The issue was whether the appellant knew, or ought to have known, that in the course of its trading it was involved in Missing Trader Intra-Community (MTIC) fraud transactions.

The appellant carried on business from June 2003 as a dealer in mobile telephones. Until March 2006, the appellant's input tax claims were met in full by the commissioners. In April 2006, it carried out 14 deals, buying goods from two suppliers and selling them to four customers. On submission of a claim by the appellant for input tax credit on the purchases, the commissioners withheld more than £2m, without making a decision to refuse the claim, while they undertook an ‘extended verification’ of the transactions. The appellant sought judicial review of the commissioners' actions but, two days before the hearing, the commissioners notified the appellant of their decision to disallow the input tax claim. This decision was made on the basis that the transactions formed part of an overall scheme to defraud the revenue involving contra-trading between supply chains and that the appellant knew or should have known this and deliberately or recklessly ignored factors indicating that the transactions formed part of a fraudulent scheme.

There was common ground that neither the appellant nor its suppliers had failed to account properly for the VAT they owed in respect of the 14 deals. However, the commissioners alleged that fraudulent evasion had taken place in other supply chains of which the appellant was not part but which were connected to the appellant's supply chains and that the chains taken together formed part of an overall scheme to defraud the revenue. The suspect transactions were in supply chains containing two traders, Uni-Brand (Europe) Ltd and Sygnet Computing Ltd, which were also in the appellant's supply chains as exporter or importer, although there was no allegation of fraud in relation to transactions in those chains.

The commissioners' argued that Uni-Brand and Sygnet were involved in the fraud by covering up missing traders' fraudulent activities through entering into import transactions to offset the net input tax position on export transactions. In the tribunal's view, it was difficult to know whether the import transactions were carried out to conceal the fraud by missing traders and it was, therefore, necessary to have cogent evidence to show that the transactions were fraudulent rather than innocent. In this case, the evidence fell short of being cogent and neither Uni-Brand nor Sygnet could be regarded as knowing parties to a fraud; the only fraud was that committed by the missing traders. The appellant contended that in view of this finding, it could not have known of the fraud. Since the missing traders took part in a chain connected to the appellant only via Uni-Brand and Sygnet, and it was the tribunal's view that those companies were not involved in the fraud, then, according to the appellant, it must follow that it was not in a position to know about the fraudulent transactions.

The commissioners conceded that there was no evidence to show that the appellant knew about a fraud. However, they claimed there were several reasons why the appellant knew or should have known that the 14 transactions were part of transaction chains which were connected to fraud, including that: (1) the pattern of the deals suggested they were contrived; (2) the appellant made onward supplies to customers known to be involved in fraud; (3) all 14 deals took place within three days; (4) the appellant was paid by its customers before it paid its suppliers but held title to the phones, which was too good to be true; (5) in the case of all 14 deals, the phones were exported to a warehouse in the Netherlands although none of the customers was based there; (6) there were flaws in the appellant's due diligence checks and (7) many of the companies involved in the transactions, including the appellant, had bank accounts with First Curaao International Bank, which was the subject of a criminal investigation in relation to money laundering.

Although the tribunal identified some unusual features in the evidence, it concluded that, taken separately or together, they did not come anywhere near to indicating that the appellant had knowledge, or means of knowledge, of fraud by the missing traders. Even if the tribunal had found that Uni-Brand and Sygnet were involved in the fraud, which it did not, the position would have been the same. Accordingly, since fraud was perpetrated by the missing traders only, the appellant could not have known about the fraud.

The tribunal allowed the company's appeal.

1. Neither Uni-Brand nor Sygnet was knowingly involved in the fraudulent activity identified by the commissioners; only the missing traders were fraudulent.
2. Nothing in the evidence indicated that the appellant had knowledge, or means of knowledge, of the fraud.

No. 20,533