In Norwich Airport Ltd v Revenue & Customs [2012] UKFTT 277 the Tribunal found that VAT was payable by an airport operator in respect of a levy imposed on departing passengers. The purpose of the levy was to raise funds to enable the airport operator to carry out improvements and enhancements to its infrastructure and passenger facilities at the airport. While the Tribunal found that there was not a relevant nexus between the levy and the improvement works, there was a relevant nexus between the levy and the ability to pass through the gates (permitting access) and to proceed through the security check and thereafter be in a position to take the flight. As permitting access to land is a supply, that supply was subject to VAT.
The case provides an analysis of the “nexus” rules in the UK, which require a “direct” nexus between supply and consideration. In finding that there was not a sufficient nexus between the levy and the improvements to the airport, the Tribunal stated:
There was no direct link because the benefit of the improvement words would be for airlines and passengers generally and the payment of the levy by each individual passenger had no direct relationship to the level of benefit, if any, he might receive. A person could pay the levy and never use the airport again and therefore entirely fail to benefit from any of the improvements. As a matter of English law, there was not even a contract for the improvement works because the explanation of what the ADF would be used for was no more than a statement of intent by NAL and far to vague to amount to an enforceable contract with the passengers paying the ADF.
The above statement has some similarities to the Commissioner’s approach to Funding Arrangements in GSTR 2011/D4, where the existence of a “sufficient connection” between the payment and some action to be taken by the recipient would appear to depend on whether the recipient enters into an obligation to take that action (see example 3 at paras 28-30).
The case also provides an illustration of how Courts look at the actual legal relationship between the parties, rather than the labels put on transactions. The airport operator argued that the payment was a fund raising levy, equivalent to the imposition of a levy by a statutory body. The Tribunal noted that the airport operator did not have any statutory revenue raising powers and posed the question “So why did passengers pay the levy?”. In answering that question, the Tribunal found that the passengers did not pay a levy, they bought a ticket which entitled them to pass through the automatic gates and ultimately on their journey.
Earlier this month the UK Upper Taxation Tribunal handed down its decision in Vehicle Control Services v The Commissioner for Her Majesty’s Revenue & Customs [2012] UKUT 130. The Upper Tribunal dismissed the taxpayer’s appeal from the Tax Tribunal and found that the penalty parking charges were not damages in trespass and, as there was no contract between the parking operator and the motorist, the penalty charges could not constitute damages for breach of contract. However, the Upper Tribunal found that the parking charges were received by the taxpayer as consideration for the parking control services provided by the taxpayer to the landowner.
The case provides an interesting analysis of a tripartite arrangement and how, as found by the Upper Tribunal, two sets of obligations are said to be “triangulated” into a single supply.
Facts
The facts of the case can be simply stated:
- The taxpayer entered into contracts with landowners to provide “parking control services” to the landowners. Under those agreements, the taxpayer’s obligations included erecting warning signs, issuing parking permits for authorised vehicles, inspecting the car parks and taking enforcement measures which included the issue of parking charges, vehicle immobilisation and towing, with consequent fees for release. The taxpayer was to collect and could retain all parking enforcement charges.
- In return for the services, the landowner agreed to pay a registration fee (on signing the contract) and an annual fee for each of the warning signs, plus ensure that all vehicles authorised to use the car park clearly displayed the permits on their windscreens
- The warning signs set out the requirements for valid permits or tickets to be displayed, various other rules and charges that were imposed for failure to comply with the rules – the signs also stated “You are entering into an a contractual agreement. Do not park in this area unless you fully understand and agree to the above contractual terms”.
- If a car was parked in contravention to the rules, the taxpayer could issue a “parking charge notice” which was placed on the windscreen of the car. The notice was enforced by the taxpayer who retained the charges.
- The issue was whether the taxpayer was required to account for VAT on those charges.
The trespass issue
The First-tier Tribunal concluded that the charges were not damages for trespass because the taxpayers had not been given the right to occupy the land. Rather, the taxpayer had been given a licence to enter the land for the purposes of the agreement but had not been given any rights of possession. Accordingly, the taxpayer could not bring an action for trespass as principal but could only do so as agent for the client. The Upper Tribunal agreed.
The contract issue
The First-tier Tribunal found that the arrangements constituted a contract between the taxpayer and the motorise, but that the parking charges were not damages for breach of contract, but rather were paid as a condition of the contract and therefore constituted consideration for a supply of services.
