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Lewison J, judgment 16 January 2009
These were the first two appeals from a full Tribunal hearing to the High Court in what is known as missing trader intra-community fraud (or MTIC) fraud. The judgment helpfully sets out the ingredients of the three principal kinds of carousel-type fraud: (1) acquisition fraud; (2) “straight” MTIC fraud and (3) contra-trading. Both appeals involved whether the traders “ought to” have had knowledge of fraud for the purposes of denying input tax repayment under the ECJ’s test in Kittel, the Tribunal having found no actual knowledge. Livewire was principally concerned with the requisite ingredients for proving that the trader ought to have known about contra-trading (which was also a secondary issue in Olympia). The Tribunal had found that the Revenue had to show that the taxable person ought to have known of both the missing trader’s fraud and also the contra-trader’s involvement in that fraud. Olympia principally involved the question of whether the knowledge to be attributed to a trader company was that of the director, whom the Tribunal had found was “naïve,” or whether it was an objective test.
The court held:
Where it was ascertained, having regard to objective factors, that the supply was to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of value added tax, it was for the national court to refuse that taxable person entitlement to the right to deduct. In both cases, the Tribunal had applied too high a test to contra-trading. In the case where the contra-trader had himself been a dishonest co-conspirator it was sufficient if the trader knew or ought to have known of the contra-trader’s dishonesty. In a case where the contra-trader had not been dishonest, it was sufficient if the taxable person knew or ought to have known of the missing trader’s default. However, on the facts as found, the Tribunal’s error of law did not affect the eventual result in relation to the contra-trades in either of these appeals. In relation to Olympia, the Tribunal was wrong to adopt a legal test for knowledge that required fewer precautions (or a lower level of understanding) than would have been required of a director of ordinary competence. Olympia was accordingly remitted for a rehearing.
Rupert Anderson QC and Philip Moser (instructed by Solicitors for Revenue and Customs and Howes Percival LLP) appeared for the Revenue.
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