Fonecomp v HMRC

In Fonecomp v HMRC [2015] EWCA Civ 39 (3 February 2015) the Court of Appeal confirmed that the Kittel principle applies to ‘contra-trading’.

Fonecomp had purchased mobile phones previously purchased and sold by another company as part of a scheme to defraud HMRC. Under the Kittel principle (C-439/04) a national court can refuse a trader the right to deduct input tax in circumstances where the trader knew or should have known that he was taking part in a transaction connected with VAT fraud. The issue was whether the Kittel principle is limited to cases where the default occurs in the same chain of supply. If it is not limited in this way it can apply to a ‘contra-trading’ transaction.

The Court of Appeal observed that in none of the cases decided by the CJEU had the fraud occurred outside the chain of supply. Those cases could...