VAT fraud: no other reasonable explanation hurdle

The Tax Appeals Commission has published a significant decision regarding the right to a defence under EU law. The case concerned a Notice of Assessment disallowing VAT inputs of €6.5m claimed by the Appellant over a number of years. The Notice of Assessment was issued following a lengthy investigation by the Revenue into VAT fraud, which formed the basis of the Revenue's contention that the taxpayer knew or should have known that the transactions to which the VAT inputs related were connected to VAT fraud.

The taxpayer appealed the assessment on two grounds:

1. That their right to a defence under EU law was violated; and
2. That Revenue had made an incorrect finding that they knew or should have known that they were involved in transactions connected with the fraudulent evasion of VAT. 

1. Right to a Defence

The taxpayer argued that Revenue had acted in breach of their right to a defence under the EU Charter of Fundamental Rights ('Charter'). This was based on the fact that although the Revenue had made its determination following a lengthy and extensive investigation into the affairs of the taxpayer, it had nevertheless failed to provide the taxpayer with access to the information and documentation upon which its conclusions were based prior to the issuance of the Notice of Assessment. This was in spite of the taxpayer's request for a right of reply to the allegations before the raising of the assessment. Therefore, the taxpayer was not afforded the opportunity to address the allegations against it before the Assessment was raised, contrary to the CJEU precedent in Glencore Agriculture Hungary Kft. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (the "Glencore" case).

Although the facts underpinning the taxpayer's appeal were not in dispute, Revenue nevertheless sought to make several arguments:

Jurisdiction

The Revenue argued that the taxpayer did not take an appeal to the courts to declare the assessment a nullity and had instead (with the benefit of legal advice at all relevant times) opted to use the mechanisms of the Tax Appeals Commission which are premised on the existence of a valid assessment. Here the Revenue in effect called into question the jurisdiction of the Tax Appeals Commission to deal with questions of administrative law, even though in an earlier meeting it had informed the taxpayer that it would be a matter for the appeals commission. It is worth noting that in Ireland, the general position is that only the High Court (subject to appeal to the Court of Appeal and/or the Supreme Court) has power of judicial review of administrative acts. However, the Commissioner relied on the fact that the Finance (Tax Appeals Act) 2015 empowers the Tax Appeals Commission to both hear and determine appeals under Irish VAT law, which in turn is governed by EU law. The Commissioner also pointed to the following cases which established a duty on all bodies dealing with disputes to apply EU law and the Commission's jurisdiction to apply it:

a. Commissioner of An Garda Síochána v Workplace Relations Commission [2018] CJEU C-378/17
b. Banco de Santander SA [2020] CJEU C-274/14
c. An Taisce v An Bord Pleanála [2020] IESC 39

In the Workplace Relations Commission case, the CJEU found that all organs of the state had an obligation to enforce EU law. The Santander judgement further clarified that this obligation applied to all competent national authorities when making decisions, not only judicial authorities. The judgement in the Workplace Relations Commission case was considered by the Supreme Court in the An Bord Pleanála case, which commented that:

"It would therefore seem to be the case in accordance with this judgment that a body such as An Bord Pleanála would be required to disapply national measures of whatever type, if inconsistent with EU principles... If applied literally, that judgment is capable of having widespread ramifications for the jurisdiction of national non-court bodies, or administrative entities, which are called upon to apply national legislation where an EU measure is relevant. Such bodies, under whose remit EU rights may arise, include the Environmental Protection Agency, the Tax Appeals Commission, the Valuation Tribunal, the Refugee Appeals Commission, the Information Commissioner as well as the District and Circuit Courts."

Finally, in an obiter dictum to Lee v the Revenue Commissioners [2021] IECA 18 Murray J stated that:

If a taxpayer wishes to contend that the application of a particular provision of the TCA breaches EU law, then the Appeal Commissioners must address that contention if it is relevant to the matter with which they are seised and, if it is appropriate and necessary to do so to decide that case, to disapply the provision or otherwise exercise their powers so as to ensure that EU law is not violated. The same principle dictates that the Appeal Commissioners may entertain claims based upon the doctrine of abuse of rights in European law. These principles derive from the mandates of European law. Neither expand the jurisdiction of the body as a matter of national law.

While acknowledging that those remarks were obiter and concerned the predecessor to the Tax Appeals Commission, the Commissioner concluded that the Commission has jurisdiction to apply the doctrine of "abuse of rights" based on the precedent set in the Glencore case. Here, the Commissioner was satisfied that the taxpayer's claim was grounded on such a doctrine.

Taxpayer's rights were not breached

The Revenue argued that the taxpayer's rights under EU law were not breached, because the VAT assessment was not a "final decision" which adversely affected the rights of the taxpayer, but was rather a step in a wider process which the taxpayer "was invited to engage with". In support of this argument, the Revenue referred to the email enclosing the Notice of Assessment which invited the taxpayer to reply to the findings made against it. This argument was rejected by the Commissioner, who found that the "raising of the assessment against the Appellant was not a neutral step in a process of engagement between the parties, but was the culmination of the Respondent's investigation into the Appellant." Therefore any right to information and to present a defence arose before the issuance of the Notice of Assessment.

