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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)

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45.  I would hold that the decision of the Court of Appeal in Powell v Boladz [1998] Lloyd’s Rep Med 116 was erroneous and that it should be overruled. I would also hold, in agreement with all your Lordships’ that criminal conduct at common law or by statute can constitute unlawful means in unlawful means conspiracy. Had it been open to the Commissioners to maintain a civil claim of damages the tort of unlawful means would have been available to them, even though the unlawful means relied upon were not in themselves actionable


46.  For these reasons I would allow the appeal by the Commissioners. But I would also allow the cross-appeal by Total. For reasons that are different from those given by the Court of Appeal, I would affirm that part of the Court of Appeal’s order by which the Commissioners’ claim was struck out.


My Lords,

47.  I have had the great advantage of reading in advance the opinions prepared by all my noble and learned friends. The relevant facts are fully set out in the opinion of Lord Hope of Craighead and I gratefully adopt his exposition. The close, and to my mind completely convincing, analysis of the legal principles applicable to the two issues that arise on this appeal (see para.1 of Lord Hope’s opinion) contained in the opinion of Lord Walker of Gestingthorpe probably say all that needs to be said. In view, however, of the importance of the two issues I propose to express in my own words why I have reached the same conclusions.

48.  It is important to keep in mind that the two issues arise from a preliminary issue directed to be tried by a Consent Order made on 9 July 2004. The preliminary issue asked this question:

“Does the Claimant [i.e. the Commissioners] have, as a matter of law, a cause of action in conspiracy against the Defendant [i.e. Total] as pleaded in the Consolidated and Amended Particulars of Claim?”

The question directs attention to the facts as pleaded by the Commissioners. These facts must, for the purposes of the preliminary issue, be assumed to be true. Whether they will, or which of them will, be proved to be true, only time will tell.

49.  There are some aspects of the pleaded facts that I wish to emphasise for they bear upon each of the two issues that arise. Paragraph 6 of the Agreed Statement of Facts and Issues, signed by leading and junior counsel for both parties, described the litigation, of which this appeal is the latest, but almost certainly not the last, stage as arising out of “a series of carousel, or missing trader intra-community, frauds". An alternative, and equally apt, description of each carousel, as pleaded by the Commissioners in this case, would be “charade". “Charade” is the name given to a game played frequently at birthday and Christmas parties but has also the colloquial meaning of an “absurd pretence” (see The Concise Oxford Dictionary 9th Ed.). The description of a “carousel fraud” taken from the decision of the VAT Tribunal in Bond v Commissioners of Customs & Excise, quoted by Ward LJ in paragraph 2 of his judgment in the present case, refers to the fraud as consisting of a series of sales of taxable goods, of which sales the initial one is zero rated, under the next one the initial buyer sells the goods and receives VAT from its buyer but then disappears without accounting to the Revenue for the VAT it has received, and the third sale made by the buyer from the “missing trader", is a zero rated sale of the goods back to the original vendor. This seller, who has paid VAT to the “missing trader", then claims back from the Revenue as input tax the amount of the VAT paid to the missing trader. The invoices are all in order so the Revenue accepts the claim for repayment of the input tax but because the “missing trader” has not accounted to the Revenue for the VAT it had apparently received, the Revenue is out-of-pocket by the amount it has had to pay to the vendor under the third sale. This description of a “carousel fraud” assumes valid sales of goods at each step.

50.  A charade, however, a pretence and in the present case a fraudulent pretence, is something else. Diplock LJ (as he then was) in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802 described as a “sham”

“…acts done or documents executed by the parties to the ‘sham’ which are intended to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.”

A “sale", at its simplest, is the exchange of property for money and it is, I suggest, plain that a contract of sale of goods requires, if the contract is to justify that description, an intention that there should be the payment of a price in exchange for the transfer of property in the goods (see s.2(1) and (3), Sale of Goods Act 1979). Consider these requirements against the facts of the “First Conspiracy” set out in paragraph 5 of the Commissioners’ Consolidated Particulars of Claim and taken to be typical of each of the other twelve pleaded conspiracies.

