Key Facts
- •Microring Limited (Micro) appealed HMRC's denial of input tax deductions (£310,184) for 10 back-to-back silver purchases and onward sales.
- •Micro made a 1% profit margin on each transaction and didn't pay suppliers until receiving payment from customers.
- •HMRC had previously warned Micro about the silver market being tainted with VAT fraud.
- •Micro conducted minimal due diligence on its counterparties.
- •The transactions involved significant quantities of silver that never physically moved between parties.
- •HMRC argued that Micro knew or should have known that the transactions were connected to VAT fraud.
Legal Principles
Kittel principle: Taxable persons who knew or should have known that their transactions were connected with fraudulent VAT evasion cannot claim input tax credit.
Axel Kittel v Belgium State, C-439/04 & C-440/04
Mobilx principle: The 'should have known' test focuses on whether the only reasonable explanation for the circumstances of the transaction was a connection to fraud. Due diligence is not the sole determining factor.
Mobilx Limited (in Liquidation) v HMRC [2010] EWCA Civ 517
Davis & Dann principle: The tribunal must consider the totality of evidence and not over-compartmentalize factors when assessing the 'should have known' test. Failure to make inquiries can lead to a finding of knowledge.
Davis & Dann Ltd & Anor v HMRC [2016] EWCA Civ 142
AC (Wholesale) Ltd principle: The 'should have known' test doesn't require HMRC to eliminate all possible reasonable explanations, only that the connection to fraud was the only reasonable explanation.
AC (Wholesale) Ltd v HMRC [2017] UKUT 191 (TCC)
Outcomes
Appeal dismissed.
The Tribunal found that there was no reasonable explanation for the circumstances of the transactions other than a connection to fraudulent VAT evasion. Micro should have known, based on the circumstances and prior warnings from HMRC, that the transactions were connected to fraud.