On appeal, the taxpayer contended that the Tribunal was correct to find that there was a contract wt, but that it should have found that the charges were outside the scope of VAT as they were either a penalty or damages.
Interestingly, both parties agreed that, if there had been a contract between the taxpayer and the motorist, the parking charges would not have been payment for a supply made under the contract – reference was made to a decision of the VAT Tribunal, Bristol City Council (No 17665, 15 May 2002) in which, on the facts of that case, a contract between the Council and motorists entering a Pay and Display car park had been held to have been created, but that the excess charges were not consideration for the supply of parking services under that contract – the excess charges did not arise until the right to park had been lost. One can see similarities with that approach in the judgment of Emmett J in American Express International Inc v Commissioner of Taxation [2009] FCA 683 (at [52]-[58]) where his Honour found that “late payment fees” on credit cards were not “in connection with” the provision, acquisition or disposition of the credit – but were payable by reason of a novas actus interveniens, namely the card holder’s breach of the credit card terms and conditions.
The Upper Tribunal disagreed with the First-tier Tribunal and found that there was no contract between the taxpayer and the motorist. This was because the taxpayer was not in a position, by virtue of its limited licence and notwithstanding the words in the warning statements about the motorists entering into a contractual agreement, to make any offer of a right to a park. Accordingly, the penalty charges could not constitute damages for breach of such contract.
The Upper Tribunal then found that the only relevant contract was between the taxpayer and the landowner, and, in finding that the parking charges were consideration to the taxpayer for providing parking control services to the landowner, the Upper Tribunal said as follows:
…there are two sets of obligations that are being “triangulated”. The first set of obligations is between the client (acting through its agent, VCS) and the motorist, and the second is between VCS and the client.
The legal analysis is that VCS collects the various parking charges as agent for the client, which represents damages for trespass, or for breach of a contract between the landowner and the motorist. Such payments are outside the scope of VAT.
By allowing VCS to collect and retain the charges, the client was giving consideration, or further consideration, to VCS for its parking control services under the contract. That was consideration for the standard-rated supply by VCS to the client.
As far as I am aware, the concept of “triangulation” of obligations is yet to find its way into the Australian GST system. A search of austlii and the ATO legal database registered no hits.
NZ Supreme Court grants leave to appeal in Stiassny case, plus hands down decision in de-registration case
On 8 May 2012 the NZ Supreme Court granted leave to the taxpayer to appeal the decision of the Court of Appeal in Commissioner of Inland Revenue v Stiassny [2012] NZCA 93 where the NZ Court of Appeal allowed the appeal by the Commissioner and found that the claim for a refund of GST by the receivers appointed to the partners in a GST-registered partnership should be struck out. To see my post on the decision of the Court of Appeal, click here.
In a matter which has implications for restitution and insolvency law, as well as GST, the approved grounds are appeal are:
- whether the GST payment was a “debtor-initiated payment” in terms of s 95 of the Personal Properties Securities Act 1999 so as to confer priority to the Commissioner over any claim to those moneys by any respondent;
- whether any of the appellants can recover the amount of GST so paid from the Commissioner on the basis that it was paid by the receivers under a mistaken belief that they were personally liable to pay it or on any other basis.
In further news, the Supreme Court today handed down its judgment in Lewis G H Thompson v Commissioner of Inland Revenue [2012] NZSC 36 upholding the decision of the Commissioner to re-register a taxpayer who had de-registered for GST before disposing of real property. The case provides an interesting insight into the “turnover threshold” provisions in the NZ legislation, which are focused solely on the future operations of the enterprise and include the disposal of capital items in the test. This can be compared to the provisions in Division 188 of the GST Act, which have both a “pre” and “post” test and exclude the disposal of capital items from the “post” test.
Yesterday the Commissioner published Miscellaneous Taxation Ruling MT 2012/3 Administrative penalties: voluntary disclosures, which outlines the Commissioner’s interpretation of s 284-225 or Schedule 1 to the TAA. This Ruling relates to all taxes, including GST, and provides an important resource for taxpayers and their advisers who form the view that GST may have been underpaid. The ruling was issued in draft form as MT 2011/D3.
The Ruling outlines the circumstances where the penalties otherwise imposed under Schedule 1 to the TAA will be:
- reduced to nil – where the entity voluntarily tells the Commissioner before being told by the Commissioner that an examination of its affairs is to be conducted (or before the day the Commissioner, in a public statement, requests voluntary disclosures with respect to the matter) and where the shortfall amount is less than $1,000 or there is no shortfall amount;
- reduced by 80% – where the entity voluntarily tells the Commissioner before being told by the Commissioner that an examination of its affairs is to be conducted (or before the day the Commissioner, in a public statement, requests voluntary disclosures with respect to the matter)
- reduced by 20% – where an entity voluntarily tells the Comissioner after being told by the Commissioner that an examination of its affairs is to be conducted.
