The primary issue was whether the appellant was entitled to input tax credit on the purchase for its vehicles of laundered, rebated fuel, which could not lawfully be used in road vehicles.

Two companies in the appellant's VAT group purchased from fraudulent suppliers fuel for use in road going vehicles operated in their haulage business.

VAT of £170,927 was duly invoiced and was paid by the appellant. As part of their investigations into fraudulent trading in rebated oil, the commissioners became aware that the appellant had purchased such fuel from two subjects of their investigations, referred to by the tribunal as Euroserv and Total, and assessments were issued to disallow the related input tax claims.

Trading with Euroserv began first and in a period of eight months to May 2002, the appellant made 15 purchases, all of which the commissioners said was of fuel designated for non-road use, although attempts had been made to remove the identifying chemicals and marker dyes. The appellant argued that the first three purchases were not of rebated fuel, but of diesel engine road vehicle (DERV) fuel. The tribunal acknowledged that the first three purchases could not be proven to be rebated fuel, but it considered that since Euroserv had made no VAT returns and had become a missing trader, it was likely that all its operations were fraudulent and, consequently, that the three supplies were also of rebated fuel.

The appellant's other supplier, Total, supplied laundered, rebated fuel for the price of over £800,000 plus VAT in the six months to July 2002. The tribunal noted that a director of two of the companies in the appellant's group claimed not to have known whom to contact at Total when ordering supplies of fuel and yet his telephone number was found in three places in the diary of a leading member of the Total conspiracy.

Further, the phone number of another member of Total was found to have been contacted from the director's home on 22 occasions. The tribunal recorded for completeness that one of the companies in theappellant's group had a previous history of rebated fuel offences.

The appellant first submitted that the invoices received were proper VAT invoices. The tribunal conceded that the fuel referred to in the invoices had been supplied and that the invoiced sums had been paid, but that did not mean the documents were valid VAT invoices.

The commissioners submitted that there could be no argument regarding the invalidity of the invoices because (1) the supply of fuel by Total was the subject of a criminal prosecution, (2) the fuel was laundered, rebated fuel and (3) the VAT number shown on the invoices belonged to a de-registered business. The appellant stated that Euroserv was registered for VAT at the time of supply and that its invoices contained all the necessary details of a VAT invoice. The commissioners submitted that no supply had been made by Euroserv, since the supplier had an accommodation address in Chester and cheques drawn in its name were paid into a bank account in the Republic of Ireland. They added that Euroserv was not a legitimate fuel supplier and its invoices failed properly to describe the goods supplied. In any event, claimed the commissioners, the VAT registration was cancelled with effect from 2 February 2002 so, in respect of later transactions, the supplier was not even registered for VAT.

The appellant next submitted that even if the invoices were invalid it was entitled to input tax recovery under the principle established in Ellen Garage (Oldham) Ltd No. 12,407; [1995] BVC 1,509. In that case it was held that the fact of the supplier's non-registration for VAT did not stop the deduction of input tax. In the appellant's view, even if the invoices were invalid, it still had a right to input tax credit because the suppliers were taxable persons and the supplies were taxable supplies. The commissioners submitted that the decision in Ellen Garage was wrong and should not be followed. They urged the tribunal to follow the decision in Ahmed (t/a New Touch) No. 20,119; [2007] BVC 2,402, in which it was held that a customer of a taxable person who was not registered was not absolved from the requirement to hold such evidence of the VAT charge as the commissioners might direct in the absence of a VAT invoice.

An alternative submission of the appellant was that, if the invoices were invalid, the commissioners’ refusal to allow input tax recovery was unreasonable under reg. 29(2) of the Value Added Tax Regulations 1995 (SI 1995/2518). Relying on Reisdorf v Finanzamt Köln-West (Case C-85/95) [1997] BVC 317, it maintained that if the commissioners were satisfied that the transactions in respect of which the tax was deducted actually took place, they should have exercised their discretion to allow input tax recovery.

The commissioners submitted that it was for the appellant to establish that the discretion had been exercised in a way in which no reasonable body of commissioners could have done and that in this case it had failed to do so. Furthermore, in knowing that it was purchasing laundered, rebated fuel, the appellant lost its right to deduct input tax, having allowed itself to become party to the fraud being perpetrated. In accordance with principle established by the European

Court that exemption from VAT should apply where illegal drugs and counterfeit currency were supplied, the commissioners submitted that the fuel was exempt from VAT because its supply was illegal throughout the European Union.

The tribunal dismissed the company's appeal.

1. The invoices of both suppliers were invalid for failing materially to describe the supplies made.
2. The case of Ellen Garage (Oldham) Ltd had been wrongly decided and the appellant was not entitled to input tax recovery, in accordance with the decision in Ahmed, that decision being consistent with European legislation on the subject of input tax recovery.
3. The appellant had failed to exercise sufficient care and judgment to ensure that it received genuine taxable supplies of fuel from taxable persons. In the circumstances, it should have known that it was purchasing laundered, rebated fuel.
4. The appellant lost its right to deduct VAT as being party to fraudulent evasion by the suppliers; the tax paid was input tax but could not be deducted.
5. In accordance with principles established in Mol v Inspecteur der Invoerrechten en Accijnzen (Case 269/86) (1989) 4 BVC 205, since the supply and use of laundered, rebated fuel was illegal throughout the EU, the product fell to be treated in the same way as narcotic drugs and counterfeit money so that its supply fell outside the scope of VAT.
6. The appellant had no entitlement to input tax deduction on the purchase of the fuel.

No. 20,382