20382
VAT — input tax — laundered rebated fuel supplied to haulage contractor for road use — whether entitled to input tax credit —whether invoices false — no — whether some supplies those of DERV — no — whether invoices for fuel supplied invalid — yes — even if invoices invalid is appellant entitled to input tax credit either under Ellen Garage principle or because Commissioners unreasonably exercised their discretion under regulation 29(2) of VAT Regulations 1995 — no — whether appellant party to fraud and so not entitled to input tax recovery — yes — whether supplies illegal so that VAT did not apply to them — yes — appeal dismissed 

MANCHESTER TRIBUNAL CENTRE

 
 	
					HARGREAVES (UK) PLC	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	David Demack (Chairman)
            Arthur Brown FCA

Sitting in public in Manchester on 12 April 2007 and 23 - 24 July 2007

Tim Brown, counsel, instructed by Messrs Burton Copeland, solicitors of London, for the Appellant 
 
James Puzey, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction
1.	Two companies in the VAT group of which the appellant company, Hargreaves (UK) plc (“Hargreaves”), is the representative member, purchased fuel for the road vehicles used in their haulage businesses from fraudsters. It transpired that most, if not all, of the fuel purchased was laundered, rebated fuel which it was illegal to use in road vehicles.  On their VAT invoices, the fraudsters showed VAT of £170,927 which Hargreaves paid to them.  It then claimed that sum as input tax for which it was entitled to credit.  On the basis that all the fuel purchased was laundered, rebated fuel,  Her Majesty’s Commissioners for Revenue and Customs (“the Commissioners”) denied its entitlement to recovery maintaining that:
(i)	the invoices for the fuel supplied were invalid; 
(ii)	if the invoices were invalid, there was no right to deduct either based on the tribunal decision in Ellen Garage (Oldham) Limited v Commissioners of Customs and Excise [1994] VATTR 392 or because the Commissioners had unreasonably exercised their discretion not to allow deduction of input tax on the basis of alternative evidence under regulation 29(2) of the VAT Regulations 1995 (“the Regulations”); 
(iii)	Hargreaves had allowed itself to become a party to the fraud; or 
(iv)	the supplies were illegal so that VAT did not apply to them.
2.	The Commissioners went on to serve two notices of assessment on Hargreaves:
(a)	one for £118,160 on 2 June 2003; and 
(b)	one for £52,767 on 18 June 2003.

And it is against those notices that Hargreaves now appeals.  
3.	Initially the Commissioners also assessed Hargreaves to excise duty on the fuel in question.  It appealed the assessments in the present proceedings, and the Commissioners later withdrew them.  Following withdrawal the Commissioners have agreed to pay Hargreaves’ costs of that aspect of the appeal, and the parties have invited us to make directions appropriate to that agreement.  We therefore direct that the Commissioners pay Hargreaves’ costs of and incidental to and consequent upon the appeal against the excise duty assessments, such costs to be the subject of detailed assessment on the standard basis by a costs judge of the High Court if the calculations cannot be agreed.
4.	The earlier of the notices of assessments to VAT relates to the tax shown on invoices for supplies of fuel made to Hargreaves by persons falsely claiming to be the Total Butler Group of companies, and the later to the VAT shown on invoices for supplies said to have been made by an individual named Geoff Millar trading as Euroserv (UK) (“Euroserv”).  Whether Geoff Millar was simply a name chosen by persons who later proved to be fraudsters, we cannot say, but he does not feature as an individual in any of the documents produced to us.
5.	There is a company called Total Butler Limited which is registered for VAT and makes legitimate supplies of fuel.  It had no connection with the fraudsters, and has never made supplies to Hargreaves.  In order to distinguish the true Total Butler Limited from the fraudulent Total operation, throughout the remainder of our decision we shall refer to the former by its true name and the latter simply as “Total”. 
6.	Each notice of assessments was accompanied by a letter from the Commissioners.  The body of that relating to the Total supplies, dated 7 January 2003 (when the assessments were originally notified), was in the following terms:
“It has come to my attention that the above registered business [Hargreaves] has received a quantity of fuel from Total Butler group [Total] between the VAT periods February 2002 and July 2002.  Total litreage supplied to Hargreaves (UK) plc has been established as 1,152,250 litres.
I confirm that the VAT Registration number quoted on the relevant invoices is not a valid number and is not appropriate to a business in the name of Total Butler Group.  Additionally, I have examined the transcript of an interview dated 31/10/02 when Officers of HMRC Customs and Excise interviewed Neal Sowerby (Fleet Engineer for Hargreaves (UK) plc).  I consider that Hargreaves (UK) plc and its subsidiaries have failed to exercise sufficient care in ensuring that they were in receipt of a genuine taxable supply from a genuine taxable person.   (Annex A) attached highlights my concerns in detail.
In light of this information, I am unable to allow the recovery of input tax on these purchases under the provisions of para 13(1) and 29(2) of the Value Added Tax Regulations 1995 No. 2518.”
7.	Annex A to the letter was in the following terms:
“1)	No commercial checks were done on the Total Butler Group that might have indicated how long the supplier had been trading and their history in the trade.
2)	No checks on the VAT registration were done with HM Customs & Excise that would confirm status despite this information being available from the National Advice Centre and HMC&E website.
3)	The fuel was bought via a flyer or unsolicited contact from the supplier? [sic]
4)	The fuel was bought indiscriminately the determining factor being price alone.
5)	If the supplier is new to the business how could they have the contacts to provide fuel at such an attractive price?  The economics of the supply were not questioned.
6)	You claim to have tested the fuel for impurities and describe a system for collecting and testing fuel.  This appears to be poorly executed.  Vague descriptions of empty pop bottles and probable labelling, along with the random nature of the sample being taken by various drivers does not seem to follow any recognised audit trail.
7)	You had no idea from which depot the fuel deliveries were coming from.
8)	Your fleet engineer has stated that he has very vague recollections of whom he dealt with at the Total Butler Group, what type of vehicles delivered the fuel or any descriptions of any drivers or their apparent nationality.  Despite the questions being put to Mr Sowerby just three months after the last delivery.  
9)	You have not done any credit searches on the company, fairly standard practice I believe for companies dealing with legitimate traders.
10)	You do not have any bank account details of your suppliers despite buying £800,000 worth of fuel from them.
11)	It is highly unlikely for fuel suppliers to elicit payment by cheque.  Legitimate suppliers usually operate a direct debit system.
12)	The cheques were made to Butler not Total Butler Group as on the invoice.  It is highly unusual for cheques to be made out to anyone other than the name on the invoice.
13)	You have bought fuel from a company with whom you have never previously dealt or heard of and say you didn’t have any doubts over the suppliers credibility or feel that there was risk attached to the purchase.
14)	You did not obtain copies of the suppliers headed paper, VAT certificate and bank details before trading with them.
15)	The tanker that supplied the goods was not liveried as per the invoice and was in fact not liveried at all.
16)	Youngs of Esh Winning, part of your group, has previous history in the misuse of rebated fuel going back some 14 years.  On this basis I would expect special care to be taken when placing fuel orders.”
8.	The letter relating to the Euroserv supplies, also dated 7 January 2003, was in similar terms mutatis mutandis to that relating to Total.  The annex to it was in the following terms:
	“1)	No commercial checks were done on Euroserv (UK) that might have indicated how long the supplier had been trading and their history in the trade.
2)	You did not obtain copies of the suppliers headed paper, VAT certificate and bank details before trading with them.
3)	The fuel was procured indiscriminantly [sic] the determining factor being price alone.
4)	Euroserv were deregistered with effect from 02/02/02.  Supplies made after this date were not made by a registered person.
5)	You claim to have tested the fuel for impurities and describe a system for collecting and testing fuel.  This appears to be poorly executed.  Vague descriptions of empty pop bottles and probable labelling, along with the random nature of the sample being taken by various drivers does not seem to follow any recognised audit trail.
6)	You had no idea from which depot the fuel deliveries were coming from.
7)	You claim never to have met the supplier – you have to contact them through a third party (driver) or on a mobile number (which you now claim to have lost).
8)	Your fleet engineer [Mr Sowerby] has stated that he has very vague recollections of whom he dealt with at Euroserv (UK), what type of vehicles delivered the fuel or any descriptions of any drivers or their apparent nationality.  Despite the questions being put to Mr Sowerby just three months after the last delivery.  
9)	You do not have any bank account details of your suppliers despite buying £350,000 worth of fuel from them.
10)	It is highly unlikely for fuel suppliers to elicit payment by cheque.  Legitimate suppliers usually operate a direct debit system.
11)	The tanker that supplied the goods was not liveried as per the invoice, in fact was not liveried at all.
12)	Youngs of Esh Winning, part of your group, has previous history in the misuse of rebated fuel going back some 14 years.  On this basis I would expect special care to be taken when placing fuel orders.”
9.	In response to the Commissioners’ contentions, Mr Tim Brown, counsel for Hargreaves, advanced the following grounds for maintaining that Hargreaves was entitled to recover input tax on its fuel purchases: 
(1)	That not all the fuel purchased from Euroserv was laundered, rebated fuel; 
(2)	That the purchase invoices were valid evidence of Hargreaves’ entitlement to reclaim input tax; 
(3)	That if the invoices were invalid, then Hargreaves was entitled to deduct in any event by virtue of the suppliers having been taxable persons (the Ellen Garage argument);
(4)	That the Commissioners should have exercised their discretion under Regulation 29(2) to allow deduction of input tax on the basis of alternative evidence;
(5)	That whether or not Hargreaves knew or should have known of the fraudulent evasion of VAT by others, that did not vitiate its right to deduct input tax as to do so would have been contrary to principles of proportionality and fiscal neutrality; 
(6)	That Hargreaves did not and could not have known of any fraud by others;
(7)	That the goods supplied to Hargreaves were not of a type to which an exemption from VAT applied due to the preclusion of competition between the lawful and unlawful sectors;
(8)	That since the Commissioners had sought or should have sought output tax or confiscation orders from the fraudsters, it would be disproportionate to disallow Hargreaves’ input tax claim.
10.	The Commissioners were represented by James Puzey, also of counsel.  Mr Brown and Mr Puzey produced three bundles of copy documents, and we took oral evidence from Mr Neal Sowerby, a director of two companies in the Hargreaves VAT group and the person responsible within the group for purchasing road fuel for group vehicles (and who is mentioned in each annex to the Commissioners’ letters referred to above), and Mr Dean Foster, an officer of the Commissioners and the assessing officer.  From that evidence, we find the following facts to have been established.
The Facts
11.	Hargreaves is a road haulier based at Esh Winning, County Durham, and provides transport and support services to the energy and waste sectors of industry.  It is the representative member of a VAT group, included in which are Youngs Haulage Limited (now called Hargreaves Transport Services Limited) and Hargreaves Waste Services Limited, those two companies being the recipients of the supplies of fuel at the heart of the appeal.
12.	As a result of a number of investigations into fraudulent trading in rebated oil, the Commissioners found that Hargreaves had purchased such fuel from two subjects of their operations. They were Euroserv and Total. Trading with Euroserv began first.
13.	 On 20 January 2001, Geoff Millar trading as Euroserv registered for VAT.  The address of the principal place of business of the person registering was given on Form VAT1 as 10 Hunters Walk, Chester.  That was merely an accommodation address at which a telephone answering service was provided.  Despite being registered, Euroserv never made any VAT returns: it became a missing trader, i.e. a trader which failed altogether to account to the Commissioners for its VAT liabilities, and disappeared.  
14.	Hargreaves, having admittedly made no checks on Euroserv’s trading history, the way in which it conducted its operations or its commercial standing, started purchasing fuel from it on 21 September 2001.  The only factors Mr Sowerby considered in deciding that Hargreaves would trade with it were those of price, credit facilities on offer and availability of fuel.  Between 21 September 2001 and 17 May 2002, Hargreaves made the following 15 purchases of fuel from it:
Date	Invoice Number	Litres	Price Per Litre	Amount
£	VAT
£	Duty
£	
21/09/2001	303	82000	0.62	50,840.00	8,897.00	42,492.40	
26/09/2001	304	27100	0.62	16,802.00	2,940.35	14,043.22	
11/10/2001	305	52850	0.62	32,767.00	5,734.23	27,386.87	
18/10/2001	306	27100	0.62	16,802.00	2,940.35	14,043.22	
25/10/2001	307	49700	0.62	30,814.00	5,392.45	25,754.54	
30/10/2001	308	27100	0.62	16,802.00	2,940.35	14,043.22	
21/02/2002	309	27100	0.62	16,066.00	2,811.55	14,043.22	
27/02/2002	310	25500	0.62	14,280.00	2,499.00	13,214.10	
05/03/2002	311	26400	0.58	15,312.00	2,679.60	13,680.48	
12/03/2002	313	26500	0.58	15,370.00	2,689.75	13,732.30	
15/03/2002	314	26400	0.58	15,312.00	2,679.60	13,680.48	
25/03/2002	315	27300	0.585	15,970.00	2,794.84	14,146.86	
10/05/2002	316	25100	0.59	14,809.00	2,591.58	13,006.82	
16/05/2002	317	25100	0.59	14,809.00	2,591.58	13,006.82	
17/05/2002	318	25100	0.59	14,809.00	2,591.58	13,006.82	
	Totals:	500,350		301,564.50	52,773.79	259,281.37	