The Ruling also outlines the Commissioner’s views on the a number concepts which are important concepts in s 284-255 of Schedule 1 to the TAA, including
- what constitutes an ‘examination…of your affairs’;
- when an entity will be taken to have been told that an examination is to be conducted of its affairs;
- the words ‘voluntarily tells’;
- the principles regarding the making of a voluntary disclosure.
GST private rulings published in April 2012
In April 2012, the Commissioner published over 60 private rulings on the private rulings register dealing with GST issues.
The private rulings I found interesting deal with GST refunds and going concerns. The refund ruling appears to take the view that the Commissioner can rely on s 105-65 in the context of the operation of the adjustment provisions in Division 19 of the GST Act.
The list of the private rulings can be accessed here and through the menu on the site.
Ruling No. 1012091511798 – GST and refunds of overpayments
This application involves the perennial question of whether the Commissioner will exercise his discretion in s 105-65 and refund overpaid GST. Where this ruling is interesting is that it appears to involve the question of whether that discretion will (or indeed can) be exercised where the refund is otherwise payable by way of an adjustment pursuant to Division 19 of the GST Act.
The facts of the ruling involve the sale of land by way of a terms contract where the parties entered into an agreement to terminate the sale contract, whereby the instalment payments were to be repaid to the purchaser. GST had been paid on the instalments by the vendor and the purchaser had claimed input tax credits.
While it is not clear from the ruling, it appears that the basis for the refund arose from the operation of the adjustment provisions in Division 19. Further, the Commissioner considers that s 105-65 applies because the taxpayer treated an arrangement as giving rise to a taxable supply but it did not give rise to a taxable supply. This may be considered to be a controversial view, given that the apparent intent of s 105-65 is to address the implications of parties mistakenly treating supplies as taxable where they are not – e.g., because they are GST-free. In the present circumstances, the parties at all times correctly treated the transaction as taxable until the transaction was cancelled, triggering Division 19 which operates to unwind the GST consequences of the transaction. One may question whether s 105-65 should interfere with that process.
Ruling No 10102090255175 – GST and going concerns
The issue in this ruling was whether the sale of a motor vehicle repair business was GST-free as the supply of a going concern. What I found interesting was the discussion of the implications of the statutory licence which was necessary to operate the business, but could not be transferred by the vendor. The agreement provided that if the licence could not be transferred to the purchaser, that the vendor would make all reasonable efforts to have a new operating licence issued to the purchaser. The ruling took the view that provided a new licence was issued to the purchaser, the vendor would be “considered to have have supplied the purchaser with an operating licence in respect of the relevant premises, for the purposes of the going concern provisions”.
I personally struggle with the conclusion in the ruling, essentially because the requirement of s 38-325(2) of the GST Act is that “the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise”. In circumstances where the supplier has no ability to transfer a statutory licence and a new licence must be issued to the purchaser, I cannot see how the words of s 38-325(2) can be satisfied.
The private ruling refers to paragraph 53 of GSTR 2002/5 and seeks to address the issue in the following way:
In accordance with paragraph 53 of GSTR 2002/5, the supply of a thing which is incapable of assignment or supply because of a statutory or legal impediment, but which is necessary for the continued operation of an enterprise by a party other than the supplier is taken to be a supply to the purchaser of that thing for the purposes of section 38-325 of the GST Act, where the following criteria are met:
- the vendor of the enterprise makes all reasonable efforts to have the thing supplied to the recipient, for example, by way of surrender;
- the supply to the purchaser is by a statutory authority or other party to the relevant contract with the vendor; and
- the thing is actually supplied to the purchaser by a party other than the vendor.
While I can appreciate the commercial practicality of this approach, I struggle with how it can fit within the clear words of the section. In recent times, the Federal Court appears to have moved away from the purposive, “practical business tax”, approach to the interpretation of the GST Act, towards a more literal construction. I do wonder what the Federal Court would make of the question.