51.  Paragraph 5 pleads that Total

“... carried out and otherwise participated in a series of transactions in a chain of supply that had no economic purpose other than to cheat and/or defraud [the Commissioners] of revenue …".

The transactions, as pleaded, related to 3,780 Nokia mobile telephones and consisted of the following events, all taking place on 15 October 2002.

  (1) Total sold the telephones to Redlaw Ltd for £1,672,224 under a zero rated transaction.

  (2) On the same day Redlaw sold the telephones to Lockparts Ltd for £1,423,170 plus VAT of £249,054, a total of £1,672,224. If this is taken to be a genuine sale it would have been a sale at an immediate loss of £249,054, the amount of the VAT for which Redlaw was accountable to the Revenue. But it was plainly never intended that Redlaw should pay £249,054 to the Revenue and Redlaw did not do so. Redlaw simply disappeared and became the “missing trader".

  (3) On the same day Lockparts sold the telephones to GAK Ltd for £1,428,840 plus VAT of £250,047, a total of £1,678,887. The VAT payable by Lockparts on its purchase from Redlaw was £249,054. Lockparts was therefore accountable to the Revenue for the balance, £993. But Lockparts, too, became a “disappeared” trader and the £993 remains unaccounted for. Leaving aside the £993 VAT balance, Lockparts made an instant paper profit of £6,550 odd on its transaction with GAK.

  (4) On the same day GAK, pursuant to written instructions given on that day by Lockparts, paid £1,672,224 into Total’s UK bank account, thereby purporting to discharge the sum owing by Redlaw to Total and owing to Redlaw by Lockparts. That left £6,663 still owing by GAK to Lockparts.

  (5) On the same day GAK sold the telephones to The Accessory People for £1,436,400 plus VAT of £251,370, a total of £1,687,770. GAK had paid, or purported to have paid, £250,047 VAT on its transaction with Lockparts and so was accountable, and did account, to the Revenue for the balance, £1323. GAK had made an instant paper profit of over £6200 on its transaction with Lockparts.

  (6) On the same day The Accessory People sold the telephones to Alldech Ltd for £1,447,740 plus VAT of £253,345. The Accessory People were liable to pay £251,370 VAT under their transaction with GAK and so were liable to account, and did account, to the Revenue for the balance, £1975. The Accessory People had made an instant paper profit of over £9375.

  (7) Finally, on the same busy day, Alldech sold the telephones back to Total for £1,508,220 under a zero rated transaction. So Total made an instant paper profit of £164,004 (i.e. £1,672,224 less £1,508,220).

Alldech later claimed, and obtained, from the Commissioners the repayment as input tax of the £253,345 VAT that it had paid to The Accessory People. Alldech had made, therefore, an instant profit of £60,480. This profit, and Total’s £164,004 profit, The Accessory People’s profit of £9375, GAK’s profit of £6200 odd and Lockpart’s profit of £6,660 odd (if the £6,663 was ever paid by GAK to Lockparts) were funded by the £253,345 input tax repayment made by the Commissioners to Alldech (less, of course, the £1323 and £1975 for which GAK and The Accessory People accounted to the Revenue).

52.  What are your Lordships to make of these transactions that had “no economic purpose other than to cheat and/or defraud [the Commissioners] of revenue” and, as pleaded in paragraph 4 of the Consolidated Particulars of Claim, were entered into “…with intent to cheat [the Commissioners] of revenue and/or to defraud the Revenue …"? The telephones, if they existed, did not physically move from the place or custody in which they were in the morning of 15 October 2002, when the carousel began, to anywhere else or anyone else’s custody by midnight. At best, if they existed, they started and ended with Total. If it is to be said that property in these telephones, if they existed, left Total, passed down the chain of companies and ended back with Total, at what point during 15 October 2002 did this process begin? We know that no money was ever paid to or by Redlaw and it does not appear that any authority was ever given by Redlaw for the payment made by GAK to Total. But these questions are, perhaps, pointless for it seems clear that the telephones, as objects of an intended sale, were irrelevant. The passing of property in the telephones was not the purpose of the transactions. The purpose was the creation of book entries enabling a claim for repayment of input tax to be made.