15.	It is common ground that, with the exception of the first three purchases, the fuel supplied was laundered, rebated fuel, i.e. fuel rebated from excise duty as being for non-road use from which attempts had been made with at least some success to remove identifying chemicals and dyes. The Commissioners maintain that the remaining three supplies were also of laundered, rebated fuel: Hargreaves contends that they were supplies of DERV (diesel engine road vehicle fuel), being so described in the invoices for the supplies.  
16.	Rebated gas oil for non-road use is subject to excise duty at a much lower rate than road fuel.  During the period with which this appeal is concerned, the rate of duty on heavy oil for use as road fuel (DERV) was 51.82p per litre, and that on rebated fuel 3.13p per litre.  To mark gas oil (a fuel technically indistinguishable from DERV) as rebated fuel quinizarin is added to it as a chemical marker.  Quinizarin does not occur naturally in gas oil.  A red marker is also added to rebated oil to change its appearance, hence the description ‘red diesel’.  Once the red dye is removed from red diesel by a chemical laundering process, visually the fuel becomes indistinguishable from DERV.  Excise duty on rebated kerosene is levied at a nil rate (fully rebated).  The chemical marker added to kerosene to mark it as rebated fuel is coumarin.  Coumarin does not occur naturally in kerosene. A green marker is added to rebated kerosene.  EC Directive 98/70/EC prohibits the distribution or sale for use within the European Community of, inter alia, DERV with a sulphur content greater than 350mg/kg, i.e. its density must not be more than 350 parts per million (see the Motor Fuel (Composition and Content) Regulations 1999).  The mixing of rebated fuels with DERV is prohibited, as is the removal of any of the statutory markers added to rebated fuels.  By section 12 of the Hydrocarbon Oil Duties Act 1979 (“HODA”), no heavy oil on which rebate of duty has been allowed may be used as the fuel for a road vehicle, or be taken into a road vehicle as fuel, unless an amount equal to the rebate is paid to the Commissioners.  Contravention of that subsection with intent that the restrictions it imposes should be contravened is a criminal offence under section 13 of HODA.  Section 13 of HODA similarly prevents the use of rebated kerosene as fuel for an engine propelling a vehicle and makes its use without payment of duty a criminal offence.  And the mixing of fuel and removal of a statutory marker, if done with the intent of fraudulently evading excise duty, is a criminal offence contrary to section 170B of the Customs and Excise Management Act 1979.
17.	We accept that the three supplies in dispute, when tested, contained no evidence of quinizarin or coumarin,  or any colour marker to indicate that they consisted of laundered, rebated fuel, but the tests carried out on the second sample showed it to have a sulphur content far in excess of that qualifying as DERV.  Further, the tests carried out on all three supplies did not conclusively prove them to be DERV, but rather to suggest that the launderers had been entirely successful in removing the statutory markers and dyes.  And throughout its existence, Euroserv made no VAT returns whatsoever and became a missing trader.  Taking all those factors together, we conclude that Euroserv was a fraudulent operation from beginning to end; and we consequently find that the three supplies were not those of DERV, but of laundered, rebated fuel.  In so finding, we have considered a claim by Mr Brown that there is no case on record of all evidence of statutory markers and dyes having been successfully removed.  As no evidence was adduced in support of the claim, we reject it.
18.	Mr Sowerby was asked in cross-examination how Hargreaves first contacted Euroserv.  Initially he replied that he could not remember but, on being pressed, admitted that Euroserv contacted Hargreaves “out of the blue”, adding that oil traders “got onto” Hargreaves’ list of suppliers by approaching him and finding out what its requirements were.  As part of its offer to supply fuel, Euroserv must have provided the means of contacting it, if only to enable orders for fuel to be placed.  The telephone apparently being the usual method of placing orders within the fuel supply industry, it is not surprising that the Commissioners found Mr Sowerby’s mobile telephone number amongst records uplifted from Euroserv, yet he denied having a contact there.  As he placed 15 orders for fuel with Euroserv, we reject his denial of knowledge of a contact.
19.	Mr Sowerby negotiated the purchase of each load, completing a purchase order for each one after its delivery.  Deliveries were made to Hargreaves by Euroserv in an unmarked tanker.  On arrival on site, the tanker driver would invite Mr Sowerby, having accepted the fuel, to complete an incomplete Euroserv invoice by inserting the date, description and quantity of fuel and its price.  Mr Sowerby acted on the invitation, identifying the fuel as DERV.  He calculated and additionally added VAT to the price.  (The Euroserv invoices were in books and listed the different types of fuel it claimed to provide.  Each invoice required completion by inserting the quantity of fuel and its price in boxes alongside its description, and the addition of VAT).  
20.	Following the first six deliveries of fuel by Euroserv, a break in supplies occurred.  After a delivery on 30 October 2001 it made no further deliveries until 21 February 2002.  Despite that break in supplies, the consecutive numbering of the invoices for the first six fuel deliveries continued in the invoices for fuel supplied after the break.  That led the Commissioners to conclude that Hargreaves may have been Euroserv’s only customer.   They questioned why the break in supplies occurred, noting particularly that their officers visited Hargreaves on 31 October 2001 – the first day of the break.  Mr Sowerby claimed in evidence that the fact that the visit and the break occurred contemporaneously was coincidental.  In all the circumstances of this case, and particularly the vagueness and evasiveness of the content of Mr Sowerby’s evidence and the manner in which it was given (the former following most precisely Mr Sowerby’s behaviour in interview by officers of Customs and Excise on 31 October 2002), we do not accept the claim.  Indeed, we conclude that Mr Sowerby is not a witness of truth, so that we place little weight on his evidence.  We infer, and thus find, that the break in supplies occurred as a direct result of the Commissioners’ interest in Hargreaves, and in particular the visit of 31 October 2001.  
21.	As is apparent from the dates of the Euroserv invoices, Hargreaves continued to receive fuel from it until 17 May 2002.  Yet in the documents before us there is evidence both that “it [Euroserv] came to end with the arrest of Keith Mitchell on 7 January 2002” and that it ceased to trade in February 2002 on the arrest of Martin Andrew Stephen O’Neill and Michael Fleming.  (We know not where O’Neill and Fleming fit into the picture, and were informed, but no evidence was adduced to prove, that Keith Mitchell was the person behind Euroserv, not Geoff Millar).  Notwithstanding that evidence, it appears, and we find, that someone whose identity was not revealed to us continued to supply Hargreaves under the style of Euroserv after O’Neill’s and Fleming’s arrests.  Following the arrests, Hargreaves’ cheques in payment for fuel were paid into an Irish bank account initially opened in the name of JCS, and later changed to Euroserv. We presume that the cheques were sent to Euroserv by post.
