James Burke BL
2 May 2023
Subject areas: VAT – VAT fraud – application of Kittel principles “knew or ought to have known” – preliminary issue – “rights of the Defence” – evidence – admissibility. Written by James Burke BL.
This was an appeal against VAT assessments raised on the Appellant in the sum of €6,542,195 for the period 1 January 2013 to 30 June 2018. The assessments were raised on the basis that the Appellant knew or ought to have known that it was participating in transactions connected with the fraudulent evasion of VAT.
Revenue raised assessments for the relevant periods on the basis that the Appellant had purchased products from twelve missing traders (“Missing Traders”) and had sold products to four further traders in the EU (“EU Customers”), in circumstances where its counterparties had not properly accounted for VAT on the transactions, and that the Appellant knew or ought to have known this.
The Appeal Commissioner ruled that Revenue should go into evidence first following submissions on the burden of proof in appeals against assessments to VAT, based on the Kittel principles. Evidence was adduced on behalf of Revenue as to the basis on which it was alleged that the Appellant knew or ought to have known that transactions with the Missing Traders and EU Customers were connected with VAT Fraud. A number of other Revenue witnesses also gave evidence. A director of the Appellant, who was also its general manager, gave evidence as to the Appellant’s dealings with the Missing Traders and EU Customers and the steps taken to ensure compliance with the VAT Acts.
The Appeal Commissioner considered two mains issues.
1. Were the Appellant’s rights of defence breached?
2. Did the Appellant know, or ought it to have known that it was involved in transactions connected to VAT fraud?
1. Were the Appellant’s rights of defence breached?
The Commissioner held that the Appellant’s rights to the defence arose as a matter of EU law and that he was thus obliged to determine (a) whether a breach of those rights had occurred and (b) what the consequence of such breach was, for the purposes of appeal. He held that the Appellant was entitled, as a matter of EU law, to receive the file of evidence held by Revenue relating to the case, and to be given an opportunity to respond to the basis on which assessments were to be raised, before they were raised. Revenue had failed to provide the file of evidence, and had not given the Appellant an opportunity to make representations prior to the raising of an assessment. The Appellant was entitled to submit its observations on the allegations and the Respondent was obliged to consider these observations before deciding whether or not to raise an assessment, . Consequently, the Appellant’s rights of the defence were breached. Consequently, the Appeal Commissioner found that: “it follows that he is obliged to disregard all of the evidence proffered by the Respondent in this case.” (49) As the Respondent bore the burden of proving that the Appellant knew or ought to have known that its transactions with the Missing Traders and EU Customers were connected with VAT fraud, and as a consequence of the Appeal Commissioner that he was obliged to disregard the evidence proffered by the Respondent as a result of its breaching the Appellants rights to the defence, it followed that there was no valid evidence before the Commissioner and so the assessment was reduced to zero, (52).
2. Did the Appellant know, or ought it to have known that it was involved in transactions connected to VAT fraud.
Despite the Appeal Commissioners findings in relation to the Appellant’s rights of defence being breached, the Appeal Commissioner proceeded to decide on the ‘knew or ought to have known’ test. There was no allegation of actual knowledge of VAT fraud but simply that the Appellant ‘ought to have known’. The Appeal Commissioner noted that Revenue’s principal witness “appeared to interpret the available evidence through the prism of what the Respondent knew rather than what the Appellant knew or should have known.” (225) The Appeal Commissioner was, on the other hand, satisfied that any reasonable businessman would understand that there was a greater risk in dealing with certain businesses compared to entities with established trading histories, physical infrastructure and staff networks, and would consequently take additional care to attempt to ensure that the risk of fraud was minimised.
The Appeal Commissioner was not satisfied that the Appellant had demonstrated the expected care in its due diligence, (236). The Commissioner stated that he would have expected that, given the lack of trading history the Appellant would have taken additional steps to ensure that the missing traders were acting bona fide, (237). The Appeal Commissioner, however, decided that the circumstances that gave rise to the Appellant dealing with missing traders were very different to many of the indicia that have typically been seen in missing traders cases. The Appeal Commissioner accepted the Appellant’s contention that it was not aware of VAT fraud in the industry and found that there was no clear evidence before him to demonstrate that the Appellant was aware of VAT fraud, (242). The Appeal Commissioner further held that there was no clear evidence from the Respondent that the Appellant was paying below market prices from the missing traders. It was not a case of the prices being offered being “too good to be true.” (244)
In weighing up the evidence, the Appeal Commissioner was satisfied that the Respondent had not met the high hurdle showing that the Appellant ought to have known that the only reasonable explanation for the transactions was that they were connected to VAT fraud. In coming to this view, the Appeal Commissioner had particular regard to the events of 2011 which provided reasonable grounds to conclude that the appearance of a trader trading in excess was bona fide, (246). The Appeal Commissioner found that there was no relevant evidence put forward by Revenue to suggest that the Appellant should have known that the transactions with the EU Customers were connected to fraud, (250).
The Appeal Commissioner held that the Respondent had breached the Appellant’s rights of the defence under EU law. He consequently disregarded the evidence proffered by the Respondent in the appeal. Thus, there was no valid evidence before the Appeal Commissioner on which the Respondent could discharge the burden of proving that the Appellant knew or ought to have known that the transactions with Missing Traders and EU Customers were connected with VAT fraud. He further held that the Respondent had failed to demonstrate that the Appellant knew or ought to have known that its transactions with the twelve missing traders and four EU customers were connected with VAT fraud. The assessments under appeal were therefore reduced to zero. The Appeal Commissioner has been asked to state a case.
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