MobilX went into administration in 2007 after HMRC refused to pay back £7.3 million in VAT repayments after claiming that one of the company’s in MobilX’s supply chain had taken part in a carousel fraud.
Carousel fraud involves transferring products between EU companies VAT free and then selling on for a price including VAT.
HMRC said that MobilX owner, Steven Bell, should have been aware of this and not have been engaged in dealing with the firm.
Mr Bell however, argued that he had no way of knowing about the actions of a firm further down the line.
In 2008 the case was taken to a VAT and Duties Tribunal where it was ruled in HMRC’s favour which led to MobilX taking the case to the High Court.
The VAT Tribunal stated that MobilX had been informed 18 months prior to HMRC’s action that 17 out of the 24 chains in two months had been traced to a defaulter and had been informed later that no improvement had been seen.
“There must come a time when a trader, told repeatedly that every one of his purchases followed a tainted chain, is compelled to recognise that without a significant change in his trading methods every one of his future purchases is more likely than not also to follow a tainted chain” the VAT Tribunal said.
Although the High Court reinforced the tribunal’s decision by finding in favour of HMRC, they did rule that the test should have been whether MobilX should have known the transactions “were more likely than not to be connected with fraud” as opposed to “whether they were connected”.
The High Court ruled that HMRC should “have known that every transaction in which it was engaged was likely to lead back to fraudulently defaulting traders” and “chose not to change the manner in which it conducted its trade”.
Lord Justice Moses said that the company ought to have known that realistically the purchases would be linked to fraudulent evasion of VAT.
Mr Bell, the owner of MobilX, was not contactable after the High Court ruling.