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Carbon credits (and a little VAT fraud)!

28 January 2013   (0 Comments)
Posted by: SAIT Technical
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By Alastair Morphet (Cliffe Dekker Hofmeyr Tax Alert)

Executive summary

Tax Alert reports on Bilta (UK) Ltd (In Liquidation) v Nazir [2012] EWHC 2163 (Ch). Bilta, a company incorporated in England and registered as a vendor for the purposes of VAT, traded in the purchase and sale of carbon credits on the Danish Emissions Trading Agency. It bought carbon credits amounting to €294m during 2009 from traders outside the UK. The purchases were therefore zero-rated. They then sold these carbon credits to persons in the United Kingdom who were registered for VAT, none of which businesses had a use for carbon credits and these supplies therefore standard rated. Bilta was unable to pay the VAT due on its supplies because it had made no profit and the proceeds of its sales had been paid away to the overseas traders.
HMRC raised eight assessments on Bilta for VAT in an amount of £38 million and the company went into liquidation.

The case turned on the principle well known in our law, of ex turpi causa non oritir actio (namely that he with dirty hands should not approach the Court for relief).

With regard to the VAT debt, it is a well known principle of private international law that the Courts of England have no jurisdiction directly or indirectly to enforce the revenue law of a foreign state

It was held that there was no reason to refuse to enforce the proper claims of HMRC in the Courts of England and Wales whether it was based on comity in international law or otherwise.

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In July 2012, a matter came before Sir Andrew Morritt in the Chancery Division in England, concerning the trading in carbon credits in the European Union. The case was referenced as Bilta (UK) Ltd (In Liquidation) v Nazir [2012] EWHC 2163 (Ch). Bilta, a company incorporated in England and registered as a vendor for the purposes of VAT, traded in the purchase and sale of carbon credits on the Danish Emissions Trading Agency. It bought and sold in excess of 5,7 million carbon credits for a total amount of about €294 million during 2009. The purchases were from traders carrying on business outside the United Kingdom, including a company called Jetivia, incorporated incorporated in Switzerland. The purchases were therefore zero rated for the purposes of VAT. They then sold these carbon credits to persons in the United Kingdom who were registered for VAT, none of which businesses had a use for carbon credits and these supplies were subject to VAT at the standard rate. The price payable by the purchasers net of VAT was less than that paid by Bilta to Jetivia and the other suppliers and was paid to them in full directly or through Bilta. Consequently Bilta was unable to pay the VAT due on its supplies because it had made no profit and the proceeds of its sales had been paid away to the overseas traders.

Accordingly Her Majesty's Revenue and Customs (HMRC) raised eight assessments on Bilta for VAT in an amount of £38 million. Accordingly the company went into liquidation. The first and second defendants were the directors of Bilta, Mr Nazir and Mr Chopra. Mr Chopra owned all of the shares in Bilta. The sixth and seventh defendants were the company Jetivia and its sole director Mr Brunschweiler.

The amended particulars of claim alleged that the defendants conspired to injure and defraud Bilta, and were knowingly parties to the carrying on of the business of Bilta with the intent to defraud the creditors of Bilta and other fraudulent purposes, and thus sought to recover £38.7 million with compound interest and costs. The allegations in the pleadings were that Jetivia and Brunschweiler had agreed to supply Bilta with carbon credits and to enter into documentation which showed Jetivia having supplied Bilta with carbon credits that had in fact been transferred to a different company for onward sale, knowing that Bilta would not be paying the VAT due on its onward sales. Bilta would then sell the carbon credits or produce paper work showing the carbon credits to have been sold on at a price inclusive of VAT.

The pleadings alleged that the pattern of trading by Jetivia with or involving Bilta was not bona fide or consistent with legitimate commercial trading, and it should be inferred was undertaken in furtherance of the conspiracy. At all material times, Mr Nazir and Mr Chopra were the directing will and mind of Bilta and failed to file any VAT returns in the relevant period of 2009 nor have they caused Bilta to account to HMRC for any sum in respect of the VAT charged on the sales.

The case then turned on the principle well known in our law, of ex turpi causa non oritir actio (namely that he with dirty hands should not approach the Court for relief; see Jajbhay v Cassim 1939 AD 537). The question then became, based on this principle, whether Jetivia and Mr Brunschweiler could approach the court or whether their application was barred by the principle the Court or was their application barred by the principle of ex turpi causa?

Sir Andrew Morritt's judgment was that the defence of ex turpi causa would not be available to Mr Nazir and Mr Chopra as a defence to any of the claims made against them or on those who dishonestly conspired with them to break the law. Accordingly Jetivia and Mr Brunschweiler also could not avail themselves of this defence.

With regard to the VAT debt, it is a well known principle of private international law that the Courts of England have no jurisdiction directly or indirectly to enforce the revenue law of a foreign state. The judge assumed that the law of Switzerland would be the same. Counsel for Jetivia and Mr Brunschweiler alleged that the claim made in this action by Bilta and the liquidators was essentially seeking to enforce the claim of HMRC for VAT under the VAT Act. The judge rejected this submission. He said that the claim was not the enforcement direct or indirectly of a revenue claim. The liquidators were seeking to recover compensation for a conspiracy to defraud the company with the means to pay HMRC, and any other creditor which may be paid a dividend in respect of their debts. Even if it is a revenue claim, it is the claim of HMRC and not of the revenue authorities of a foreign state. The judge said that there was no reason to refuse to enforce the proper claims of HMRC in the Courts of England and Wales whether it was based on comity in international law or otherwise. The claimants were not seeking to enforce the revenue laws of Switzerland.


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