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Judgments - Total Network SL (a company incorporated in Spain) (Original Respondents and Cross-appellants) v Her Majesty's Revenue and Customs (suing as Commissioners of Customs and Excise) (Original Appellants and Cross-respondents)


SESSION 2007-08

[2008] UKHL 19

on appeal from: [2007] EWCA Civ 39




Total Network SL (a company incorporated in Spain) (Original Respondents and Cross-appellants) v Her Majesty’s Revenue and Customs (suing as Commissioners of Customs and Excise) (Original Appellants and Cross-respondents)

Appellate Committee

Lord Hope of Craighead

Lord Scott of Foscote

Lord Walker of Gestingthorpe

Lord Mance

Lord Neuberger of Abbotsbury



John Martin QC

Philip Coppel

(Instructed by Solicitor Her Majesty’s Revenue and Customs)


Charles Flint QC

Tom Weisselberg

(Instructed by Byrne and Partners)

Hearing date:

26 & 27 NOVEMBER 2007






Total Network SL (a company incorporated in Spain) (Original Respondents and Cross-appellants) v Her Majesty’s Revenue and Customs (suing as Commissioners of Customs and Excise) (Original Appellants and Cross-respondents)

[2008] UKHL 19


My Lords,

1.  The issue in this case is whether the Commissioners can maintain a civil claim for damages under the tort of unlawful means conspiracy against a participant in a missing trader intra-community, or carousel, fraud. Two questions need to be considered. The first is whether it is open to the Commissioners to maintain a cause of action in damages at common law as a means of recovering VAT from a person who has not been made accountable or otherwise liable for that tax by Parliament. The second is whether, if so, it is an essential requirement of the tort of unlawful means conspiracy that the conduct which is said to amount to the unlawful means should give rise to a separate action in tort against at least one of the conspirators.

2.  On the second issue the Court of Appeal considered itself bound by prior Court of Appeal authority to hold that the unlawful means had to be independently actionable: [2007] EWCA Civ 39, paras 78-79. Its decision to strike out the Commissioner’s claim for this reason is the subject of the appeal to this House by the Commissioners. The Court of Appeal decided the first issue in favour of the Commissioners: paras 31-32. Total Network SA (“Total”) has cross-appealed on the first issue.

The facts

3.  Total is a company incorporated in Spain which has a bank account in the United Kingdom. The Commissioners claim that Total is liable to them in damages at common law for conspiracy in sums equivalent to amounts of VAT which the Commissioners say they have lost as a result of thirteen carousel frauds which were participated in by Total. There are alleged to have been thirteen such conspiracies over five months from May to October 2002.

4.  In its simplest form a carousel fraud begins with the sale of taxable goods by a trader registered for VAT in one member state, A, to a VAT-registered trader in another member state, B. Under article 28c(A)(a) of European Council Directive 77/388/EEC of 17 May 1977 (OJ L 145, 13 June 1977) on the harmonisation of the laws of the member states relating to turnover taxes (the Sixth Directive), the supply of goods to a trader in another member state is exempted from VAT. In the words of section 30 of the Value Added Tax Act 1994 (“VATA 1994”), it is zero-rated. B then sells the goods to another VAT-registered trader, C, in its own member state, charging and receiving VAT on the consideration. It fails to account for that VAT to the taxing authorities and disappears. It becomes a missing trader. But before doing so it provides a tax invoice to C, which claims and receives the VAT that it has paid to B as input tax. C, the middleman or broker, then sells the goods to a registered trader in another member state. In the simplest form, this is A. This sale is zero-rated, so there is no output tax to set off against the input tax which C has received. B’s disappearance has resulted in a profit to the conspirators which is equivalent to the amount of the input tax received by C. It is the circularity of the transaction that gives rise to the description of the fraud as a carousel.