53.  Article 2 of the First Council Directive, 67/227/EEC of 11 April 1967 says that

“… The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption …” (emphasis added)

and article 2(1) of the Sixth Directive says that

“… a supply of goods and services effected for consideration by a taxable person acting as such is subject to VAT".

Article 4(1) of the Sixth Directive defines “taxable person” as

“… any person who independently carries out in any place any economic activity …”

and “economic activities” are defined in article 4(2) as comprising

“… all activities of producers, traders and persons supplying services …”

On what basis could it be suggested that the carousel of 15 October 2002, on the basis of the facts as pleaded, involved the participants in trading in goods or supplying services? The several transactions were plainly orchestrated and pre-ordained. None of the participants wanted mobile telephones. All that they wanted was to obtain a money profit at no risk and without doing anything that could remotely be described as trading or supplying goods in a commercial transaction.

54.  On the Commissioners’ pleaded case Alldech was a fraudulent conspirator, not an innocent trader caught up in somebody else’s fraudulent scheme. The pleaded case does not allege that GAK or The Accessory People were conspirators. It is difficult to believe that they did not know or suspect the fraudulent purpose of a scheme under which they were to sign up to buy goods they had never seen and immediately to sell on the goods for an enhanced price. And if they did not know of the fraudulent purpose it is difficult to believe that their lack of knowledge was not attributable to a decision not to enquire, a convenient adoption of a Nelsonian blind eye. Be that as it may, Alldech, on the pleaded case, was a participating conspirator with knowledge of all the pleaded features of the conspiracy and neither expected nor intended to become the owner of mobile telephones. That was not the purpose of the carousel. In my opinion, there was, on 15 October 2002 when the several transactions were entered into, no supply or intention to supply mobile telephones, no change of the property rights in any mobile telephones and no transaction that could claim the description of a contract of sale or a contract for the supply of telephones. This was a fraudulent scheme designed to extract by deception money from the Revenue. If the pleaded facts had been known to the Revenue at the time that Alldech’s input tax repayment claim was made, the Revenue would not have paid and would not have been liable to pay.

55.  The ECJ’s judgment in Optigen Ltd v Customs & Excise [2006] Ch.218 is no authority to the contrary. The ECJ emphasise in their judgment that the terms “supply of goods” and “taxable person acting as such” in the Sixth Directive require an objective assessment to be made (see para.44 of the judgment). In paragraph 46 of the judgment the ECJ said this:

“An obligation on the tax authorities to take account, in order to determine whether a given transaction constituted a supply by a taxable person acting as such and an economic activity, of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain … of which that taxable person had no knowledge and no means of knowledge, would a fortiori be contrary to [the objectives of the Sixth Directive].”

And in paragraph 51 the ECJ repeated that whether a supply of goods had been made by a taxable person acting as such was to be objectively ascertained

“… regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge“ (emphasis added).

It follows from this that if a trader becomes innocently involved in a fraudulent and/or sham chain of supply, the innocent trader does not necessarily cease to be a person liable to pay output VAT and eligible to claim input VAT. If objectively assessed without regard to the fraud, there would appear to have been a supply of goods by or to the innocent trader, the innocent trader does not by reason of the fraud fall outside the VAT loop. None of this, in my opinion, assists Total in the present case. Alldech was not an innocent trader. GAK and The Accessory People may have been. If Alldech was not an innocent trader but a conspirator in the fraud there is no need to disregard the intentions of the conspirators, the fraudsters, in assessing the true nature of the transactions into which they entered. In my opinion, on the facts as pleaded, neither Total when it entered into its transaction with Redlaw, nor Alldech when it entered into its transaction with The Accessory People, nor Total and Alldech when they entered into the final transaction with one another, were intending to buy or sell, as the case may be, mobile telephones. They were intending to produce pieces of paper invoices, in order to pretend to the Revenue that genuine commercial transactions had taken place and thereby to deceive the Commissioners into paying-up on a spurious input tax repayment claim. The issue is whether in these circumstances the Commissioners have a civil action in tort to recover from Total, as damages for the tort, the loss suffered by the Commissioners by the success of the fraudulent scheme.