22.	Hargreaves was in the habit of having some of its fuel deliveries tested.  Mr Sowerby claimed the main purpose of the tests was to check the oil purchased for “dirt and water ingression [sic]”.  Of the 15 loads of fuel supplied by Euroserv, Hargreaves had 11 of them tested by ITS Testing Services (UK) Ltd (now Intertek Caleb Brett).  The result of the first three samples tested, those from the deliveries made on 21 September 2001, 26 September 2001 and 11 October 2001, was recorded as “ok”.  In the remaining eight samples tested, seven were found to have a small quantity of quinizarin in them, and all eight to be of high density, i.e. too dense to meet the requirements for DERV of the Motor Fuel (Composites and Content) Regulations 1999.  
23.	ITS reported its findings by fax to Hargreaves within a few days of each sample being submitted to it, and at the end of each month collated all the results for that month and forwarded its original reports to Hargreaves.  In every report, the sample was stated to have “passed” the appearance test, i.e. it appeared not to contain the red marker used to indicate rebated fuel, but to have contained traces of quinizarin and/or coumarin.  Mr Sowerby maintained that he believed the word “passed” to indicate that all the tests carried out by ITS, i.e. for density, quinizarin, coumarin and water content, showed the fuel tested to be DERV.  As the person responsible for the purchase of all Hargreaves’ fuel supplies at director level, and knowing of Customs’ seizure of rebated fuel from Hargreaves in July 2000 (see below at paragraph 33), we are unable to accept that he could have been so naïve and, viewed in the context of our finding that he was untruthful, are driven to the conclusion that he knew perfectly well that the fuel tested was laundered, rebated fuel.  We therefore reject his claim to have believed the supplies to have been of DERV.
24.	On 31 October 2001 Mr Rollins, one of the Commissioners’ officers, visited Hargreaves.  He was presented with a sample of fuel which Mr Sowerby said had been delivered by Euroserv “the day before” the visit.  The sample was tested and found to contain 900 mg per kg of sulphur – a quantity far in excess of that permitted in DERV.  As a result it was illegal to use the fuel for powering diesel engined road vehicles.  On 1 November 2001, Mr Rollins returned to Hargreaves and was present when Mr David Small, an officer in the Commissioners’ road fuel testing unit, took a fuel sample from a blue tank in Hargreaves’ yard, Mr Sowerby having explained that the fuel in the tank had been delivered by Euroserv the previous day.  The sample was marked 120241, and was taken to the laboratory of the Government Chemist at Newcastle-upon-Tyne.  Subsequent testing showed it to qualify for use as DERV.  We take no notice of sample 120241 as Euroserv made no delivery to Hargreaves on 31 October 2001, so that we are unable to say by whom and when the fuel was delivered.
25.	On 27 August 2002, the Commissioners cancelled the VAT registration of Euroserv with effect from 2 February 2002.
26.	To the extent that it may be unclear from our findings thus far, with the following exceptions, we find all matters of fact referred to in the Annex to the Commissioners’ letter referred to in paragraphs 7 of our decision to have been proved as fact.  Exceptionally, we find that price alone was not the determinant factor in Hargreaves decision to buy fuel from Euroserv; so too were the credit facilities on offer and the availability of fuel.
27.	We then proceed to deal with the supplies made to Hargreaves by Total, and record that the evidence adduced relating thereto consisted merely of a copy of the opening speech of counsel for the Crown in the conspiracy proceedings before the Crown Court. On 13 February 2002, various persons who were later convicted of conspiracy to cheat the public revenue began making supplies of what is agreed to have been laundered, rebated fuel to Hargreaves, their invoices being raised in the name of Total.  Hargreaves did not check on Total’s VAT registration, or its address or telephone number.  Nor did it make commercial checks to ascertain its bona fides, its trading history or commercial standing.  In particular it made no credit checks on Total or obtain details of its bank account.  Again the determinant factors in Hargreaves establishing the trading relationship were price, credit facilities and availability of fuel.
28.	The address on the Total invoices was the true address of Total Butler Ltd, but the VAT registration was not: the number was that of Butler (1843) Ltd, the VAT registration of which was cancelled on 1 January 2000.  Nor was the telephone number on the invoices that of Total Butler Limited.    Although we were not provided with copies of any invoices for the fuel supplied by Total, it being common ground, we find that they all described the fuel as DERV.
29.	Total supplied 1,255,600 litres of laundered, rebated fuel to Hargreaves between February 2002 and July 2002 for which Hargreaves paid over £800,000 plus VAT.  The fuel was delivered in a silver unmarked tanker.  The tanker was almost invariably accompanied by a motor car, whose driver sometimes collected cheques from Hargreaves for the delivery.  At other times the cheques were collected later by members of the conspiracy.  The cheques had to be collected: had they been sent by post they would have been delivered to Total Butler Ltd, and that would undoubtedly have caused problems for the conspirators.  Yet, in evidence, Mr Sowerby claimed that some cheques were posted to Total.  Again we reject his claim.  The cheques were drawn in favour of Butler despite the invoices indicating that the supplier was Total Butler Group.
30.	As with the Euroserv supplies, in evidence Mr Sowerby initially claimed to be unable to remember whether Total approached Hargreaves with a view to its making supplies of fuel or whether Hargreaves contacted it, but then admitted that Total contacted him.  
31.	Mr Sowerby claimed not to have known whom to contact at Total when ordering supplies of fuel.  Yet his telephone number was found to have been entered on at least three occasions in the diary of John Desmond, a leading member of the Total conspiracy.  Further, during a search of Mr Sowerby’s home, the Commissioners’ officers investigating the Total conspiracy uplifted an itemised telephone bill.  On examination, it was found to show that between 10 September 2001 and 27 September 2001, 22 telephone calls had been made from his home to telephones used by Gary Owens, another member of the conspiracy.  (Admittedly, those calls were made before Total made any supplies to Hargreaves, but in our judgment that does not aid Hargreaves).
32.	Again, with the solitary exception of the Commissioners’ claim that price was the only factor to determine whether Hargreaves dealt with Total, we find all the factual matters referred to in the annex to the Commissioners’ letter of 7 January 2003 relating to Total to have been proved as facts.
33.	For completeness, we record that on 2 April 1990, Youngs Haulage Ltd was convicted of an offence of using rebated fuel in a transit van and a minibus, and in July 2000, the Commissioners seized 70,000 litres of rebated fuel from Youngs Haulage Ltd which it  had received from M L Tyres. As the result of the investigations which gave rise to the assessments under appeal, the Commissioners seized a further 64,000 litres of rebated fuel from Hargreaves.
A summary of the relevant legislation  
34.	Throughout the period with which this appeal is concerned, the Sixth Directive (77/388/EEC) formed the basis of the relevant VAT law.  Article 18(1) thereof required a taxable person to hold an invoice containing the information set out in Article 22(3) in order to exercise his right to deduct tax. Amongst other things, Article 22(3) made the right to deduct dependent on the tax mentioned in an invoice corresponding with the supply of goods. That was subject to Article 18(3) which permitted Member States to lay down conditions and procedures to allow deduction in the absence of an invoice.  