5.  The fraud is the product of a dishonest application of the system of value added tax. C has a claim for input tax arising from its transaction with the missing trader, B, which it is entitled to recover under article 17(2)(d) of the Sixth Directive. Its sale to A is zero-rated in its own member state. So it is not required to account to the taxing authorities for any output tax on that sale. The result of the fraud is that the missing trader, B, has received the VAT from C. But it has not accounted for that VAT as output tax to the taxing authorities. They must nevertheless pay the VAT, or give credit for it, to C when it is claimed as input tax. The goods are no more than a token to give the transaction the semblance of reality. A has no genuine business motive in buying back what it has sold. Typically the goods are high volume articles such as computer chips or mobile telephones.

6.  As the Court of Appeal observed in para 3 of its judgment, this type of fraud is not confined to the United Kingdom. It is common in other countries within the EU. It has been described as a sophisticated attack on the VAT system. It was estimated to have cost in excess of £1bn in the year 2004/2005 to the United Kingdom by way of lost revenue. The Commissioners refer in their written case to estimates that show that this figure was exceeded substantially in the succeeding financial years. There is no doubt that this is a pernicious stratagem, and that member states are justified in making use of every means at their disposal within the scope of the Sixth Directive to eradicate it.

7.  It is sufficient for the purposes of this case to summarise the details of the first of the thirteen conspiracies alleged in the Statement of Claim. It has been treated as representative of all of them. On or about 15 October 2002 Total sold 3,780 Nokia mobile phones to Redlaw Ltd, a company incorporated in England and Wales, for £1,672,224.75. On the same day Redlaw sold the mobile phones to Lockparts Ltd for £1,423,170 plus £249,054.75 as VAT, amounting in total to £1,672,224.75. On the same day Lockparts sold them to GAK Ltd, for £1,428,840 plus £250,047 as VAT, amounting in total to £1,678,887. Both Redlaw and Lockparts thereafter ceased to trade and did not pay the VAT due on these transactions. On the same day GAK sold the mobile telephones to The Accessory People plc, for £1,436,400 plus £251,370 as VAT, amounting in total to £1,687,770. On the same day The Accessory People sold them to Alldech Ltd, the broker, for £1,447,740 plus £253,345.50 as VAT, amounting in total to £1,701,094.50. In due course GAK and The Accessory People paid VAT on the transactions which they had entered into. Finally, on the same day Alldech sold the mobile telephones to Total for £1,508,220. That sale, being a sale out of the United Kingdom, was zero-rated. Alldech claimed and was paid a refund of input tax from the Commissioners which included the sum of £253,345.50 of VAT which it had paid to The Accessory People.

8.  Reduced to its essentials, the position is that Redlaw, the first missing trader, was liable to pay VAT of £249,054.75 on its taxable supply which it failed to pay to the Commissioners. The intermediaries in the chain, other than Lockparts, did properly account for and pay VAT on the supplies. Alldech, the broker, did actually pay VAT of £253,345.50 on the supply it received from The Accessory People. Alldech then claimed and received a VAT credit for £253,345 in respect of the zero-rated supply out of the United Kingdom to Total. If Redlaw, the first missing trader, had paid the VAT due from it of £249,054.75 the result would have been that substantially all the VAT due on these transactions would have been paid or accounted for. The difference between the amounts paid and due at each end of the chain is accounted for by the fact that VAT of £992.25 due by Lockparts, the second missing trader, was not paid to the Commissioners.

9.  The total number of mobile phones involved in the thirteen conspiracies was 30,704. They were sold by Total to the various missing traders for a total of £12,299,117.40 and re-purchased by Total from the various brokers for a total of £11,663,423. The total amount of VAT due but unpaid on the sales by the missing traders is £1,921,331.12. The total amount of the VAT refund claimed by the brokers and allowed by the Commissioners is £1,958,714.95. That is the sum claimed in this action.