ECJ hands down judgment in VAT phone-card case, plus international cases update – April 2012
On Friday the European Court of Justice handed down its decision in Lebara (Taxation) [2012] EUECJ C-520/10. In this case the Court was asked to determine whether the supply of phone cards by Lebara to distributors who then on-sold those cards to customers involved a single supply of telecommunication services by Lebara or (as contended by the Revenue) the supply of two services by Lebara, being (i) the issue of the card and (ii) the redemption of the card by the end user. The Court found that only a single supply of telecommunication services was made.
The facts can be simply stated. Lebara sold phone cards to distributors for an agreed arise (being lower than the face value of the cards), the distributors then resold the cards at their face value (either under their own brand or even under the Lebara brand) – in any event, the distributors were acting in their own name and not as agents of Lebara. The phone cards were activated by Lebara following a request by the distributor, provided that the distributor had paid for them. Lebara did not know the identity of the user, but had systems in place which enabled it to track each card sold, whether the card was still valid, the amount of unused credit, the numbers called – the distributors did not have access to that system.
Lebara did not account for VAT on the sale of phone cards to distributors in the basis that the transaction was a supply of telecommunication services in the Member State in which the distributor was established and that, in consequence, it was the distributor which had to pay the VAT in that Member State in accordance with the reverse charge mechanism. Lebara contended that the actual use of the card did not entail the supply by Lebara, for consideration, of services to the end user. By contract, the Revenue contended that Lebara had to pay VAT in the UK because it supplied two services, (i) the issue of the card, which took place t the time the card was sold to the distributor, and (2) the redemption, when the card was actually used. The UK taxes the second supply – the taxable value was contended to be the amount paid by the distributor to Lebara which represented the use actually made of the card by the end user as a proportion of the face value of the card.
In considering the issue, the Court referred to the following principles (most of which would also have application in Australia):
- the principle of the common system of VAT is the application to goods and services of a general tax on consumption which is exactly proportional to the price of goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged;
- VAT is intended to tax only the final consumer and to be completely neutral as regards the taxable persons involved in the production and distribution processes prior to the stage of final taxation, regardless of the number of transactions involved;
- it is supplies of goods or services which are subject to VAT, rather than payments made by way of consideration for such supplies
- the supply of services is effected “for” consideration only if there is a legal relationship between the service provider and the recipient, pursuant to which there is a reciprocal performance, the remuneration received by the service provider constituting the value actually given in return for the service supplied to the recipient
In finding that Lebara made a single supply of telecommunication services, the Court found that a supply of services is only taxable if it is made “for” consideration, which presupposes a reciprocity between the service provided and the remuneration constituting the value given in return for that service – Lebara only received a single actual payment in the course of supplying its telecommunication services. Further, that payment cannot be treated as a payment made to Lebara by the end user, even if the resale of the phone card by the distributor ultimately leads to the burden of making that payment being passed on to the end user.
From an Australian perspective, the case does appear unusual, particularly as it appears that the UK was trying to claim a second amount of VAT on what was a single payment. As is often the case, the impetus for the case may well lie in the complexities of the European system and the UK feeling that it was missing out on VAT revenue (the phone cards were sold in other Member States). In Australia, the issue would not appear to arise as the voucher provision in Division 100 of the GST Act would operate with the effect that no GST was payable on the redemption only, not on the issue of the cards.
International cases update
In April 2012 the following decisions were handed down in New Zealand and the UK (including the ECJ) and Canada.
New Zealand
Court of Appeal
- Simpson v Commissioner of Inland Revenue [2012] NZCA 126 – whether receivers of mortgagee selling real property personally liable for GST – to see my post on this case, click here.
United Kingdom and ECJ
Upper Tax Tribunal
- Brendan McMahon v HMRC [2012] UKUT 106 - VALUE ADDED TAX – evidence of export – whether First-tier Tribunal applied correct legal test – despite incorrect statement, yes – whether tribunal’s findings of fact supported by evidence – yes – appeal dismissed
- Sally Moher at Premier Dental Agency v HMRC [2012] UKUTB2 - VALUE ADDED TAX – exemptions – appellant engaged dental nurses and supplied them as temporary staff to dentists – whether appellant made supplies of staff or of medical treatment – supplies of staff – supplies standard-rated – appeal dismissed
First Tier Tribunal
- Collins (t/a Unique Vehicles) v Revenue & Customs [2012] UKFTT 220 - VAT – entitlement to credit for input tax on motor cars – article 7 of VAT (Input Tax) Order 1992 (SI 1992/3222) considered – whether intention to make car available for private use – intention to use car primarily for self-drive hire – evidence of entitlement to input tax where documents contradictory or missing – 2007 statement of practice on input tax deduction without valid invoice – jurisdiction of Tribunal to review HMRC’s exercise of discretion whether to accept alternative evidence of entitlement to input tax deduction – misdeclaration penalty – appeal allowed in part
- The Trustees of The Eaton Mews Trust v Revenue & Customs [2012] UKFTT 249 - VALUE ADDED TAX — zero-rating — construction of building — VATA s 30(2), Sch 8 Group 5 — whether retention of party wall a condition of planning consent — yes — appeal allowed
- Sound Solutions (Europe) Ltd v Revenue & Customs [2012] UKFTT 251 - VALUE ADDED TAX- – MTIC-sale of mobile phones and CPUs – appellant’s repayment claim of £3,039,723.75 refused on grounds that the appellant knew or ought to have known that the transactions were part of an MTIC fraud -appellant knew that the deals were part of a VAT fraud –appeal dismissed – to see my post on this case, click here.