35.	Article 18 was implemented in UK domestic law in section 24 of the Value Added Tax Act 1994 (“VATA”).  Subsection 24(6) provides that VAT may be treated as input tax only to the extent that it is evidenced by reference to such documents as may be specified in regulations.  For present purposes those are regulations 13, 14 and 29(2) of the Regulations.  Under regulation 14(1), amongst other information, the name and address of the supplier, his VAT number and a description of the goods must be present on a VAT invoice.   By regulation 29(2):

“At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of a supply from another taxable person, hold the document on which is required to be provided under regulation 13 … provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold or provide such other evidence of the charge to VAT as the Commissioners may direct”.  

The document for which regulation 13 provides is a VAT invoice.

Submissions and Conclusions

Were the invoices held by Hargreaves false? 
36.	Mr Brown opened his submissions by claiming that the invoices for fuel purchased from both Euroserv and Total were true VAT invoices: whilst admittedly the Euroserv invoices had been completed by Mr Sowerby, that did not falsify them; and the Total invoices had been provided by the supplier of the fuel.

37.	We accept that fuel in the quantities referred to in the various invoices was so supplied, and that Hargreaves paid to the suppliers the amounts invoiced. Consequently, we hold that the invoices held by Hargreaves were not false. But that is not to say that we accept that they were valid VAT invoices.

Were the invoices for the fuel supplied valid?
38.	On the basis that the supply of fuel by those behind Total was the subject of a criminal prosecution which established the existence of a conspiracy and it was not disputed that the fuel supplied by the conspirators was all laundered, rebated fuel, Mr Puzey submitted that the invoices for those deliveries wrongly described the fuel as DERV.  Further, the invoices were not those of Total Butler Ltd, and the VAT number quoted thereon was that of a business which had been de-registered in 2000.  Thus he contended that there could be no doubt that those invoices were invalid and did not meet the requirements of regulation 14 of the Regulations.  In response, Mr Brown submitted that the Total invoices were valid as having been provided by the supplier of the fuel. 

39.	Mr Brown submitted that the Euroserv invoices held by Hargreaves were valid.  At the time of the transactions Euroserv was registered for VAT, as de-registration action was not carried out by the Commissioners until 27 August 2002, and was then backdated to 2 February 2002.  And, he added, even if the retrospective de-registration was effective, the Euroserv invoices up to 2 February 2002 were valid.  He contended that the invoices fulfilled the requirements of regulation 29(2)(a) of the Regulations in that they were tax invoices as defined by regulation 14(1)(g) since they included a valid VAT registration number, and a description sufficient to identify the goods supplied.  The description of the supplies was sufficiently clear and unambiguous “to identify the subject of a query” between the parties (see paragraph 34 of the decision in Enviroengineering Ltd v Commissioners of Customs and Excise (2006) Decision No. 19756 which is set out in paragraph 41 below).  It was only if the description on an invoice was liable to give rise to an incorrect application of VAT that it might be regarded as invalid (see paragraphs 72 – 77 of Advocate-General Jacob’s opinion in Finanzamt Gummersbach v Bockemühl (Case C-90/02) [2005] STC 934, a decision of the Court of Justice of the European Communities (“the ECJ”), which concerned the same question as in Enviroengineering); one looked to see whether the description in the invoice was materially incorrect.  Taken in conjunction with the decision in Enviroengineering, Mr Brown contended that the description of the fuel supplied by Euroserv was not so materially incorrect as to fall foul of regulation 14(1)(g).
40.	 In contrast, Mr Puzey submitted that no supply had been made by a business called Euroserv to Hargreaves:  the business calling itself Euroserv had an accommodation address in Chester and cheques drawn in its favour were paid to a bank account in Eire – an account which featured in other criminal investigations into laundered fuel and money.  (We find that as a fact, Mr Puzey’s claim not being challenged by Mr Brown). He contended that Euroserv was not a legitimate fuel business and was thus unlikely to sell legitimate fuel.  Its invoices were invalid as failing properly to describe the goods supplied. Further, Mr Puzey added, in respect of the supplies Euroserv made after 2 February 2002, it was not registered for VAT, and thus its invoices carried an invalid VAT number.  That was so regardless of the fact that its registration was not cancelled until 27 August 2002.  The Enviroengineering and Bockemühl cases showed the importance of invoices containing key particulars, such as the name of the person to be supplied and the nature of the goods.  

41.	At paragraphs 31 – 35 of its decision in Enviroengineering, the tribunal said: 

	“31.	The tribunal does not consider that [the issue of whether invoices comply with regulation 14(1)(g) of the VAT Regulations] is a matter of law of any complexity, but of the application to these particular transactions of what is deliberately very general ordinary English wording.  The tribunal resists any submission that it should add to the complexity of the many millions of value added tax invoices issued by embroidering or elaborating the requirements in regulation 14.  The only point of law, in the view of the tribunal, is that any question about the adequacy of an invoice under this regulation is to be tested by reference to the invoice as a whole, and not by each individual part separately.  And evaluation of adequacy is always subject to the saving in the opening words of the regulation. [“Save as the Commissioners may otherwise allow, …”].
	32.	Within that context, compliance with regulation 14 is essentially a question of fact. An omission of a key identifying number or the value added tax registration number of a supplier may of itself call the adequacy of an invoice into question. But the adequacy of other elements, such as the type of supply or the description, is to be evaluated by looking at the invoice as a whole. It is not something to be evaluated item by item by some objective standard in isolation from all else. It is to be tested as part of the invoice in its immediate context with questions such as: Was the invoice ambiguous, such that it might apply to more than one supply? Did it refer to an actual taxable supply of goods or services? Did the taxable person know for what the invoice was raised, or should it have known? Did the inadequacy of the invoice as a whole raise any question about the rate of value added tax on the supply or the time of supply?
33.	In this case, while it was submitted that the description was inadequate, no other element was contended to be missing from these invoices. So the invoices [which in that case were missing] must have stated the supplier, the taxable person supplied, the relevant dates and addresses, the type of supply, the extent of the services and the relevant rate of value added tax ... 
34.	… the invoices included a general description by reference to a defined period of time of services provided by the supplier to the taxable person of a kind attracting the full rate of value added tax. Those supplies were supplied, and the taxable person knew or should have known about the supply. There was no accusation of any breach of contract. And it is not contended that anything else supplied by that supplier during that time period could have been confused with these supplies. Nor is it contended that Mr Lewis was himself directly paid in any way for the services or that anyone else had raised an invoice for them. Whether or not APSE charged EE Ltd [Enviroengineering] a low or high amount for those services may concern Mr Speechley, but it is of no relevance to HMRC if the transactions occurred, and no fraud, evasion or illegal avoidance is suggested. The tribunal finds that had the taxable person wished to query the invoice with the supplier, the description was sufficiently clear and unambiguous to identify the subject of the query to EE Ltd.
35.	The tribunal therefore does not accept the contention by HMRC that the invoices were in breach of regulation 14. They clearly existed and HMRC has clearly seen them. There is no other outstanding issue as to the acceptance of these invoices, and therefore the tribunal takes the view that they should have been accepted, and that no correction is needed to any return to remove any calculation of input tax made with respect to those three invoices. The appeal must be allowed to that extent and the relevant adjustments to the returns for the quarters to 4/98, 7/98 and 10/98 discharged.”
42.	And at paragraphs 72 – 77 of his opinion in Bockemühl, which in Mr Puzey’s submission appeared further to emphasise the need for a correct description of supplies in invoices,  Advocate-General Jacobs said:
	“72.	To require the express indication of the name and address of the supplier, and indeed of the customer, even when the invoice already contains his VAT identification number, may prove useful.  It provides an additional element of clarity and, should for instance there be a misprint in the VAT number, it can help to resolve any uncertainty as to the identity of the taxable persons.

	73.	Identification of the taxable transaction is clearly of great practical importance for determining what provisions are applicable.  It is evident that, when mentioned, the taxable transaction must be defined correctly in accordance with the categories in that directive, since a different qualification may trigger the application of different provisions of the directive and possibly different tax rates.  Definitions which are not accurate in that regard may prejudice the application of the directive and distort competition.

