HMRC loses final VAT appeal against trader

Mobile phone trader Brayfal Limited is set to get its withheld VAT repaid along with court costs after six-year legal battle

An HM Revenue and Customs (HMRC) appeal against a mobile phone trader has been thrown out of court after a lengthy legal battle.

Brayfal Limited, which was set up in 1985, had a seven-figure VAT repayment held up by HMRC more than six years ago under its Extended Verification process, after the government alleged it was caught up in VAT carousel fraud and claimed it "knew or should have known" that its transactions were connected with fraud.

Together with legal firm Dass Solicitors, Brayfal finally triumphed this week, after Mr Justice Lewison, sitting as a judge of the Upper Tribunal, ruled that the firm was unaware of any fraudulent activity in its chain of sale. The ruling follows a tribunal hearing, which also ruled in favour of the trader, but which was appealed by HMRC.

Brayfal’s case was similar to that of fellow trader Blue Sphere Global Limited, which bought a consignment of mobile phones from a contra-trader that had been involved in a fraudulent chain known as a "dirty chain". But Blue Sphere exported the phones in a "clean chain", paying all the duties required. HMRC was ordered to pay Blue Sphere back its money.

However, another landmark case, that of trader Mobilx vs HMRC, saw the government win its appeal against the trader, claiming it "should have been aware" of fraud in its chain. HMRC kept the £7m in VAT it had withheld from the company.

Robert Holland, associate solicitor at Dass, who was acting on behalf of Brayfal, told CRN the victory will make it more difficult for tribunal judges to just rule in favour of HMRC. “It will pose problems for tribunal judges, because even if they prefer Mobilx over Blue Sphere and Brayfal, it will be held up to a court of appeal and they will know it is not a clear-cut case.”

In his ruling, Justice Lewison said: “The way in which the members formulated their conclusion imposed a higher burden on Brayfal than they should have done. They found that Brayfal had proved it did not have actual knowledge or the means of knowledge, whereas we now know from Mobilx that the burden of proof lies on HMRC to prove that Brayfal did have knowledge or the means of knowledge. The appeal must be dismissed.”

In a statement, HMRC said: “HMRC is considering the judgement in full.”

Anthony Elliot-Square, managing director of the International Phone Traders web site, said: “This is a very important case. HMRC may appeal again just to delay payment and squander more taxpayers’ money. Let's hope not.

“This whole situation urgently needs an independent inquiry, with proper legal thought. I would urge any trader caught up in the extended verification process to put pressure on their MP and get them to raise the issue with the Treasury. This is hardly the right approach to helping the economy grow."