01 June 2007

Fraud and trust litigation news - summer: Proving carousel fraud


Total Network SL .v. Commissioners of Customs & Excise [2007] EWCA Civ 39, (CA), (Ward LJ, Chadwick LJ and Gage LJ)

Facts of the case

This was an appeal by Total Network SL (‘Total'), a Spanish company alleged to be part of a “carousel” fraud relating to the VAT payable on importing and exporting mobile telephones, against a first-instance judgment of Mr Justice Hodge who held that the Commissioners of Customs & Excise  (‘Customs') had a cause of action against Total, “in conspiracy where the unlawful means alleged is a common law offence of cheating the public revenue.”

“Carousel” frauds, also known as “missing trader inter-community” frauds, are usually conducted as follows: VAT-registered trader (A) in one EC member state sells taxable goods to a VAT-registered trader (B) in another EC member state, in this case the UK. This transaction is VAT zero-rated in A's member state. B should declare the purchase and pay acquisition tax in UK on the basis that this can be claimed back as input tax when the goods are sold on but does not do so. B sells on to C, another VAT registered trader in the same EC member state (UK), and charges VAT on the sale but fails to account to Customs for that VAT and vanishes becoming a “missing trader”. C re-sells the goods back to A. This transaction is VAT zero rated being a sale out of the UK. C becomes entitled to reclaim the VAT it paid to B. At this point the loss to the taxpayer of the VAT claimed back by C is crystallised.

In this case, Customs alleged 13 separate conspiracies with all the transactions being conducted on the same day with Total being the first and last link in the chain.

The decision

The Court of Appeal held that the Commissioners of Customs & Excise (‘Customs') had no cause of action in the tort of unlawful conspiracy against traders conducting “carousel” frauds.

At first instance, Mr Justice Hodge held that Customs had a cause of action against Total in conspiracy where the unlawful means alleged is a common-law offence of cheating the public revenue.  Hodge J found that it was sufficient for Customs to show that Total was a party to a conspiracy, the intention of which was to cheat Customs by a series of transactions that had no other purpose than to defraud.  In effect, the first instance judge held that the fraud automatically amounted to unlawful means for the purposes of the tort.

Lord Justice Ward identified the key issues in this appeal in respect of unlawful means conspiracy, as follows:

  • Is it a necessary ingredient of an unlawful means conspiracy for the unlawful means to be actionable at the suit of Customs against at least one of the conspirators? 
  • Is the Court of Appeal bound by the decision in Powell v Boldaz [1998] Lloyds Re P Med 116 which found that an unlawful act actionable at the suit of the claimant was a necessary ingredient of unlawful means conspiracy? 

In relation to the first issue, Customs argued that the allegation of the offence of common law cheat was sufficient on its own to found an unlawful means conspiracy.  Further, an unlawful means conspiracy does not require Customs to show that it had an actionable claim against any single conspirator.  However, Total submitted that an unlawful means conspiracy can only arise if the unlawful means are actionable at the suit of Customs against at least one of the alleged conspirators.  The Court of Appeal conducted an analysis of several authorities, including the 19th edition of Clerk & Lindsell on Torts and concluded that, were it not for the authority in Boldaz (see below), there was no reason why Customs could not rely on the tort of conspiracy by unlawful means.  As Ward LJ states “to hold that a conspiracy to cheat with the intention to injure is actionable without more by a person against whom it is aimed seems to us appropriate and justified.  As the assumed facts of this case demonstrate, to hold otherwise would mean that [Customs] would have no remedy against an entity which had benefited from the fraud and in respect of which the VAT legislation is unavailable”.

As to question 2, the Court of Appeal felt bound to follow the precedent in Boldaz.  In that case, Stuart-Smith LJ said “the unlawful act relied upon must be actionable at the suit of the plaintiff.  It is not sufficient that it amounts to a crime or breach of contract with a third party”.

Points of interest

The Court of Appeal felt bound by the decision in Boldaz; An unlawful act actionable at the suit of the Claimant is a necessary ingredient of unlawful means conspiracy. Customs did not have an actionable remedy against Total.  Accordingly, Customs' claim was struck out.

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