Butt v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 August 2017 |
| Neutral Citation | [2017] UKUT 325 (TCC) |
| Date | 08 August 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0325 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Hon Mr Justice Newey, Judge Greg Sinfield
Rory Mullan, Harriet Brown and Etienne Wong, counsel, acting pro bono under licence from the Bar Pro Bono Unit, appeared for the appellant
Jeremy Benson QC and Karen Robinson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Penalty – Missing Trader Intra-Community Fraud (MTIC) – Liability of director of company to penalty for dishonest conduct in relation to evasion of VAT – Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 considered – Whether FTT's approach to evidence flawed – Whether judge, who refused application for HMRC to be barred under Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 8(3), should have recused herself from hearing substantive appeal – Director's appeal dismissed.
The Upper Tribunal (UT) dismissed the appeal against the decision of the First-tier Tribunal (FTT) ([2015] TC 04668) that the director was liable to a penalty relating to MTIC fraud. The director had dishonestly participated in the fraud. The company's conduct was wholly attributable to the dishonesty of Mr Butt and his fellow director.
In this case on missing trader intra-Community (MTIC) fraud, the director Mr Butt unsuccessfully appealed from the FTT. The dispute is not of general interest, so no detailed headnote has been prepared.
HMRC refused a claim by Waterfire Ltd for input tax of £6,792,184 incurred in the period 04/06 on the ground that the company, through its directors, knew or should have known that its transactions were connected with MTIC fraud. HMRC decided that Waterfire had dishonestly sought to evade VAT and that the company was liable to a penalty of £6,792,184 under VATA 1994, s. 60.
Mr Butt had applied to the FTT for a direction under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273) (“the FTT Rules”), r. 8(3) that HMRC be barred from taking further part in the proceedings and the FTT issue a summary decision that Mr Butt's appeal be allowed. Judge Blewitt at the FTT had refused the application on the basis that she was not satisfied that HMRC's case, or part of it, had no reasonable prospect of success such that HMRC should be barred from taking further part in the proceedings.
The substantive appeal was heard by the FTT and, at the start of the hearing, Mr Butt unsuccessfully applied that Judge Blewitt recuse herself from hearing the substantive appeal on the ground that a fair minded and informed observer would conclude that there was a real possibility that she had pre-judged a major part of the issues by virtue of the fact that she had refused Mr Butt's application in the Summary Decision. Judge Blewitt rejected the application that she recuse herself and the hearing continued. Judge Blewitt issued a decision (“the Recusal Decision”) on the second day of the hearing and extended the time for appealing to be coterminous with the time limit for appealing the decision in relation to the substantive appeal.
The FTT dismissed Mr Butt's appeal (the “Substantive Decision”; [2015] TC 04668). The FTT held that the only issue for determination was whether the conditions in VATA 1994, s. 61 were met. The FTT found that Waterfire's actions were intended to facilitate fraud and that Mr Butt had actual knowledge that Waterfire's transactions were connected to the fraudulent evasion of VAT. The FTT found that Waterfire had acted dishonestly and its directors were dishonest. Accordingly, Waterfire was liable to a penalty under s. 60. The FTT also found that Waterfire's conduct was wholly attributable to the dishonesty of Mr Butt and his fellow director.
Mr Butt unsuccessfully appealed to the UT against the Substantive Decision and the Recusal Decision. The grounds of appeal raised the following issues:
- In the absence of specific legislation, can a principle of EU law be used as the basis of penalising a UK taxpayer?
- Does s. 60 permit a penalty to be imposed on a knowing participant in an MTIC fraud?
- Was the FTT's approach to the evidence correct in law?
- Would a reasonable person conclude that Judge Blewitt pre-judged matters in her summary judgment decision?
The UT held that none of the grounds revealed any error of law by the FTT and Mr Butt's appeal was dismissed (para. 9 of the decision).
This is another victory for HMRC in their long battle against MTIC fraud. Section 60 provides that a person who has dishonestly done something or omitted to do something for the purpose of evading VAT is liable to a penalty equal to the amount of VAT evaded or sought to be evaded.