European Court of Justice
- Able UK (VAT) [2012] EUECJ C-225/11 - Exemptions – Article 151(1)(c) – Supply of services of dismantling obsolete US Navy ships in the territory of a Member State
- Balkan and Sea Properties (VAT) [2012] EUECJ C-621/10 - Sale of immovable property between connected companies – Value of the transaction – National legislation providing that for transactions between connected persons the taxable amount for VAT purposes is the open market value of the transaction
Canada
Supreme Court of Canada
- Calgary (City) v Canada 2012 SCC 20 - Single supply or multiple supplies ― City acquiring and constructing transit facilities ― City claiming and receiving public service body rebates for portion of GST paid ― City also claiming input tax credits in respect of GST paid on purchases made for transit facilities ― Whether acquisition and construction of transit facilities constituting an exempt supply, a taxable supply or both ― Whether “transit facilities services” a taxable supply to the Province separate from exempt supply of “public transit services” to public – to access my case summary click here
Tax Court of Canada
- Legace v The Queen 2012 TCC 117 – whether directors liable for unpaid GST of company – whether “due diligence defence” satisfied
- SWS Communications Inc v The Queen 2012 TCC 114 – whether supply of telecommunication services zero-rated as an export to non-resident – whether supplier had a permanent establishment in Canada
Today the Commissioner issued two ATO IDs on the implications of intra-GST group supplies where an entity subsequently leaves the GST group. The IDs illustrates the problems that may arise due to the GST Act failing to include rules dealing with the time of supply. In particular, in the second ID, the Commissioner appears to address the issue by inserting words into the legislation which are simply not there – in recent times the Federal Court has been reluctant to adopt such an approach.
The issue is whether s 48-40(2) of the GST Act applies to a supply made by entity A to entity B if it is made when the entities are in the same GST group, but the related invoice is issued when entity B is no longer a member of the GST group. The Commissioner considers that the answer is yes – so that the supply is not a taxable supply as it was made at a time when both entities were members of the GST group.
The Commissioner acknowledges that the GST Act is silent on the issue of when a supply is made, also noting that Division 29 deals with attribution only and does not address the time of supply.
The issue is whether s 48-40(2) of the GST Act applies to a supply of services made from entity A to entity B, to the extent that the services are performed at a time when they are in the same GST group, despite the fact that some of the services are performed when B is no longer a member of the GST group. The Commissioner considers that the answer is yes, but only to the extent that the supply was performed when both entities were members of the GST group. To the extent that the services were performed after B left the GST group, the supply will be taxable.
The Commissioner saw the issue as whether s 48-40(2) applied “to the extent” that the supply was made when both entities were members of the GST group. Notwithstanding that the section does not contain those words, the Commissioner is of the view that the section should be interpreted in such a way as to allow apportionment of the supply – this is an interesting view, particularly considering the recent focus of the Courts on the words of the legislation, rather than taking a purposive view. The basis for the Commissioner’s view is stated as follows:
At the time immediately following Entity B leaving the GST group, Entity A is still making a supply by continuing to perform the service, however from this point in time there is no longer a ‘supply that entity makes to another member’, because Entity B is not ‘another member’ for the purposes of paragraph 48-40(2)(a). As such, a reasonable interpretation is that to the extent that the supply of services is performed after the recipient ceases to be a member, paragraph 48-40(2) no longer has application to that part of the supply. Paragraph 48-40(2)(a) can be interpreted in this way, despite the absence of the words ‘to the extent’ in the provision.