	74.	In the case at issue, the invoice mentioned construction work done whereas the tax authorities consider that it should have mentioned the supply of staff to do that work. If a description of services invoiced is incorrect and thus liable to give rise to an incorrect application of VAT, it seems to me that the invoice may legitimately be regarded as invalid for VAT purposes in accordance with such rules as a member state has adopted to that effect. It seems however that in Mr Bockemühl's case the tax authorities may have been motivated principally by concerns relating to possible circumvention of national provisions of employment and social security law. Such concerns, whilst clearly very important, are extraneous to the VAT rules and should not in my view be regarded as relevant to the ruling to be given in the present case. 

75.	My view is none the less that the applicable version of the Sixth Directive allows member states to require suppliers to indicate their name and address and to identify accurately the nature of the supply, on any invoice used for VAT purposes, and thus to refuse the recipient a right to deduct if those particulars are absent or materially incorrect.

76.	In Jorion, née Jeunehomme, et Société anonyme d'êtude et de gestion immobilière 'EGI' v Belgium (Joined cases 123/87 and 330/87) [1988] ECR 4517, para 16 the court made it clear that—

‘as regards the exercise of the right to deduction … the Sixth Directive does no more than require an invoice containing certain information. Member States may provide for the inclusion of additional information to ensure the correct levying of value added tax and permit supervision by the tax authorities.’

77. 	It did however also warn (at para 17):

‘the requirement on the invoice of particulars other than those set out in Article 22(3)(b) of the Sixth Directive, as a condition for the exercise of the right to deduction, must be limited to what is necessary to ensure the correct levying of value added tax and permit supervision by the tax authorities. Moreover, such particulars must not, by reason of their number or technical nature, render the exercise of the right to deduction practically impossible or excessively difficult.’

In my view, there is no such difficulty with fundamental particulars such as the name and address of the supplier and the (correct) identification of the taxable transaction.”

43.	For all the reasons advanced by Mr Puzey, coupled with our finding in Euroserv’s case that it was throughout a fraudulent operation (see paragraph 17 above), we hold the invoices of both suppliers to be invalid as failing materially to describe the supplies made.  
If the invoices were invalid, is Hargreaves entitled to input tax recovery under the “Ellen Garage” principle?
44.	In Ellen Garage, it was held that the fact that a supplier was not registered did not preclude recovery of input VAT even though regulation 13(1) of the Regulations (as it now is) provided that VAT invoices must be provided by registered persons, not taxable persons.  Based on the reasoning in that case, Mr Brown submitted that even were we to hold the Total and Euroserv invoices invalid, Hargreaves still had a right to deduct the input VAT thereon because the suppliers were taxable persons, albeit in Total’s case unregistered, and the supplies were taxable supplies.  
45.	In contrast, Mr Puzey submitted that the decision in Ellen Garage was wrong and should not be followed.  He invited us instead to follow the decision in Masood Ahmed t/a New Touch v Commissioners of Customs and Excise (2007) Decision Number 20119 where, in distinguishing that case from Ellen Garage, the tribunal held that a customer of a taxable person who was not registered was not absolved from the requirement under regulation 29(2) to hold such evidence of the charge to VAT as the Commissioners might direct in the absence of a regulation 13 invoice.  
46.	In Masood Ahmed the tribunal said: 
“76.	The parties agree, as do we, that regulation 29(2)(a) of the VAT Regulations is not in point in the situation where the supplier is not registered, since the taxpayer cannot “…hold the document which is required to be provided under regulation 13” (i.e. a VAT invoice issued by a supplier who is a registered person, being an invoice which satisfies the requirements as to content of regulation 14). Further, it is not surprising that there is no express stipulation in regulation 29 dealing with the position where the taxable person is not registered – by its nature that is a very unusual circumstance which probably arises only where the actions of the supplier are, or are tantamount to, fraudulent. But it seems to us too large a step to say, as the Appellant says, that because there is no express stipulation as to the evidence he must produce as to the VAT charged, he must be entitled to claim a deduction for input tax once he shows the supply has been made. That would be inconsistent with the overall scheme under which taxpayers are permitted to claim a deduction for input tax. That scheme, as it appears from section 24(6) VATA and regulation 29(2), is to permit VAT to be treated as input tax only to the extent that the charge to VAT is evidenced by reference to specified documents or specified other evidence, or by such other evidence as the Commissioners direct. There is no scope within the legislation for anything else, that is, for the taxpayer to claim input tax on some other basis or evidence.
77.	Since regulation 29(2) does not specify a document or other specific evidence in the case of a supply from a person who is taxable but not registered, that situation must be regarded as falling within the proviso to regulation 29(2), so that the taxpayer, in order to claim the deduction, must hold or provide such other evidence of the charge to VAT as the Commissioners may direct – thus the matter is within their discretion. This is an outcome which entirely accords with common sense: given the unusual circumstances of VAT charged by taxable but unregistered persons, it would seem strange if the legislation did not preserve for the Commissioners the right to specify the evidence they required of the charge to VAT but instead gave the taxpayer the right to claim the deduction if he showed the supply was in fact made. That would put such a taxpayer in a better position than his counterpart who has received a supply from a taxable person who is registered, and who must satisfy a specific evidential requirement (holding a valid VAT invoice) or rely on the Commissioners' discretion (and so could not as of right claim the deduction simply by showing that the supply was in fact made).”
47.	The Masood Ahmed tribunal also noted that the Ellen Garage tribunal may have reached its conclusion as to the lack of a direction made in the absence of a regulation 13 invoice based on the evidence adduced (or lack of it), or may have misunderstood the nature of the proviso to regulation 29(2).  But it did “not think the scheme of the legislation permitted the view that [the taxpayer was entitled to succeed in its claims on establishing that the supply had been made]” saying, at paragraph 79 of its decision:
	“79.	The only way in which a taxpayer can claim a deduction for input tax is to satisfy specific evidential requirements which have built into them a measure of discretion conferred on the Commissioners – there is no express or implied default position.  In that respect we would not follow the tribunal’s decision in the Ellen Garage case”.
48.	In the instant case, Mr Puzey observed, Hargreaves had put forward no evidence, other than the invalid invoices, to support the charge to VAT.  He submitted that the decision in Masood Ahmed was consistent with the EU legislation on the subject of input tax recovery.  Article 18(1) of the Sixth Directive provided that a taxable person must hold an invoice drawn up in accordance with Article 22(3) in order to exercise his right to deduct input tax, and Article 22(3)(b) required the nature of the goods to be specified.  That was repeated in regulation 14(1) of the Regulations.  He maintained that it was of central importance that the description be accurate because, if not, it could lead to an incorrect application of VAT, as in the instant case.  Moreover, Member States were entitled to specify requirements for the proof of the right to deduct tax (Reisdorf v Finanzamt Köln-West (Case C-85/95) [1997] STC 180). 
49.	Mr Puzey also maintained that, if a supplier was not registered, it did not absolve its customer from the necessity of showing that a taxable supply had been made.  As the ECJ said in paragraph 24 of its judgment in D A Rompelman and E A Rompelman-Van Deelen v Minister van Financien [1985] ECR 655, [1985] 3 CMLR 202, it was for the taxable person claiming the right to deduct to demonstrate that he had that right:
“24.	As regards the question Article 4 [of the Sixth Directive] … it is for the person applying to deduct VAT to show that the conditions for deduction are met and in particular that he is a taxable person.  Therefore Article 4 does not preclude the Revenue authorities from requiring the declared intention to be supported by objective evidence …”
50.	Further, at paragraph 15 of its judgment in Genius Holding BV v Staatssecretaris van Financien (Case 342/87) [1991] STC 239, Mr Puzey noted that the ECJ held that the mere mention of VAT on invoices did not mean there was an automatic entitlement to deduct:
“15.	According to art 18(1)(a), to exercise his right to deduct, the taxable person must hold an invoice, drawn up in accordance with art 22(3), which requires the invoice to state clearly the price exclusive of tax and the corresponding tax at each rate as well as any exemptions. In accordance with that provision, mention of the tax corresponding to the supply of goods and services is an element in the invoice on which the exercise of the right to deduct depends. It follows that that right cannot be exercised in respect of tax which does not correspond to a given transaction, either because that tax is higher than that legally due or because the transaction in question is not subject to value added tax.”
50.	In relation to the question with which we are dealing, we accept Mr Puzey’s submissions in their entirety and, in particular, agree that the decision in Masood Ahmed is consistent with the EU legislation on the subject of input tax recovery. We therefore propose to follow it.  We hold that Hargreaves is not entitled to recover the input tax paid on the supplies made to it by Euroserv and Total under the Ellen Garage principle, that case having been wrongly decided.
Alternatively, if the invoices were invalid, was the Commissioners’ refusal to allow input tax recovery unreasonable under regulations 29(2) of the Regulations?
51.	Mr Brown submitted that if the Commissioners were satisfied that the transactions in respect of which the deductions were claimed actually took place, they should have exercised their discretion to allow input tax recovery.  He based his submissions on the judgment in Reisdorf and particularly paragraphs 25 – 30 thereof wherein the ECJ said:
“25.	It must therefore be concluded that art 18(1)(a) and art 22(3) of the Sixth Directive permit the member states to regard as an invoice not only the original but also any other document serving as an invoice that fulfils the criteria determined by the member states themselves.

