The High Court is still pondering an appeal brought by HM Revenue and Customs (HMRC) after its fraud claims against mobile phone trader Livewire were thrown out.

In the original ruling (CRN, 4 February 2008), HMRC was ordered to pay back all the withheld VAT that it had secluded under its unpopular ‘Extended Verification’ strategy, aimed at stopping VAT fraud in the UK. But after lodging an appeal with the High Court, the case has dragged on a further year.

If the appeal is dismissed, it is a much-needed shot in the arm for the hundreds of innocent traders that have been crippled by the government’s anti-fraud crackdown. It also means that the government will have to cough up some of the money it has been holding onto for more than three years.

However, even if the appeal is successful, traders will at least know where they stand and can prepare for the next stage of their fight against HMRC.

Don Mavin, head of tax disputes and litigation group at Vantis, wrote a comment piece at the end of last year, discussing the potential outcome of the case. It is printed in full below.

"The High Court has been considering the appeal brought by HMRC against the victory secured by Livewire Telecom Ltd in the VAT Tribunal in January 2008. Clearly, whatever the outcome, the fine print of Mr Justice Lewison’s judgement will be studied closely by both sides. There has already been a degree of speculation as to potential outcomes and likely ramifications. The truth is, however, that speculation is all there can be at this stage.

"No-one knows when the judgement will be handed down – although various estimates have been circulated. If the High Court chooses to uphold the tribunal decision of Dr Avery-Jones, Livewire will expect to receive the remainder of its withheld VAT plus interest and repayment supplement, but we think it unlikely that there will be the rapid repayment of withheld and denied VAT to other traders predicted by some advisers.

"HMRC will inevitably wish to review those cases which it considers to be similar in fact and law to Livewire. It would, therefore, be in the interests of any companies currently awaiting the Livewire result to ensure that their cases are prepared to a sufficiently advanced stage to enable any negotiations with HMRC to be conducted from a position of strength.

"Clearly, even if it loses its appeal, HMRC will be unlikely to countenance making any repayments unless another, similarly affected trader, is in a position to show by way of compelling evidence that its case is on all fours with any positive finding from Mr Justice Lewison. But it would be foolish to underestimate the determination of HMRC to avoid making repayments of enormous sums of VAT, and it will already have been at work drafting plans for every possible contingency. It may well be that there is further litigation still to come, and companies and their advisers must make their preparations accordingly.

"Another question often asked is: 'What if HMRC loses and decides to take the case to the Court of Appeal?' Again, there is little to be gained in speculating. A lot will depend on how much room – if any – HMRC is given in the High Court judgement to apply to take the matter further. It is possible the Livewire case may possibly travel as far as the House of Lords, but it is unlikely to be referred to the European Court of Justice (ECJ). The ECJ judgement so close to HMRC’s heart – that of Axel Kittel et al (C-439 and C440/04) – clearly states that it is for the national court to decide in individual cases whether or not a trader should be denied its input tax.

"Early feedback from sources close to HMRC seems to indicate that preparations are already underway for a review of current MTIC policies and procedures as they relate to so-called “means of knowledge” cases, and it is more than likely that 2009 will herald a different approach to compliance and enforcement by HMRC in relation to traders which they consider to be involved in high-risk “MTIC” trading activities.

"As far as the immediate future is concerned, however, the good news for those victims of HMRC’s current policies is that any future litigation will be conducted against the background of a binding High Court authority, based upon the events which unfolded in the Strand this week. Whatever the result, the Livewire High Court judgement will crystallise and clarify many of the ambiguities and inconsistencies associated with this type of litigation and the landscape will be much more clearly defined."