10.  The cause of action relied on by the Commissioners is the tort known as unlawful means conspiracy. The unlawful means on which they rely in their re-re-amended Particulars of Claim are (a) the commission by Redlaw and/or Alldech of the common law offence of cheating the revenue and (b) the making by Alldech of a fraudulent misrepresentation that the transactions had a genuine economic purpose and that VAT was chargeable and/or recoverable on them by the submission to the Commissioners of a VAT return in the relevant form claiming that it was entitled to a VAT credit. The claim relating to four of the alleged conspiracies was issued on 2 July 2003. On the same day Fulford J granted a freezing injunction against Total, the amount of which was increased on several subsequent occasions as other alleged conspiracies were added to the claim. On 10 January 2005 Hodge J held that the Commissioners had a cause of action in conspiracy where the unlawful means alleged was the common law offence of cheating the public revenue. On 31 January 2007 the Court of Appeal allowed Total’s appeal against that order. The Commissioners were granted permission to appeal to this House and Total were granted permission to cross-appeal. The freezing injunction was continued pending the determination of the appeal and the cross-appeal.

The statutory scheme

11.  Value added tax is a creature of statute. More precisely, it is the product of a series of EC Directives, of which the Sixth Directive was the most recent. (The Sixth Directive was repealed and replaced by Council Directive 2006/112/EC of 28 November 2006. But it was still in force at the time when the transactions that gave rise to this case were entered into). They provided for the harmonisation of this form of sales tax throughout all the member states of the EU: see Part I of the Finance Act 1972, which brought the then Directives into force in the UK following its accession to the EEC. It is a Community tax. There is no common law to which reference can be made. So it is important, to set the issues into their proper context, to identify the provisions of the statute that apply to the transactions that were involved in the alleged fraud. They are to be found in the Value Added Tax Act 1994, as amended. It is important also to identify the extent of the remedial steps that are available under the Act to the Commissioners. There are, as Mr Flint QC for Total explained, three aspects of the statutory scheme that need to be considered. These are (a) the application of VATA 1994 to transactions of the type complained of in this action; (b) whether VATA 1994 creates an exclusive regime for the enforcement of liabilities arising out of the failure to account for or pay VAT; and (c) the nature of the duties and rights of the Commissioners.

12.  Section 1(1) VATA 1994 provides that VAT shall be charged, in accordance with the provisions of the Act, on the supply of goods or services in the United Kingdom and on the acquisition in the United Kingdom from another member State of any goods. Section 1(2) provides that VAT on the supply of goods or services is a liability of the person making the supply and that, subject to provisions about accounting and payment, it becomes due at the time of the supply. That section must be read with sections 4(1) and 10(1) which make it clear that VAT is charged on the events referred to in section 1 only when the person who makes the supply or acquisition is a taxable person. Section 3(1) provides that a person is a taxable person while he is, or is required to be, registered under the Act. Total is not, and does not require to be, registered as it is a Spanish company carrying on business outside the United Kingdom. On the other hand Redlaw, the first missing trader, was registered under the Act, as was the broker, Alldech.

13.  Section 7 VATA 1994 deals with the place of supply. It applies for determining whether, for the purposes of the Act, goods or services are supplied in the United Kingdom. Section 13 deals with the place of acquisition. It applies for determining whether, for the purposes of the Act, goods acquired from another member State are acquired in the United Kingdom. Section 25(1) provides that a taxable person shall account for and pay VAT in respect of supplies made by him and in respect of the acquisition by him of goods from another member State. This is to be done by reference to prescribed accounting periods. Section 25(2) provides that he is entitled at the end of each accounting period to credit for so much of his input tax as is allowable under section 26 and then to deduct that amount from any output tax that is due from him. So Redlaw was liable under section 25(1) VATA 1994 to pay the output tax due on the supplies of the mobile telephones that it made in the United Kingdom, and Alldech was entitled under the same subsection to recover the VAT that it paid on their supply to it as input tax allowable under section 26.

14.  Part IV VATA 1994, which is headed “Administration, Collection and Enforcement", is introduced by section 58, which provides that Schedule 11 shall have effect with respect to the administration, collection and enforcement of VAT. Para 1(1) of Schedule 11, as originally enacted, provided that VAT was to be under the care and management of the Commissioners. Para 5(1) provides that VAT due from any person shall be recoverable as a debt due to the Crown. These provisions must now be read together with the Commissioners for Revenue and Customs Act 2005, which provides for the appointment of the Commissioners to exercise the functions previously vested in the Commissioners of Customs and Excise and for the transfer to them of the ancillary powers that were conferred on the former Commissioners by the Customs and Excise Management Act 1979.