The tort of conspiracy

56.  The pleaded tort is a conspiracy to cheat and/or defraud the Commissioners by unlawful means. The issue is whether this tort requires that the unlawful means relied on include some civil wrong actionable by the claimant against at least one of the conspirators. On this issue I can add nothing of value to the conclusion and reasoning of my noble and learned friends. The Court of Appeal felt bound to follow the earlier Court of Appeal decision in Powell v Boladz [1998] Lloyd’s Rep. Med.116 in which Stuart-Smith LJ, with whose judgment the other two members of the Court agreed, had said at 126 that

“… the unlawful act relied on 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".

My Lords, in agreement with my noble and learned friends and for the reasons they have given I too would hold that criminal conduct can constitute unlawful means for the purposes of a tortious conspiracy to injure by unlawful means (see para.95 of Lord Walker’s opinion). It must, in my opinion, be kept in mind that the whole of this branch of the law of tort is the result of a step by step development by judges of the action on the case. We were taught at Law School that the action on the case was the means whereby our judicial forbears allowed tortious remedies in damages where harm had been caused in circumstances where the conduct of the authors of the harm had been sufficiently reprehensible to require the conclusion that they ought to be held responsible for the harm. The law whereby harm caused by negligence can be remedied by an action in tort for damages results from a development of the action on the case. The law enabling an action for tortious damages to be brought where two or more persons have joined together with the predominant intention of injuring another person and have successfully carried out their intention is another, and for present purposes highly relevant, example of a judicial development of the action on the case. This is the so-called “lawful means” conspiracy which is tortious notwithstanding that the means employed to cause the harm are themselves neither criminal nor tortious. The essential ingredient of this type of action is the combination of people all intent on causing harm to the victim, not on the type of means employed for doing so. As it was put by Viscount Simon in Crofter Hand Woven Harris Tweed Co.Ltd v Veitch [1942] AC 435 at 445

“If that predominant purpose is to damage another person and damage results, that is tortious conspiracy. If the predominant purpose is the lawful protection or promotion of any lawful interest of the combiners (no illegal means being employed), it is not a tortious conspiracy, even though it causes damage to another person.”

Where, however, unlawful means are employed by the conspirators to achieve their object and their object involves causing harm to the victim, the intent to cause that harm does not have to be the predominant purpose of the conspiracy. This difference between the torts of lawful means conspiracy and unlawful means conspiracy is sometimes described as anomalous. In my opinion it is not. The difference reflects and demonstrates the essential flexibility of the action on the case. It is not all conduct foreseeably likely to cause, and that does cause, economic harm to another that is tortious. Nor should it be. The circumstances must be such as to make the conduct sufficiently reprehensible to justify imposing on those who have brought about the harm liability in damages for having done so. Bearing that in mind, the proposition that a combination of two or more people to carry out a scheme that is criminal in its nature and is intended to cause economic harm to some person does not, when carried out with that result, constitute a tort actionable by that person is, in my opinion, unacceptable. Such a proposition is not only inconsistent with the jurisprudence of tortious conspiracy, as Lord Walker has demonstrated and explained, but is inconsistent also with the historic role of the action on the case.

57.  In my opinion, any coherent law of tortious liability for conspiracy must hold Total liable in tort if the facts of the conspiracies pleaded in this case can be proved.