26. 	As regards … the provisions of the Sixth Directive relating to proof of the right to deduct input tax after it has been exercised by a taxable person, it should be noted that, as the German government has rightly pointed out, art 18, in accordance with its heading, deals only with exercise of the right of deduction and does not govern proof of that right after it has been exercised by a taxable person.

27. 	Article 22(2) thus requires every taxable person to keep accounts in sufficient detail to permit application of VAT and inspection by the tax authorities. Article 22(8) adds that member states may impose other obligations which they deem necessary for the correct levying and collection of the tax and for the prevention of fraud.

28. 	Admittedly, art 22 contains no provision specifically governing proof by the taxable person of the right to deduct input tax.

29. 	However, it follows from the provisions mentioned above, conferring on the member states the power to require additional information as regards invoices and to impose any other obligation necessary for the correct levying and collection of the tax and for the prevention of fraud, that the Sixth Directive gives member states the power to determine the rules relating to supervision of the exercise of the right to deduct input tax, in particular the manner in which taxable persons are to establish that right. As indicated by the Advocate General (Fennelly) in paras 26 and 27 of his opinion, that power includes the power to require production of the original invoice when tax inspections are carried out and also, where a taxable person no longer holds it, to allow him to produce other cogent evidence that the transaction in respect of which the deduction is claimed actually took place.

30. 	Accordingly, in the absence of specific rules governing proof of the right to deduct input tax, member states have the power to require production of the original invoice in order to establish that right, as well as the power, where a taxable person no longer holds the original, to admit other evidence that the transaction in respect of which the deduction is claimed actually took place.”

52.	Mr Brown submitted there was adequate evidence to show that taxable supplies had been made by taxable persons.  The Commissioners did not dispute that the supplies were made; indeed they had made assessments to excise duty on them on 5 February 2003.  Those supplies must have been made by a taxable person by virtue of Euroserv having been registered for VAT and / or Euroserv and Total having been liable for registration by virtue of their respective turnovers (sections 3 and 4 of and Schedule 1(1) to VATA).  The Commissioners had acted in a way no reasonable Commissioners could have acted in not exercising their discretion to allow the deduction.  The factors Mr Foster, as assessing officer, listed in the annexes to the assessment letters were irrelevant; he knew taxable supplies had been made by taxable persons.  The consideration for the supplies was the amount shown on the invoices irrespective of the sort of fuel supplied: the VAT shown on the invoices was VAT.
53.	In response to Mr Brown’s claims, Mr Puzey observed that Hargreaves had received supplies of over £1 million of laundered, rebated fuel, with which it fuelled its road vehicles over a period of nine months.  He submitted that the circumstances of those purchases were so suspicious that Hargreaves either knew or should have known that the purchases were not those of legitimate road fuel.  
54.	Mr Puzey accepted that the exercise of the Commissioners’ discretion under regulation 29(2) might be reviewed by the tribunal on supervisory principles (see Kohanzad v Commissioners of Customs and Excise [1994] STC 967 at page 969D – F), but submitted that it was for Hargreaves to establish that the discretion had been exercised in a way in which no reasonable body of Commissioners could have conducted themselves.  The circumstances which the Commissioners considered were set out in the letters of assessment and accompanying annexes: the matters referred to therein led to the Commissioners’ expressed conclusion that Hargreaves had failed to exercise sufficient care and judgment to ensure that it was in receipt of genuine taxable supplies from genuine taxable persons.  Mr Puzey submitted that that conclusion was a proper consideration under regulation 29(2), because if the supplies were not as stated on the invoices, and if the supplier was not as claimed and was not registered, then the principles underlying the VAT system were undermined.  He maintained that the reasons given for the assessments were adequate and, even if not, the assessments were good.  As Arden LJ said in Commissioners of Revenue and Customs v BUPA Purchasing Limited & Another [2007] EWCA Civ 542 at paragraph 45, even if the reasons given for them were inadequate or incomplete, that did not mean that the assessments were bad in law:
“45.	The duty of the Commissioners under public law may be discharged by the provision of the estimates as to input and output tax on which assessment is based.  In other cases it may need supplementary narrative.  Accordingly the fact that VATA refers to input tax and output tax and makes them part of an assessment for the purposes of s73(1) does not mean that VATA treats the reasons required for an assessment as part of the assessment which cannot therefore be changed.”
55.	Mr Puzey further submitted that the tribunal had to consider whether Hargreaves had been properly assessed.  He maintained that the assessments were not capricious, arbitrary, or a spurious guess with all necessary elements missing.  Mr Foster clearly considered regulation 29(2) when drafting the annexes to the assessment letter.   Whether there was a genuine supply by a genuine person was a relevant consideration under regulation 29(2).
56.	We accept that the circumstances the Commissioners considered were, with one exception, set out in the annexes accompanying the letters of assessment.  The exception was the omission of the fact that the supplies were those of laundered, rebated fuel.  Ignoring that omission, which whilst important we do not consider crucial, we hold that Hargreaves failed to exercise sufficient care and judgment to ensure that it received genuine taxable supplies of fuel from taxable persons.  That exercise was particularly important in the instant case for the fuel concerned was not only liable to VAT but also to excise duty, and the VAT was to be calculated on the cost of the fuel and the excise duty thereon.  On the basis of what we consider to be the largely untruthful oral evidence of Mr Sowerby and, in particular, the connections he clearly had with Euroserv and Total, coupled with Hargreaves’ sudden and unexplained cessation of trading with Euroserv immediately following the Commissioners’ visit of 31 October 2001, we are satisfied that the company, through Mr Sowerby, knew or should have known that it was purchasing laundered, rebated fuel.  The Commissioners having carried out the assessment process regularly, reasonably and by making a genuine attempt to calculate the tax due, we hold that the assessments were properly made, and the Commissioners’ refusal to allow input tax recovery was not unreasonable.  
Did Hargreaves lose the right to deduct as being a party to fraud?
57.	Relying on the same factual basis as for his earlier submissions relating to the exercise of the Commissioners’ discretion under regulation 29(2), Mr Puzey submitted that the circumstances of the Total and Euroserv transactions and the information available to Hargreaves led to the view that it knew or should have known that it was purchasing laundered, rebated fuel. Consequently, he contended that Hargreaves had lost the right to deduct tax having allowed itself to become a party to the fraud. 
58.	He placed reliance on the judgment of the ECJ in Axel Kittel v Belgian State [2006] EU ECJ, Case C-439/04 and, in particular, on paragraph 56 thereof.  The whole of the relevant part of that judgment extends from paragraphs 49 to 61, and we proceed to cite it: 
 “49.	The question whether the VAT payable on prior or subsequent sales of the goods concerned has or has not been paid to the Treasury is irrelevant to the right of the taxable person to deduct input VAT (see, to that effect, the order of the Court in Case C-395/02 Transport Service [2004] ECR I-1991, paragraph 26). According to the fundamental principle which underlies the common system of VAT, and which follows from Article 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components (see, inter alia, Case C-98/98 Midland Bank [2000] ECR I-4177, paragraph 29; Case C-497/01 Zita Modes [2003] ECR I-14393, paragraph 37; and Optigen, paragraph 54).

50.	In that context, as the referring court observed, it is settled case-law that the principle of fiscal neutrality prevents any general distinction between lawful and unlawful transactions. Consequently, the mere fact that conduct amounts to an offence does not entail exemption from tax; that exemption applies only in specific circumstances where, owing to the special characteristics of certain goods or services, any competition between a lawful economic sector and an unlawful sector is precluded (see, inter alia, Case C-158/98 Coffeeshop 'Siberië' [1999] ECR I-3971, paragraphs 14 and 21, and Case C-455/98 Salumets and Others [2000] ECR I-4993, paragraph 19). It is common ground, however, that that is not the case with either the computer components or the vehicles at issue in the main proceedings.

51.	In the light of the foregoing, it is apparent that traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT (see, to that effect, Case C-384/04 Federation of Technological Industries and Others [2006] ECR I-0000, paragraph 33).

52.	It follows that, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller, causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

53.	By contrast, the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity' are not met where tax is evaded by the taxable person himself (see Case C-255/02 Halifax and Others [2006] ECR I-0000, paragraph 59).

54.	As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I-5337, paragraph 76). Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C-367/96 Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C-373/97 Diamantis [2000] ECR I-1705, paragraph 33; and Case C-32/03 Fini H [2005] ECR I-1599, paragraph 32).

55.	Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (see, inter alia, Case 268/83 Rompelman [1985] ECR 655, paragraph 24; Case C-110/94 INZO [1996] ECR I-857, paragraph 24; and Gabalfrisa, paragraph 46). It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends (see Fini H, paragraph 34).