One may question whether a Court would adopt such an approach, as it involves inserting words into the section which are not there. What this ID does illustrates is the problems that can arise by reason of the GST Act not having any rules dealing with time of supply.
Today the Assistant Treasurer released an exposure draft regulation and explanatory statement specifying the GST treatment of certain Australian government fees and charges.
The Treasury release states that exposure draft regulations prescribe fees and charges that will be treated as GST exempt, and fees and charges that will be treated as taxable supplies from 1 July 2012. Also, the draft regulations will also ensure that the GST treatment of particular goods and services supplies by governmental related entities is consistent with the principles contained in the Intergovernmental Agreement on Federal Financial Relations.
Please see the following links:
Submissions are due by 30 May 2012.
Earlier this week, Canada’s highest Court handed down its decision in Calgary (City) v Canada 2012 SCC 20. In a unanimous judgment, the Court found that the construction of transit facilities by the City of Calgary was a single exempt supply of “public transport services” to Calgary citizens rather than two supplies, being the exempt supply of “public transport services” and a separate taxable supply of “transit facilities services” to the Province – which would have entitled the City to input tax credits for the costs of construction.
The case is interesting because it is a judgement from a Court which is the equivalent to our High Court. Also, the Court considers the following issues, which may have relevance to Australia and elsewhere:
- Determining whether there is a single supply or multiple supplies
- Whether preparatory work for a supply can be a supply in its own right
- GST implications of funding agreements and performance of statutory obligations
For my detailed analysis of the decision, click here.
UK decision gives insight into scope of “carousel fraud” in the UK – losses in excess of £15 billion
On 10 April 2012 the UK First Tier Tribunal handed down its decision in Sound Solutions (Europe) Ltd v Revenue & Customs [2012] UKFTT 251. The case provides an insight into the extent of “missing trader fraud” or “carousel fraud” in the UK, usually involving the sale of computer chips and mobile phones.
This type of VAT fraud received some focus in Australia recently in Multiflex (see [2011] FCAFC 142), where the Commissioner had a suspicion that an investigation would disclose that Multiflex did not in fact make creditable acquisitions giving rise to the claimed input tax credits. The evidence of the Commissioner’s auditor was that three companies in the same group as Multiflex had been involved in “sham transactions through a supply chain”. The arrangement was described as follows:
The first company in the supply chain imported electronic goods into Australia, they were then on-sold (usually on the same day) through several different intermediary or buffer companies. These products were not entered into Australia for domestic consumption but remained in a bonded warehouse. Each of the companies in the Mercantile Group…was the final link in the chain and operated as the exporter. Non- reporting of GST by the “missing traders” in the supply chain has lead to revenue leakage. The tax office position in that the supply chain was a contrived sham arrangement for which the Mercantile Group was a participant. In the United Kingdom this type of fraud is called “missing trader intra-community fraud”. The revenue leakage is caused by the non-reporting of GST by the “missing trader”. This and similar frauds have apparently cost the Government in the United Kingdom a significant sum of tax revenue.
In the decision of the First Tier Tribunal, the evidence from the Revenue was that carousel fraud was rife from 2003 to 2007. Further, any loss to the exchequer only occurs when the input tax is refunded on a repayment claim. The Revenue was been repaying substantial sums of money, in many cases in excess of £10,000,000 and the total loss to the revenue during these years amounted to in excess of £15 billion.
The position in the UK on the refunds of input tax credits is similar to that considered in Multiflex, in that the refund provisions are in mandatory terms and that no element of discretion is conferred on the revenue. Of course, the position in Australia will change if the amendments to the TAA to introduce s 8AAZLGA are introduced (giving the Commissioner the right to withhold refunds pending an investigation). Interestingly, the law in the UK developed its own defence to the mandatory refund provisions. Because the claimant of the refund was usually a long way down a chain of transactions from the defaulting entity, the Courts extended the established principles of fraudulent evasion beyond evasion by the taxable entity to include those entities who knew or ought to have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT. This enlarged the category of participants who did not satisfy the objective criteria of being entitled to claim credits to those who themselves had no intention of committing fraud, but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants.
The decision of the First Tier Tribunal undertakes a detailed investigation into the development of the law in this area and the judgment shows the level of complexity and sophistication of these types of transactions. One would suspect that such transactions are being undertaken in Australia, as is shown by the Multflex decision. As to whether the level of such activity reaches the giddy heights of the UK experience, and the effect on these schemes of the proposed amendments to the TAA allowing the Commissioner to delay refund payments, time will tell.