15.   Various provisions are included within Part IV to enable the Commissioners to collect and to enforce the payment of VAT. Section 60 enables a civil penalty to be recovered in cases of dishonest evasion of VAT or the making of false input tax or repayment claims. Section 61 extends liability to a civil penalty to the director or managing officer where the person liable under section 60 is a body corporate. Section 72 makes it an offence for a person to be knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by him or by any other person. This provision supplements other common law offences with which the offender may be charged, including conspiracy to cheat the revenue. All persons knowingly concerned in the fraudulent evasion who are subject to the criminal jurisdiction of the relevant part of the United Kingdom are within its reach. Section 73 enables the Commissioners to assess the amount of VAT due where there has been a failure for whatever reason to make any returns required by the Act. The making of assessments under this provision is subject to the time limits set out in section 73(6). They may not be made after the later of two years after the end of the prescribed accounting period or one year after the evidence of the facts came to the knowledge of the Commissioners. Section 76 enables the Commissioners to assess amounts due by way of penalty, interest or surcharge. Section 77 prescribes a long-stop time limit, normally six years in the section as originally enacted and now three as substituted by section 47(10) of the Finance Act 1997, on the making of assessments, including assessments for penalties, interest or surcharge, under section 76.

16.  Two further provisions, added to VATA 1994 by amendment to address the problem of intra-community fraud, are also relevant to an understanding of the scheme of VATA 1994. First, section 77A was added by section 18(1) and (4) of the Finance Act 2003 with effect from 10 April 2003. It enables the Commissioners, where a taxable supply of goods to which the section applies has been made to a taxable person, and at the time of supply that person knew or had reasonable grounds to suspect that some or all of the VAT payable in respect of that supply would go unpaid, to serve a notice on the taxable person making him jointly and severally liable with the person who is liable to the Commissioners for that amount. Section 77A(1) provides that the section applies to telephones and equipment made or adapted for use in connection with telephones, computers and equipment made or adapted for use in connection with computers and various other equipment of a similar nature which it specifies.

17.  Secondly, section 55A was added by section 19(1) of the Finance Act 2006, together with section 26AB which provides for the adjustment of accounts to give effect to it. It introduced a system known as reverse charge accounting which had been permitted by a derogation from article 21(1)(a) of the Sixth Directive that had been requested by the UK government under article 27(1) to combat missing trader intra-community fraud. Its core is to be found in section 55A(3) by which the purchaser rather than the seller is liable to account for and pay the VAT on the supply. It applies to goods of a description specified in an order made by the Treasury. In June 2007 reverse charge accounting was implemented in respect of mobile phones and computer chips.

18.  Neither of these additional measures to combat fraud has the effect of enabling the Commissioners to obtain a statutory remedy against persons in another member state whom it believes to have been involved in intra-community fraud who are not registered for VAT in the UK. No provision for this is made in the Sixth Directive. There is no statutory remedy against Total. Redlaw and Alldech on the other hand are within the reach of the statute. Redlaw’s failure to pay was a breach of section 25(1) VATA 1994. Alldech can be assessed under section 73(2) for an amount as being VAT due from it to the Commissioners which is equivalent to the amount of the VAT that it recovered as input tax, on the ground that the Commissioners would have been entitled to withhold payment of the VAT if the purpose of the transaction had been disclosed to them.

19.  Mention should also be made of the provision which VATA 1994 makes for appeals. Section 82(1) provides that a reference to a tribunal is a reference to a tribunal constituted in accordance with Schedule 12. Section 83 provides that an appeal shall lie to a tribunal with respect to the various matters listed in that section which, as amended, include the amount of any input tax that may be credited to any person, any liability to a penalty or a surcharge under sections 59 to 69, any assessment made under section 73 and any liability arising by virtue of section 77A.

