Vantis is pleased to announce that the VAT appeal conducted by this firm on behalf of its client, Livewire Telecom Ltd (‘Livewire’), has been successful and the VAT Tribunal has overturned HM Revenue & Customs’ (“HMRC’s”) decision to deny a VAT repayment to Livewire, a mobile phone wholesale company. This landmark ruling is extremely significant as it is the first case in which a decision by HMRC that a company “knew or should have known” about fraud in a supply chain has been overturned by the VAT Tribunal. Livewire’s case concerned a specific allegation of VAT losses allegedly disguised by so called “contra trading”. However, the implications of this decision for the hundreds of companies who have had their repayments denied, or withheld, in similar circumstances will be extremely far-reaching, and a number of the Tribunal’s key findings will have a marked effect upon future cases alleged to involve defaulting or missing traders.
Since the European Court of Justice issued its Judgement in the Case of Axel Kittel & Ors in July 2006, HMRC has had the power to deny a VAT repayment to any company which, it contends, either “knew or should have known” that a VAT fraud had occurred in any of its supply chains. It is their application of the Kittel doctrine which has underpinned HMRC’s enforcement policies and their entire strategy to combat missing trader intra-community (MTIC) frauds using their infamous regime of “extended verification” – which, in Livewire’s case, lasted for seven months. Until now, a decision as to whether a company had knowledge of a fraud was largely based on the opinion of an Officer of HMRC. There was very little in the way of legal framework and even less case precedent upon which to base this decision, or appeal against it.
In winning this case, we have been able to overturn HMRC’s most common and damaging misconceptions about trading in the mobile phone grey market and we have also succeeded in setting a number of important legal and factual benchmarks which will impact upon future cases of this type:
- HMRC’s guiding principal for the last five years, and the justification for their economically damaging policy of “extended verification” has been that the entire grey market in mobile phones exists only to facilitate fraud. During this appeal, HMRC was forced to admit that there is indeed a substantial and legitimate grey market. The Tribunal fully accepted both the concept and the actuality of the grey market.
- In a direct reversal of the Tribunal’s findings in the Calltell VAT Tribunal appeal, it was found that mobile phones of Central European specification could be used in the UK as well as in a number of other European markets. HMRC has consistently – and misleadingly – contended that the importation of mobile phones with a Central European specification into the UK is in itself an indicator of fraud. The Tribunal was extremely critical of this approach.
- To date, HMRC has argued if a company such as Livewire had a general knowledge of the existence of fraud in the mobile phone market, then this was tantamount to knowledge of fraud in specific transaction chains and acted as justification for the withholding of VAT repayment claims. We were able successfully to argue before the Tribunal that HMRC was required to prove that a company such as Livewire had specific knowledge of the particular fraud which it was alleged had occurred in its supply chain. A general knowledge that MTIC fraud exists in the mobile phone grey market is no longer enough, and HMRC will have to re-examine the manner in which they decide to withhold VAT repayments on the basis of a company’s knowledge of the existence of fraud.
- Having been forced to concede that there is a legitimate grey market for mobile phones, HMRC was required to produce cogent evidence to prove each aspect of its case, and prove that Livewire had specific knowledge of the alleged fraud. In this instance, HMRC was required to show that Livewire, an exporter of goods in one chain of supply, knew of a missing trader in another, un-connected, chain of supply. This is, clearly, a difficult allegation to prove, and, indeed, HMRC failed to demonstrate the degree of knowledge necessary to satisfy the Tribunal that Livewire had been in any way complicit in or even aware of the operation of the alleged contra trading fraud.
- HMRC argued that, when alleging that a fraud has taken place, they are only required to prove their case to the civil standard - namely “on the balance of probabilities”. Vantis successfully argued that the Commissioners should be obliged to produce “cogent evidence” that a company had acted fraudulently. Accordingly, if HMRC seeks in the future to argue that a series of transactions constitutes an overall scheme to defraud the revenue (a phrase to be found in virtually every single decision letter issued at the conclusion of an extended verification exercise), then they will need to be in possession of evidence to support in full that allegation.
- HMRC has consistently used alleged failings in due diligence procedures to support an allegation that a company had the means of knowing about the existence of fraud in transaction chains. However, often these allegations depended upon facts which were known only to HMRC, or on events which took place after the transactions had been completed. In reaching its decision the Tribunal considered several so-called deficiencies of this sort in Livewire’s due diligence procedures, but found that none of these had any bearing on whether Livewire knew or had the means of knowing of the alleged fraud.
- The Tribunal also found that events which took place after transactions had been completed could only be taken into consideration if HMRC could demonstrate that Livewire knew at the time of the transactions that those events would occur. Further criticism was levelled against HMRC for relying upon matters about which Livewire could never have been aware - such as foreign covert investigations - as indicators of Livewire’s alleged knowledge of fraud in its supply chain The Tribunal found that HMRC’s attempts to rely upon these matters were both irrelevant and prejudicial.
- In considering the checks and procedures which a mobile phone company is expected to undertake, the Tribunal expressly stated that it is sufficient that a company take reasonable precautions to ensure that it is avoiding involvement in fraud, and significantly, that it is not the role of companies, such as Livewire, to police the VAT regime on HMRC’s behalf. Those whose businesses have been the subject of extended verification will recognise that it often seems as though no system of due diligence, however stringent will satisfy HMRC. They will, no doubt, take some comfort from the Tribunal’s view that even if Livewire’s due diligence procedures had been perfect, the company could still never have known of the existence of this particular fraud.
We believe it is vital in conducting appeals of this type to the VAT Tribunal to examine the legal and evidential tests which ought properly to be applied. In our opinion, it is always necessary to analyse, test and challenge at a fundamental level, all aspects of any case brought by HMRC against our clients.
There can be no doubt that this victory was due, to a large extent, to the case having been thoroughly prepared and researched before proceeding to the Tribunal. Each and every issue in dispute was examined and tested, and solid evidence was gathered to counter all of HMRC’s allegations. Comprehensive disclosure of documentation and investigative material was sought by us and obtained from HMRC, and as detailed a picture as possible of their enquiries into, and conduct of, the case was assembled well in advance of the actual hearing.
HMRC will continue to bring cases of this type to the VAT Tribunal. They will continue to argue that companies knew or should have known about fraudulent VAT losses in their supply chains. There is no doubt that the arguments which found favour with the Tribunal in Livewire’s appeal will be helpful to future Appellants. However, it is likely that each subsequent case will be decided on an analysis of its own particular facts, but it is now settled law that HMRC can only disallow a VAT repayment in circumstances where they can prove an allegation of knowledge of fraud.
Livewire’s victory in the VAT Tribunal serves as a warning that there can be no short cuts for either side in litigation of this type. The devil is indeed in the detail, and this decision puts both future Appellants and HMRC firmly on notice that each argument and counter-argument must be capable of withstanding the most intense scrutiny and detailed analysis. Our strategy at Vantis has been, and remains, one of careful and detailed preparation of every aspect of an Appellant’s case, and a determination to focus upon the factual and evidential issues of the appeal.
If you wish to discuss the Livewire VAT appeal, or would like to talk about your own dispute with HMRC please contact Martin O’Neill or Allan Brown, Senior Consultants, Customs Investigation and Litigation Team, on 020 7549 8098/8097 or please enter your details and submit the online form below.
We are also holding a seminar on 'The implications of the Livewire Decision on future VAT appeals' please click on the link for further details.