The Commissioner considered that the CJEU's jurisprudence on the right to defence in VAT cases such as this one was clear, citing the decision in WebMindLicenses Kft v Nemzeti Adó- és Vámhivatal Kiemelt Adó- és Vám Főigazgatóság Case C-419/14 ("WebMindLicenses") where it was held that the taxpayer must have the opportunity "in the context of the administrative procedure, of gaining access to that evidence and of being heard concerning it." Such an opportunity was not presented to the taxpayer here and therefore, their right to defence was breached. Furthermore, the Commissioner noted that Revenue is required to respect the rights protected by the Charter when implementing EU law (such as in this instance) and are also obliged to interpret national measures in conformity with the Charter whenever they come within the scope of EU law.

Disclosure not necessary

The Revenue also sought to argue it should not be required to provide the taxpayer with a file containing the evidence against them because all the information relevant to the matter was contained in the taxpayer's own records. While the Commissioner accepted that the vast majority of the information relevant to the Notice of Assessment originated from the taxpayer, he found that this did not disapply the Revenue's obligations towards the taxpayer under the Glencore Agriculture Hungary judgement.

Placing the burden on the taxpayer to guess what information the Revenue intended to rely upon, from the entirety of its documents, would be contrary to the CJEU decision in Glencore Agriculture Hungary that "the requirement [...] for a person to be able to make his views known as regards the evidence on which the authorities intend to base their decision means that the addressees of that decision must be in a position to be aware of that evidence". Therefore, Revenue had an obligation to provide the file of evidence upon which it sought to rely. The CJEU did hold that a tax authority can restrict access to information and documents if 'objectives of public interest' warrant it, however the Commissioner was satisfied that no such objectives were invoked by Revenue in this instance.

The Commissioner therefore found in favour of the taxpayer that the assessment was invalid based on the "abuse of rights" principal.

2. Revenue finding was incorrect based on the facts

Despite allowing the appeal based on the abuse of rightsprincipal, the Commissioner set out what its finding would have been had it not made that decision. Having reviewed the extensive evidence offered by both parties, it reached the conclusion that the Revenue had failed to demonstrate that the taxpayer "knew or should have known", that the transactions it had entered into were likely fraudulent in nature, in line with the test in the CJEU decision in Axel Kittel v État belge Case C-439/04 ("Kittel").

In Mobilx Limited (in administration) v Revenue and Customs Commissioners [2010] STC 1476 ("Mobilx Limited"), the English Court of Appeal stated inter alia that:

"The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who 'should have known'. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel."

The Revenue did not allege actual knowledge of the fraud on the part of the taxpayer, rather that they 'ought to have known,' based on a cumulative consideration of the totality of the relevant facts. The Revenue submitted that objective evidence of what occurred included traders newly registered for VAT accumulating huge sales, on atypical credit terms, failing to pay VAT, and disappearing, following significant disruption to the market. It was argued that this provided more than enough warning to a person prepared to look at the evidence. Furthermore, it was submitted by Revenue that the applicants had not taken sufficient due diligence steps prior to commencing business with the fraudulent traders.

The taxpayer argued that there was no objective evidence before the Commissioner to demonstrate non-payment of VAT by anyone, or the connection between that non-payment and the commission of a fraud. The taxpayer had no way of establishing whether or not the suppliers accounted for VAT and no way of establishing whether their failure to do so was as a result of fraud.

The Commissioner made a number of findings of material fact and determined that the taxpayer had carried out a degree of due diligence for the traders, including sourcing IDs, proof of address' and certificates of registration and incorporation where applicable. However, the Commissioner was not satisfied that the taxpayer demonstrated the expected care in its due diligence of the missing traders, especially given the heightened risk of fraud arising from the frequently transitory nature of their trading.

Notwithstanding the insufficient due diligence carried out, the Commissioner determined that there was no clear evidence that the taxpayer knew or ought to have known that its transactions were connected with VAT fraud or that there was VAT fraud present in the particular industry. External industry factors made it reasonable for the taxpayer to deal with the missing traders rather than established traders in the market in an attempt to make a more substantial profit. The Commissioner had regard to the dictum of Arden LJ in Davis and Dann Limited where it was noted that the level of knowledge required for 'ought to have known' was 'the no other reasonable explanation standard'. The Commissioner was satisfied that Revenue had not shown that the taxpayer met this hurdle in this instance.

Conclusion

The most significant aspect of this decision is the Commissioner's willingness to accept arguments based on EU law. As Irish VAT law is based on an EU directive, the Tax Appeals Commission is obliged by judgements of the CJEU to implement EU law, including the "abuse of rights" doctrine. It is no surprise therefore that the Revenue have appealed the decision to the High Court, which will be an interesting case to watch.

From the taxpayer's point of view, this was clearly a good outcome. While the Revenue have appealed the decision to the High Court, the Commissioner has set the bar to overturning the decision in full very high. Given that the appeal was allowed on both procedural and factual grounds, it is unlikely that the High Court's ruling will adversely impact the taxpayer.

It is worth considering how EU law might impact appeals over direct tax assessments. At present, the majority of Irish direct tax legislation is domestic in its origination. However, the EU's influence on Irish direct tax has steadily increased over time, including the Mutual Assistance and Anti-Tax Avoidance Directives. Of particular note, Pillar Two model rules, arguably the most radical change to the Irish corporation tax system since the 1990s, will be implemented through an EU Directive. Unless the Courts rule otherwise, it is likely that taxpayer rights under EU law will feature in direct tax cases in years to come.