The second issue

58.  The second issue is whether the Commissioners can bring a private law action to recover the loss they have been caused by the fraudulent conspiracy. It is said that the damages claim is, in substance, a claim to recover the tax that Redlaw has failed to pay. The action constitutes, it is said, an attempt to make Total liable to pay the tax, an attempt that is barred by article 4 of the Bill of Rights (see para.21 of Lord Hope’s opinion). It is said, alternatively, that the statutory VAT scheme establishes exclusive remedies for the recovery of tax or for dealing with false input tax repayment claims and that these remedies cannot be supplemented by a tortious action for damages. Lord Hope, in paragraph 15 of his opinion, has listed the various statutory remedies available under the statutory VAT scheme.

59.  My Lords, there is, in my opinion, nothing whatever in the Bill of Rights point. It is true that Total are not taxable under the statutory VAT scheme in respect of any of the pleaded transactions, but the claim against Total is not a claim for tax. It is a claim for damages, for loss, caused by the fraudulent conspiracy. The Consolidated Particulars of Claim claim from Total damages (for the first conspiracy) of “not less than £253,345.50". That was the sum paid by the Revenue to Alldech in response to Alldech’s claim for repayment of the VAT Alldech had paid as input tax to The Accessory People. It was not the amount of the VAT in respect of which Redlaw, the missing trader, should have accounted to the Revenue. The claim for a sum in damages not less than the sum paid by the Revenue to Alldech is, however, capable of leading to a misunderstanding. The sum recoverable by the Commissioners as damages may well be less than £253,345. A tortious damages claim must bring into account benefits, as well as losses, that have accrued to the victim from the wrongful conduct. So the Commissioners must give credit for the £1323 and £1975 for which GAK and The Accessory People accounted to the Revenue and must give credit, also, for the value of any statutory right of the Commissioners under the VAT scheme to recover the £253,345 from Alldech (see s.73(2) of the Value Added Tax Act 1994). But this would all be part of the assessment of the quantum of damages recoverable by the Commissioners from Total if the Commissioners succeed in establishing the tort. It is not the levying of tax.

60.  As for the point that the statutory VAT scheme prescribes exclusive remedies for the Commissioners, I can, for my part, see no reason why the statutory scheme should be thought to provide protection against tort claims for those who by fraudulent schemes succeed in extracting money from the Commissioners. If the Commissioners have a statutory remedy against Alldech to recover the £235,345 and if Alldech are good for the money, then the economic damage caused by the conspiracy will, presumably, be nil. But if Alldech is not good for the money, or if there is no statutory remedy available in a case such as this, I can see no reason why the Commissioners, the victims of a fraudulent conspiracy, should be barred from recovering damages against the principal conspirator, Total. An intention that that should be so cannot, in my opinion, be attributed to the legislature in enacting the VAT scheme.


61.  In agreement, therefore, with all my noble and learned friends on the tort of conspiracy point and with Lord Walker and Lord Mance on all other points, I would allow the Commissioners’ appeal, dismiss Total’s cross-appeal, restore paragraph 1 of the order of Hodge J made on 10 January 2005, and set aside paragraph 1 of the order of the Court of Appeal made on 31 January 2007.


My Lords,

The two issues

62.  This appeal on a preliminary point of law raises two issues, each of which is important. The first is whether the appellants, the Commissioners of HM Revenue and Customs (“the Commissioners”) are entitled to resort to a private law remedy—an action for damages for the tort of conspiracy—in order to recoup value added tax (VAT), which would otherwise be irrecoverable. The second issue is whether (on the facts which the House is required to assume for the purposes of the preliminary issue) the requirements of the common law tort of conspiracy can be established.

63.  Although they are distinct the two issues touch at a single point. That is whether (if, contrary to the Commissioners’ primary case, a claimant alleging an “unlawful means” conspiracy must establish that the unlawful means consisted of or included the commission of a civil wrong actionable at the suit of the claimant) the Commissioners would have been able to bring a private law claim for fraudulent misrepresentation against a company called Alldech Limited (“Alldech”), which was (on the assumed facts) a participant in a fraudulent conspiracy with the respondent Total Network SL (“Total”).

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