56.	In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods. 

57.	That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.

58.	In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.

59.	Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity'.

60.	It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void - by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller - causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”
59.	Mr Puzey observed that there was nothing in the Kittel judgment to the effect that the principle applied only to MTIC (Missing Trader Intra-Community)/carousel fraud; indeed, the ECJ had made similar statements in relation to fraud and the necessity to prevent fraud in cases such as Optigen and others v Commissioners of Customs and Excise  [2006] ECR I-483 and Federation of Technological Industries and others v Commissioners of Customs and Excise [2006] ECR I-4191.  In any event, Euroserv was, in fact, a missing trader and Total Butler Ltd’s identity had been hijacked by a criminal conspiracy from which it might or might not have been possible to recover some of the tax lost.  However, that fact should not prevent the UK authorities from seeking to recover tax wrongly reclaimed by Hargreaves.  
60.	In Mr Puzey’s submission, the following matters demonstrated knowledge or constructive knowledge on the part of Hargreaves of the true nature of the supplies it was receiving:
a)	Mr Sowerby was a director of the Hargreaves Group representative company at the relevant times and his responsibility for all fuel purchases meant that Hargreaves could be fixed with the same degree of knowledge as him;
b)	He ignored the test results indicating the presence of markers in purchases from Euroserv;
c)	He wrote out invoices to Hargreaves from Euroserv without question;
d)	He provided no details of the persons he dealt with at Total or Euroserv;
e)	He made no background checks on either supplier, and considered his sole responsibility to be to buy the cheapest fuel available; 
f)	He made numerous telephone calls to a principal in the Total conspiracy, Gary Owens, and his own telephone number was in the diary of John Desmond, another such principal; and
g)	There was no evidence of a normal business relationship between Hargreaves and the two suppliers.  Supplies from Euroserv ceased for three months directly after Customs’ visit to Mr Sowerby on 1 November 2001.
61.	Whilst the Commissioners accepted that they bore the burden of proving that the goods supplied were loads of laundered, unrebated fuel, (i.e. that there was a fraud), Mr Puzey also submitted that the burden of proving that Hargreaves was not aware of the fraud, either constructively or otherwise, fell upon the company (see paragraph 114 in the tribunal decision of Dragon Futures v Commissioners of Customs and Excise (2005) Decision Number 19186).
62.	The “means of knowing” principle applied by the ECJ in Kittel and Optigen was, in Mr Brown’s submission, subject to the principles of certainty, proportionality and fiscal neutrality (Dragon Futures paragraph 73).  The Commissioners knew the identity of the missing traders and had prosecuted them (or had attempted to do so).  In those circumstances, he contended that it was disproportionate to apply the Kittel principle as the output tax on the supplies should have been sought from those persons either by way of a confiscation order for those convicted of a criminal offence (Criminal Justice Act 1988, as amended), or by assessing the supplier for output tax on the supplies and recovery of the amount by way of civil recovery.  In any event, he maintained, the principle in Kittel thus far only applied in carousel fraud case, should be confined to such cases.  The assessments were contrary to the principle of fiscal neutrality if the Commissioners had obtained, or were in the process of seeking, or could have sought, confiscation orders from those convicted as the profits on which the orders were based must include an element of evaded output tax on the supplies (Criminal Justice Act 1988, as amended).  In any event, he submitted, Hargreaves did not know, nor ought it to have known, that by its purchases it was participating in transactions connected with the fraudulent evasion of VAT by another person.  The supplies took place in 2001 and 2002, before any guidance was issued by the Commissioners in respect of making checks on suppliers or customers, and the cases of Kittel and Optigen were before the courts.  Hargreaves should be judged by the law, custom and practice at the relevant time.
63.	In Calltell Telecom Ltd and another v Commissioners of Revenue and Customs (2007) Decision No 20266 – an MTIC fraud decision not cited to us – the tribunal observed at paragraph 59 of its decision that in Kittel the ECJ appeared to have concluded that the VAT which a trader participating in or knowing of a fraud claims to deduct as input tax remains input tax, even if the transaction itself is fraudulent, but the right to deduct is lost.  The tribunal derived that conclusion from the ECJ’s reasoning in paragraph 50 of its judgment, and the repeated references thereafter to the loss of the right to deduct and the tax authority’s ability to refuse to allow deduction.  It also noted that the right to deduct applies only to input tax, and that there can be no right, within the meaning of the VAT directives, which a fraudulent trader might lose to deduct something which is not input tax – a conclusion consistent with the fiscal neutrality of the VAT system.  The tribunal continued:
“59.   … The court did not indicate that the right to deduct is lost only to the extent of the tax lost, nor that it might be regained to the extent that the tax authority is able to recover the tax lost by assessing another trader who is able to and does pay. On the contrary, the indications of the judgment are that a trader, with the requisite knowledge, who enters into a transaction of the kind under consideration forfeits the entire right to deduct regardless of the measure of the tax lost, and (as paragraph 58 suggests) that that outcome is desirable as a means of discouraging fraud. The question, therefore, is whether the loss of the right to deduct is properly to be regarded as a penalty, either to the extent that the value of the lost right exceeds the tax loss elsewhere, or to the extent that it is not regained when tax originally lost elsewhere is recovered.”
64.	Having concluded that the right to deduct was not to be regarded as a penalty, the tribunal proceeded on the assumption that for the right to be lost there must be some actual loss of tax.  It dealt with the questions of certainty and proportionality thus:
“63.	We should, lastly, deal with Mr Patchett-Joyce’s [counsel for Calltell] arguments that the Commissioners’ approach offended the principles of legal certainty and of effectiveness, and could not be reconciled with the rights to the peaceful enjoyment of property and to pursue a lawful trade. The first argument was dealt with comprehensively by Burton J in Just Fabulous [v HMRC [2007] EWHC 521 (Admin)]. At [45] he said “The principle of legal certainty must be trumped by the ‘objective recognised and encouraged by the Sixth Directive’ (paragraph 54 of the judgment in Kittel) of preventing tax evasion, avoidance and abuse.” We respectfully agree.
64.  	For the second argument, Mr Patchett-Joyce relied on the comment of the Court of Justice in Weber’s Wine World Handels-GmbH (Case C-147/01) [2005] All ER (EC) 224, at paragraph 118, that “the principle of effectiveness precludes national legislation or a national administrative practice which makes the exercise of the rights conferred by the Community legal order impossible in practice or excessively difficult.” We agree with Mr Cunningham [counsel for the Commissioners] that the argument is, for practical purposes, indistinguishable from the requirement, advanced by the court in Garage Molenheide and others v Belgium (Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96) [1998] STC 126, that measures which are adopted in order to protect the revenue must be proportionate, and must go no further than is necessary to achieve their objective. In our view this argument, too, is misconceived. The very question we must determine is whether, applying the court’s own jurisprudence, the Appellants have the right which they claim. If they do not, these principles cannot assist them. If they have the right, the Respondents accept that they cannot impede their exercise of it.
65.	Although Mr Patchett-Joyce put forward separate arguments relating to the rights to the peaceful enjoyment of property and to pursue a lawful trade, they are in our view, in the context of this case, the same thing put in different words. He relied on what was said by the European Court of Human Rights at paragraph 38 of its judgment, delivered on 9 January 2007, in Intersplav v Ukraine (Application no. 803/02):
‘In the Court’s view, when the State authorities possess any information about abuse of the VAT refund system by a concrete entity, they can apply appropriate measures to prevent or stop such abuses. The Court cannot, however, accept the argument about a general situation with the VAT refunds advanced by the Government, in the absence of any indication of the applicant’s direct involvement in such abusive practices.’
66.	That passage, he said, made it clear that only direct involvement is sufficient to deprive a trader of his right to deduct input tax he has incurred. The Commissioners’ approach, he continued, acted as a deterrent to legitimate trade and was a brake on the free movement of goods, a cardinal principle of Community law. We reject that argument. If the Commissioners are right that the Appellants knew, or had the means of knowing, that the transactions in which they engaged were tainted by fraud, they were not legitimate transactions and measures which were designed to prevent them, or to negate their effect, could not offend any of the relevant principles, which protect only legitimate trade. And, again, if we find that the Commissioners are wrong, the Appellants’ right to deduct is unimpeded. If by “direct involvement” the court meant to indicate that only those transactions in which the trader concerned participated with a view to securing a dishonest benefit for himself may properly be affected by any power to deprive the trader of the right to deduct—an inference we do not draw—there is, or may be, a conflict between the ECHR and the Court of Justice. We do not, ourselves, think there is any such conflict—in our view “direct involvement” is sufficient to include cases in which the trader had the means of knowing that he was participating in an abusive transaction—but if there is, we must apply the binding jurisprudence of the Court of Justice in preference to the persuasive guidance of the ECHR. And it is quite impossible to accept that the principle of the free movement of goods encompasses abusive movement.”