[1] The Appellant, Mr Umaad Butt, was one of two directors of and owned 50% of the shares in Waterfire Limited (“Waterfire”). The Respondents (“HMRC”) refused a claim by Waterfire for input tax of £6,792,184 incurred in the period 04/06 on the ground that the company, through its directors, knew or should have known that its transactions were connected with fraud, namely a missing trader intra-Community (or “MTIC”) fraud. HMRC considered that Waterfire had dishonestly sought to evade VAT and that the company was liable to a penalty of £6,792,184 under section 60 Value Added Tax Act 1994 (“VATA94”).
[2] Section 60(1) VATA94 provides that a person who has dishonestly done something or omitted to do something for the purpose of evading VAT shall be liable to a penalty equal to the amount of VAT evaded or sought to be evaded. For these purposes, evading VAT includes obtaining a VAT credit in circumstances where a person is not entitled to that amount. Section 60(7) provides that the burden of proof as to the matters specified in section 60(1) is on HMRC. Where the person liable to a penalty under section 60 is a company and the conduct giving rise to that penalty is, in whole or in part, attributable to the dishonesty of a director or other officer, section 61 VATA94 provides that HMRC may recover the penalty or a proportion of it from the director or other officer. HMRC considered that Waterfire's conduct was attributable to the dishonesty of its directors and imposed a penalty under section 61 VATA94 on Mr Butt of £3,137,483.03, being 50% of the input tax claimed less a reduction of 10%.
[3] Mr Butt appealed to the First-tier Tribunal (Tax Chamber) (“the FTT”) in August 2010. In December 2013, Mr Butt applied to the FTT for a direction under rule 8(3) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the FTT Rules”) that HMRC be barred from taking further part in the proceedings and the FTT issue a summary decision that Mr Butt's appeal was allowed. The application was heard by the FTT (Judge Jennifer Blewitt) on 14 May 2014. Judge Blewitt released her decision, [2014] TC 03616, refusing the application on 20 May (“the Summary Decision”). Judge Blewitt refused the application on the basis that she was not satisfied that HMRC's case, or part of it, had no reasonable prospect of success such that HMRC should be barred from taking further part in the proceedings. Mr Butt had also applied for the hearing of the appeal, listed June 2014, to be postponed. That application had been refused by email on 23 April and that decision was confirmed orally at the hearing on 14 May.
[4] Mr Butt applied to the FTT for permission to appeal against the Summary Decision and the refusal to vacate the hearing. In a decision notice issued on 28 May 2014, Judge Blewitt refused to grant Mr Butt permission to appeal on either matter. Mr Butt then applied to the Upper Tribunal for permission to appeal. The Upper Tribunal refused permission to appeal on the papers and after a reconsideration at an oral hearing.
[5] The substantive appeal was heard by the FTT (Judge Blewitt and Mr Wilson) over seven days in June 2014 with closing submissions in September. At the start of the hearing, counsel for Mr Butt made an application that Judge Blewitt recuse herself from hearing the substantive appeal on the ground that a fair minded and informed observer would conclude that there was a real possibility that she had pre-judged a major part of the issues by virtue of the fact that she had refused Mr Butt's application in the Summary Decision. Judge Blewitt rejected the application that she recuse herself and the hearing continued. Judge Blewitt issued a decision (“the Recusal Decision”) on the second day of the hearing and extended the time for appealing to be coterminous with the time limit for appealing the decision in relation to the substantive appeal.
[6] In a decision released on 13 October 2015, [2015] TC 04668, (“the Substantive Decision”), the FTT dismissed Mr Butt's appeal. Save as otherwise indicated, paragraph references in square brackets in this decision are to the paragraphs in the Substantive Decision. The FTT found, in [313], that Waterfire's VAT return for the period 04/06 was arithmetically correct and accurately represented the taxable supplies which were made during the period. At [320], the FTT held that the only issue for determination was whether the statutory criteria of section 61 VATA94 were fulfilled. In [321]–[323], the FTT held, relying on paragraph 47 of the judgment of Moses LJ in Mobilx Ltd (in administration) v R & C Commrs [2010] BVC 638 (“Mobilx”) and para. 56–59 of the judgment of the Court of Justice (“CJEU”) in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 (“Kittel”), that Waterfire never had any right to deduct the VAT claimed and HMRC were entitled to refuse input tax credit where a trader enters into a transaction which he knows or should have known is connected with fraud. The FTT found, at [387], that Waterfire's actions were intended to facilitate fraud and that Mr Butt had actual...
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