have the hearing continued if matters such as the amount of interest which is due to Ultracell cannot be agreed; here, we impose no time limit.

Mr Young sought a direction for costs in Ultracell's favour. It is possible that this issue too will have to be revisited if there is a successful application for continuation of the hearing, and at this stage we can make only a provisional direction, which will become final if no application is made within the one-month time limit we have imposed. Although the appeal has not succeeded on every point, it has succeeded in substance, and we do not think there is any criticism to be made of Ultracell's testing the evidence about the existence of a carousel, or of its advancing an argument about article 22(8) even though it has failed on both counts. We have concluded that Ultracell should have all of its costs of and incidental to and consequent upon the appeal, and we so direct. If the amount cannot be agreed, the costs payable by the Respondents are to be the subject of detailed assessment, on the standard basis, by a costs judge of the High Court.

COLIN BISHOPP

CHAIRMAN
Release Date: 24 March 2006

MAN/03/0364