Award Drinks Ltd ((in Liquidation))
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 October 2018 |
| Neutral Citation | [2018] UKFTT 632 (TC) |
| Date | 23 October 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0632 (TC)
Judge John Brooks, Elizabeth Bridge
Joseph Howard, Counsel, instructed by TT Tax, appeared for the appellant
Brendon McGurk, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Best judgment assessments – Various deposits into appellant's UK bank account – Whether from sales of alcohol to cash and carry outlets in France – Whether sufficient evidence to displace assessments – No – Appeal dismissed.
[1] The appellant, Award Drinks Limited (in liquidation) (“Award Drinks”), appeals against assessments to VAT issued by HM Revenue and Customs (“HMRC”) under s 73 of the Value Added Tax Act 1994 (“VATA”) on 30 September 2014 in the sum of £1,543,714 in relation to its VAT accounting periods between September 2012 and June 2013 and on 6 January 2015 in the sum of £5,029,677 in relation to VAT periods between December 2010 and June 2012. These assessments were made on the basis of 1,311 separate deposits made between 4 January 2011 and 27 December 2012 at 42 different UK branches of Barclays Bank into an account held by Award Drinks totalling £32,650,305.89. The assessments were reduced on 23 December 2015, “leaving only those transactions where HMRC consider that the origin of the payments has not been sufficiently evidenced”.
[2] The ground of appeal initially advanced by Award Drinks, and maintained until its closing submissions, was that these sums deposited into its UK bank accounts by couriers were payments for in-bond sales of alcohol from bonded warehouses in France to cash and carry operators in France. The money was paid in pounds sterling as that was the currency accepted by these outlets from UK “booze cruise” tourists. Award Drinks contends that as there were no taxable supplies in the UK its appeal against the assessments should succeed.
[3] However, HMRC do not accept that this is the case and contend that, having traced the relevant supply chains, the goods sold by Award Drinks had entered the UK as a result of an inward diversion fraud and supplies were made in the UK and therefore taxable but, as made unequivocally clear in a letter to the Tribunal of 9 May 2017, HMRC makes no allegation of fraud against Award Drinks.
[4] In a highly contentious and often somewhat fractious hearing, Award Drinks was represented by Mr Joseph Howard with Mr Brendan McGurk appearing for HMRC.
[5] Before considering the relevant legislation and its application to the evidence and our findings of fact, it is convenient to first describe the nature of inward diversion fraud and deal with the issue of the burden of proof in circumstances in which an allegation of fraud has arisen. We should also mention at this stage that, although carefully considered, we have not found it necessary to refer to every argument advanced by or on behalf of the parties in arriving at our conclusions.
[6] We gratefully adopt the following succinct and helpful description of inward diversion fraud given by the Tribunal (Judge Falk and Mr Simon) in Dale Global Ltd [2018] TC 06577:
[50] In outline, alcohol diversion fraud is used to evade excise duty and VAT through abuse of the Excise Movement and Control System (“EMCS”), which permits authorised warehouse keepers to move excise goods from warehouse to warehouse within the EU on behalf of account holders, in duty suspense. Any movement requires the generation of an Administrative Reference Code (“ARC”) within the EMCS, which must travel with the goods. The system has operated in electronic form since January 2011. An ARC number will typically last for a few days, and expires when the load is recorded on the system by the receiving warehouse as having been being delivered.
[51] Inward diversion fraud, which is the type of fraud potentially relevant in this case, operates as follows. Alcohol originating in the UK is supplied under duty suspension to tax warehouses on the near continent, principally in France, the Netherlands and Belgium (what follows uses the example of France). Once in the tax warehouse they will usually change hands a number of times and will often be divided up before being reconstituted. A supply chain is set up with a purported end customer based in France. Some of the goods will be consigned back to the UK in duty suspense using an ARC number. This is the “cover load”. Within the lifetime of the ARC number further consignments of goods of the same description will purportedly be released for consumption in France, attracting duty at low French rates, but will in fact be smuggled to the UK using the same ARC number. These are the “mirror” loads, and this will carry on until the ARC number expires or one of the loads is intercepted by Customs, following which a new ARC number will be generated in a similar manner.