20.  Overall the impression that is conveyed by VATA 1994 as amended is of a comprehensive scheme for the administration, collection and enforcement of VAT by the Commissioners under the powers that are given to them by the statute. This is consistent with the propositions which I set out in para 11: VAT is a creature of statute, the limits of which are set by the Sixth Directive which requires member states to comply strictly with the harmonised rules that it lays down. It is designed to apply throughout the EU. So there is no common law to which reference can be made to fill any gaps in the scheme as to the persons from whom the Commissioners may collect amounts due to it as VAT. This is the background to the first issue, which is whether the Commissioners can maintain a cause of action in damages at common law as a means of recovering VAT that ought not to have been paid or credited from a person who has not been made accountable or otherwise liable for that tax by Parliament.

The first issue: the exclusive regime issue

21.  Total submits that it is a fundamental constitutional principle that no money shall be levied for or to the use of the Crown except by grant of Parliament, and that this in substance is what the Commissioners are seeking to do in this case without Parliamentary authority. Although their claim is presented as one for the award of damages, what they are really seeking to do is to recover by indirect means sums due as tax. Their action was ultra vires of the statute, from which alone they derive their powers. It was also contrary to article 4 of the Bill of Rights 1688, which declares:

“That levying money for or to the use of the Crown, by pretence of prerogative, without Grant of Parliament for longer time, or in other manner than the same is or shall be granted, is illegal.”

The Commissioners had no power under VATA 1994 to raise an assessment on Total for the tax that had been not been paid on the transactions. Nor was there any power under the Act to commence civil proceedings by action to recover unpaid tax from Total as a debt, as Total was not a taxable person. The absence of any such power was to be contrasted with the powers to recover unpaid tax that were now available to the Commissioners in terms of sections 55A and 77A of the Act, as amended.

22.  The Court of Appeal did not, of course, question the fundamental constitutional principle. Ample support for it is to be found in the authorities. In Gosling v Veley (1850) 12 QB 328, 407, Wilde CJ said:

“The rule of law that no pecuniary burden can be imposed upon the subjects of this country, by whatever name it may be called, whether tax, due, rate or toll, except upon clear and distinct legal authority, established by those who seek to impose the burden, has been so often the subject of legal decision that it may be deemed a legal axiom, and requires no authority to be cited in support of it.”

In Attorney-General v Wilts United Dairies Ltd (1921) 37 TLR 884 the Food Controller under the Defence of the Realm Acts sought to impose a charge as a condition of the grant of a licence to purchase milk in certain areas for which no authority had been given by Parliament. It was held that he had no power to do so. Atkin LJ referred at p 886 to the Bill of Rights and to what he described as the elaborate custom of Parliament by which money for the service of the Crown is only granted at the request of the Crown made by a responsible Minister and assented to by the House of Commons. He went on to draw this conclusion:

“In these circumstances, if an officer of the executive seeks to justify a charge upon the subject made for the use of the Crown (which includes all the purposes of the public revenue), he must show, in clear terms, that Parliament has authorised the particular charge.”

In the House of Lords, where the decision was affirmed, Lord Buckmaster said that the imposition could only be properly described as a tax, which could not be levied except by direct statutory means: (1922) 38 TLR 781.

23.  Having recognised the principle, the Court of Appeal said in para 31 of its judgment that the crucial issue was to determine the nature of the claim in conspiracy:

“Assuming for the purpose of this argument that a claim in conspiracy does lie, then this is a claim for damages for a perfectly proper, well-recognised tort, the tort of conspiring together to defraud the claimant. That the measure of damages suffered by such a claimant may be measured by reference to the amount by which the Exchequer’s income is depleted does not in our view alter the essential character of the claim as one for damages, not as a levy of money for the use of the Crown without grant of Parliament.”

Having distinguished the nature of the claim in the Wilts United Dairies case, the court summed up its conclusion with these words:

“Properly characterised this claim by the Commissioners is not a direct claim for VAT. It is a claim brought on a wholly different basis. It is a claim against conspirators to recover loss occasioned by fraud. It would make a mockery of the law to suggest that a fraudster can escape with impunity by piously claiming the benefit of the Bill of Rights designed for the innocent down-trodden citizen, not the scheming international fraudster.”