HMRC -V- BLUE SPHERE GLOBAL (APPEAL)

Michael Patchett-Joyce and James Rickards have successfully represented Blue Sphere Global ("BSG") in its appeal against the decision of the VAT and Duties Tribunal to deny its right to reclaim VAT, in excess of a million pounds, in proceedings before the Chancellor of the High Court.

The appeal involved a close examination of the law of Missing Trader Intra-Community Fraud, or MTIC for short, in a contra-trading situation. In essence HMRC alleged that BSG ought to have known of the fraud of defaulting traders in an accounting chain with which BSG was not involved otherwise than through a connection with its supplier who in this case was an innocent contra-trader.

Central to the appeal was the fact that BSG's supplier was expressly acquitted of fraud, by the Tribunal, and the fact that the fraud of the defaulting traders took place after BSG had made acquisitions from its supplier.

The Chancellor discussed the principles expressed by Lewison J, in the well known decision of Livewire, regarding constructive knowledge in contra-trading situations. HMRC's case was that BSG ought to known of the connection, through its supplier, between its transactions and the fraud of the defaulting traders. The Chancellor rejected HMRC's case on the basis that mere knowledge by BSG that its transactions would, for the purposes of VAT, be connected with other transactions with which its supplier was concerned was not enough. What HMRC had to show was that at the time of the transactions, BSG knew, or ought to have known, that its supplier's transactions were involved with the fraudulent evasion of VAT.

In this case given that the fraud had not occurred at the time BSG entered into its transactions it was axiomatic that it could not know of the fraud and no amount of due diligence could reveal it.

In such circumstances it was, in the Chancellor's words "an inescapable consequence" of contra-trading that HMRC must be in a position to prove that the contra-trader was a party to a conspiracy to defraud HMRC. Given that the contra-trader was innocent HMRC was unable to satisfy this requirement and accordingly the appeal was allowed with costs.

This is an important case for HMRC and traders faced with a repayment claim given its close examination of the legal principles involved in MTIC and the affirmation of the principles in Livewire. What HMRC must prove is constructive knowledge of a connection between the transaction in question and the fraudulent evasion of VAT. Mere awareness of MTIC fraud is not enough.
Finally there are over 600 appeals that have yet to be heard before the Tribunal and many of these will progress to the High Court. The potential cost to HMRC, should these claims be successful, is estimated at between £4 and £8 billion. With so much at stake this decision will be keenly reviewed by the industry and welcomed for adding clarity to the complex area of VAT law.

For more details please see [2009] EWHC 1150 (Ch