[52] Mirror loads are typically sold immediately following their arrival in the UK for cash. This process is known as “slaughtering”. The UK customers may create false paper trails to generate the impression that the goods were supplied to them legitimately.
[7] This is not a case where it is alleged that Award Drinks knew or should have known that its supplies were connected to the fraudulent evasion of VAT in which the burden of proof would be on HMRC (see Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 and Mobilx Ltd (in Administration) v R & C Commrs; R & C Commrs v Blue Sphere Global Ltd; Calltel Telecom Ltd v R & C Commrs [2010] BVC 638). Rather, as we have already observed, HMRC are not making any allegation of fraud against Award Drinks and therefore the position is as described by Dillon and Mustill LJJ in Brady (HMIT) v Group Lotus Car Companies plc [1987] BTC 480 (“Brady”) in which Dillon LJ said, at p. 485:
Where the assessments are made in time, however, as these were, the burden lies on the taxpayer from the start to displace the assessments: see Hudson v Humbles (HMIT) (1965) 42 TC 380 at 384 and T. Haythornthwaite & Sons Ltd v Kelly (HMIT) (1927) 11 TC 657, a decision of this court. This ruling on onus was founded on the statutory provisions for appeals against assessments, now in section 50 of the Act and especially in subsection (6) of that section: see the statement of Lord Hanworth MR in Haythornthwaite at p. 667 as follows:
Now it is to be remembered that under the law as it stands the duty of the Commissioners who hear the appeal is this: Parties are entitled to produce any lawful evidence, and if on appeal it appears to the majority of the Commissioners by examination of the Appellant on oath or affirmation, or by other lawful evidence, that the Appellant is over-charged by any assessment, the Commissioners shall abate or reduce the assessment accordingly: but otherwise every such assessment or surcharge shall stand good. Hence it is quite plain that the Commissioners are to hold the assessment standing good unless the subject – the Appellant – establishes before the Commissioners, by evidence satisfactory to them, that the assessment ought to be reduced …
Estimated assessments may be made by an inspector where the taxpayer has failed to make any Return at all and the inspector has no idea what the taxpayer's taxable income truly is, or they may be made where the inspector suspects that the taxpayer has concealed part of his income, whether by fraud, wilful default or mere mistake. In either case, if the assessment is made in due time, the onus to displace the assessment is on the taxpayer throughout.
[8] Mustill LJ observed, at pp. 487–489 (with emphasis added), that:
… It is a commonplace that, if there is a disputed question of fact admitting of only two possible solutions, X and Y, with party A having the burden of proving X in order to establish his case, if A produces credible evidence in favour of X and B produces none in favour of Y, it is very likely that A will win. B must therefore exert himself if he wishes to avoid defeat. But this does not mean that B ever has the burden of proof. So also here. It may well be that, if the appellants' version does not correspond with the true facts, it must follow that someone was guilty of fraud. This does not mean that, by traversing the appellants' case, the Revenue have taken on the burden of proving fraud. Naturally, if they produce no cogent evidence or argument to cast doubt on the appellants' case, the appellants will have a greater prospect of success. But this has nothing to do with the burden of proof, which remains on the appellants because it is they who, on the law as it has stood for many years, are charged with the task of falsifying the assessment. The contention that, by traversing the appellants' version, the Revenue are implicitly setting out to prove a loss by fraud, overlooks the fact that, in order to make good their case, the Revenue need only produce a situation where the Commissioners [Tribunal] are left in doubt. In the world of fact, there may be only two possibilities: innocence or fraud. In the world of proof, there are three: proof of one or other possibility, and a verdict of not proven. The latter will suffice, so far as the Revenue are concerned.
[9] Also, as Henderson J (as he then was) said in Ingenious Games LLP v R & C Commrs [2015] BTC 508 at [15]:
… the fundamental principle, well known to tax lawyers but sometimes a cause of initial surprise to a lay person, that if an assessment to tax (or, nowadays, an amendment to a self-assessment return) is made within normal time limits, the burden of proof is on the appellant taxpayer to show that the assessment (or amendment) is incorrect: see section 50(6) of the Taxes Management Act 1970 and authorities such as Brady (HMIT) v Group Lotus Car Companies plc [1987] BTC 480 at p. 485 per Dillon LJ, p. 487...
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Awards Drinks Ltd (in iquidation) v R & C Commissioners
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