65.	There is nothing in the Kittel judgment to the effect that the principle that a taxable person who knew or should have known that by making a purchase he was taking part in a transaction connected with the fraudulent evasion of VAT must be regarded as a participant in that fraud is confined to MTIC fraud cases; and, in the absence of any such indication, we are not prepared to accept that it is so confined.  Similarly, we take the view that the decision of the tribunal in Calltell Telecom is not confined to such cases and, accepting the correctness of those parts of it we have cited, we adopt them.
66.	We accept that the transactions in point in the instant case occurred before the Commissioners provided detailed guidance to traders dealing in goods which were usually the subject of MTIC fraud, but do not consider that fact to be of any assistance to Hargreaves.  The company was involved in the purchase of rebated, laundered fuel as late as 2000, when 70,000 litres were seized from it.  If it was an innocent party to the transactions, one would have expected it immediately to have put in place adequate checks to ensure that it did not repeat the error.  Clearly, it did not do so. In purchasing fuel from both Euroserv and Total it dealt with suppliers with which it had never previously dealt, took no steps whatsoever to check on their commercial standing, their trading history or the way in which they conducted their operations and, very importantly, carried out no checks on their VAT registrations with the Commissioners.  As we have already found, Hargreaves knew, or should have known, that by its purchases it was participating in transactions connected with the fraudulent evasion of VAT by Euroserv and Total: to adopt the language of the ECJ at paragraph 51 of its judgment in Kittel, it failed to take every precaution which could reasonably be required of it to ensure that its transactions were not connected with fraud.
67.	Consequently, in our judgment, Hargreaves lost the right to deduct the VAT it paid to Euroserv and Total on the fuel it bought as being a party to the fraudulent evasion of VAT perpetrated by them: the tax it paid was input tax, but cannot be deducted.
Were the supplies illegal and thus not liable to VAT?
68.	Against a background of the ECJ having held that exemption from VAT arises where drugs are illegally imported and supplied and counterfeit currency is supplied, Mr Puzey submitted that laundered, rebated fuel, fell into the exemption as there was a general prohibition on its use for road vehicles in EU law, and the laundering process was by definition an illegal activity similar to the counterfeiting of currency.  In reliance on the headnote to the Fischer v Finanzampt Donaueschingen Case C-283/95 [1998] STC 708 case, he contended that the supplies were illegal ab initio.  That headnote reads:
“(1)	The only unlawful activities which did not give rise to any liability to VAT were ones relating to products such as illegally imported or supplied narcotic drugs or counterfeit currency which had special characteristics such that their release into the economic and commercial channels of the Community was by definition precluded and could give rise only to penalties under the criminal law, so that they were wholly alien to the Sixth Directive. Betting and gambling transactions did not, as such, fall outside the Sixth Directive.

(2) 	Outside those cases where all competition between a lawful and unlawful economic sector was ruled out, the principle of fiscal neutrality precluded a generalised distinction from being drawn in the levying of VAT between lawful and unlawful transactions.”

69.	Further, Mr Puzey added, Directive 98/70/EC prohibited the distribution or sale for use within the European Community of DERV with a sulphur content greater than 350mg/kg.  Furthermore, Member States were required to make such use an offence (see the Recital to and Articles 1 and 3 of Directive 98/70/EC).  Neither UK law nor EC law permitted the use of rebated fuel as road fuel; all competition between fuel launderers and genuine fuel distributors was prohibited.  Thus, in Mr Puzey’s submission, the supply of laundered fuel was not an activity subject to VAT because it was by definition illegal throughout the EU.  An example of a case in which that conclusion was reached (in relation to counterfeit money) was Witzemann v Hauptzollamt Munchen-Mitte Case C-343/89 [1993] STC 108, where the Advocate-General (Jacobs) said at paragraph 10 of his opinion:
“10.	Not every transaction tainted with illegality will be exempt from taxation.  A line must be drawn between, on the one hand, transactions that lie so clearly outside the sphere of legitimate economic activity that, instead of being taxed, they can only be the subject of criminal prosecution and, on the other hand, transactions which, though unlawful, must none the less be taxed, if only for the sake of ensuring, in the name of fiscal neutrality, that the criminal is not treated more favourably than the legitimate trader.”
70.	At paragraph 23 of his opinion in Goodwin and another C3/97 [1998] STC 699), the Advocate General (Leger) pointed out that counterfeiting was a plague which caused serious damage to lawful commercial activities and against which the Community had sought to guard itself.  But even now, Mr Puzey observed, a finding that counterfeiting was illegal could only come about at Community level if the holder of the flouted right took action.  As Advocate-General Leger added in paragraph 26 of his opinion in Goodwin:
“26.	… counterfeit goods, such as the perfumes at issue, are not unlawful at Community level by reason of their inherent characteristics.  They can only be prohibited if it is proved that they infringe a valid property right.  As the Commissioners have pointed out, the marketing of such products could at most be subject to a conditional prohibition but not, as in the case of narcotics or counterfeit currency, wholly banned.”
The rebated fuel in point in the instant case was, in Mr Puzey’s submission, to be treated in the same way as counterfeit currency.
71.	In contrast, Mr Brown submitted that exemption from VAT applied only where competition between a lawful and an unlawful economic sector was precluded (Staatssecretaris van Financiën v Coffeeshop Siberië vof (Case C-158/98) [1999] STC 472).  He maintained that rebated fuel was not a type of good to which the exemption from VAT due to the preclusion of competition between lawful and unlawful sectors applied.  Possession of the goods did not constitute a criminal offence (R v Goodwin and Unstead [1997] STC 22); and the principle of fiscal neutrality prevented the existence of any general distinction between lawful and unlawful transactions (Coffeeshop Siberie).
72.	In Mol v Inspecteur der Invoerrechten en Accijnzen (Case 269/86) [1988] ECR 3627, where the ECJ had to decide whether narcotic drugs were exempt from VAT as being illegally supplied, Advocate-general Mancini considered at page 3642 paragraph 4 that:
“In my view that factor [the international commitments assumed by all member states to ban the importation and marketing of narcotic drugs] is of great relevance to these two cases. [The reference to two cases was to the fact that the Court of Justice heard Vereniging Happy Family v Inspecteur der Omzetbelasting (Case 289/86) [1988] ECR 3655 at the same time that it heard the Mol case, both cases raising the same issue.] By bringing the two prohibitions together, in fact, the Court seems to consider that drugs fall outside lawful economic channels in the various Member States. The fact that drugs are physically present in the Member States because they are manufactured domestically rather than being imported has no significance; in both cases … what is decisive is that they may not be “integrated into the economy of the Community”.
73.	The ECJ determined that such drugs were not subject to VAT their supply being forbidden by law, saying:
“18. 	It must be acknowledged that the principle of fiscal neutrality does in fact preclude, as far as the levying of value-added tax is concerned, a generalized differentiation between lawful and unlawful transactions. However, that is not true in the case of the supply of products, such as narcotic drugs, which have special characteristics inasmuch as, because of their very nature, they are subject to a total prohibition on their being put into circulation in all the Member States, with the exception of strictly controlled economic channels for use for medical and scientific purposes. In a specific situation of that kind where all competition between a lawful economic sector and an unlawful sector is precluded, the fact that no liability to value-added tax arises cannot affect the principle of fiscal neutrality.” 
74.	In Witzemann, the ECJ decided that the same approach should be applied to counterfeit currency as had been applied to narcotic drugs in Mol. 
75.	In R v Goodwin and Unstead [1997] STC 22, a case concerning counterfeit perfume, Roch LJ giving the judgment of the Court of Appeal relied on the judgment in Mol in saying (at page 30):
“In our judgment, the Court of Justice has laid down clear principles by which to answer the question on which side of the line do goods under consideration fall? If the goods are subject to a total prohibition on their being put into circulation because of their intrinsically harmful nature, if all competition between such goods in the law economic sector and such goods in an unlawful economic sector is precluded, such goods are not liable to VAT. That immunity from VAT cannot affect the principle of fiscal neutrality.
The key is the total ban: the fact that such goods, even in the hands of the ultimate consumer or user give rise to sanctions under the criminal law.”
76.	Applying the clear principles laid down by the ECJ in Mol to which the Court of Appeal referred, since the supply and use of laundered, rebated fuel is illegal throughout the EU, and all competition between fuel launderers and genuine fuel distributors is prohibited, in our judgment such products fall on the same side of the line referred to in Mol as do narcotic drugs and counterfeit money so that they are outside the scope of VAT.  As the Court of Appeal observed, that immunity from VAT cannot affect the principle of fiscal neutrality.
Summary
77.	It follows that we dismiss the appeal in its entirety.  We direct Hargreaves to pay the Commissioners’ costs of and incidental to and consequent upon the appeal, such costs to be calculated on the standard basis and to be assessed by a Costs Judge of the High Court in the event of their not being agreed.

DAVID DEMACK
CHAIRMAN
Release Date: 3 October 2007
MAN/03/0729