Coast Telecom Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 September 2019 |
| Neutral Citation | [2019] UKFTT 596 (TC) |
| Date | 20 September 2019 |
| Court | First-tier Tribunal (Tax Chamber) |
[2019] UKFTT 596 (TC)
Judge Barbara Mosedale
Mr M Firth, Counsel, instructed by Morgan Rose Solicitors, appeared for the appellant
Mr H Watkinson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Procedure – Application for preliminary issue – Wrottesley v R & C Commrs [2015] BTC 537 considered – Succinct, knockout point but lacked reasonable prospect of success – Application refused.
[1] On 14 June 2017, HMRC made a decision which they are now treating as an assessment on the appellant to recover input tax which the appellant had deducted on their VAT returns relating to periods on and after 8/14. That decision is under appeal. This application is an application by the appellant for the Tribunal to determine a point of law as a preliminary issue in that appeal.
[2] The background to the appeal is that it appears accepted by all parties that in the relevant periods the appellant had acquired mobile phones by purchase from traders based in other EU member States and then sold them either to a UK-based customer or to trader based in another EU member State. And in respect of these mobile phones sales, the appellant's VAT returns effectively returned a nil VAT liability.
[3] The appellant would not have been expected to account for VAT on the sales of the phones because the sale was (if cross-border) ordinarily zero rated and (if within the UK) ordinarily caught by the UK's reverse charge regime. Moreover, ordinarily a taxpayer acquiring cross-border taxable goods for resale would not expect to pay VAT on the purchase: such a trader would be obliged to charge itself acquisition VAT on the acquisition of the phones but would off-set in its VAT books the same amount as input tax incurred on the taxable (albeit zero rated) sale. And this was how the appellant calculated its liability to VAT as nil.
[4] HMRC did not accept that the ordinary position prevailed in this case; they considered that the transactions in question were connected to fraud and the appellant knew or ought to have known that. They considered that the doctrine in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 applied such that the appellant was correctly denied its input tax deduction, such that it should have accounted to HMRC for the acquisition VAT.
[5] The appellant raised a number of grounds of appeal, including that it denied the connection to fraud and that if it was wrong on that, it denied that it knew or should have known of it. There were other grounds of appeal as well, including a technical one relating to the original decision letter, and whether the assessment was timely. I was not concerned with any of those grounds in this hearing. I was concerned with the appellant's case that, properly understood, Kittel meant that, where there was a connection to fraud of which the taxpayer knew or ought to have known, the taxpayer was not obliged to account for acquisition VAT any more than it was entitled to recover its input tax. The appellant applied for that ground of appeal to be tried as a preliminary issue and HMRC opposed the application.
[6] I did not understand the parties to be in dispute over the applicable law to the question of whether or not to order a preliminary issue hearing. The leading authority is Wrottesley v R & C Commrs [2015] BTC 537 although I was also referred to cases considered by the Upper Tribunal when giving their guidance in that case, and to another, later, case which cited it with approval.
[7] My approach is to set out the Wrottesley guidance and then deal with the parties' submissions in respect of each of the matters which the Upper Tribunal said should be considered. That guidance was contained at [28] and was as follows:
We think that the key principles to consider can be summarised as follows:
- The matter should be approached on the basis that the power to deal with matters separately at a preliminary hearing should be exercised with caution and used sparingly.
- The power should only be exercised where there is a succinct, knockout point which will dispose of the case or an aspect of the case. In this context an aspect of the case would normally mean a separate issue rather than a point which is a step in the analysis in arriving at a conclusion on a single issue. In addition, if there is a risk that determination of the preliminary issue may prove to be irrelevant then the point is unlikely to be a knockout one.
- An aspect of the requirement that the point must be a succinct one is that it must be capable of being decided after a relatively short hearing (as compared to the rest of the case) and without significant delay. This is unlikely if (a) the issue cannot be entirely divorced from the evidence and submissions relevant to the rest of the case, or (b) if a substantial body of evidence will require to be considered. This point explains why preliminary questions will usually be points of law. The tribunal should be particularly cautious on matters of mixed fact and law.
- Regard should be had to whether there is any risk that determination of the preliminary issue could hinder the tribunal in arriving at a just result at a subsequent hearing of the remainder of the case. This is clearly more likely if the issues overlap in some way – (3)(a) above.
- Account should be taken of any potential for overall delay, making allowance for the possibility of a separate appeal on the preliminary issue.
- The possibility that determination of the preliminary issue may result in there being no need for a further hearing should be considered.
- Consideration should be given to whether determination of the preliminary issue would significantly cut down the cost and time required for pre-trial preparation or for the trial itself, or whether it could in fact increase costs overall.
- The tribunal should at all times have in mind the overall objective of the tribunal rules, namely to enable the tribunal to deal with cases fairly and justly.
[8] I was referred to Hildyard J's decision in Wentworth Sons Sub-Debt SARL v Lomas [2017] EWHC 3158 where he had cited Wrottesley with approval and said, at [36]:
… caution may be the tie-breaker.
My understanding of the authorities is that in cases of doubt whether to order a preliminary issue, the tribunal should err on side of caution and probably refuse to do so.
[9] The Upper Tribunal meant what it said: there is no point to a preliminary issue hearing unless the subject of it is a short, self-contained point that, if resolved in favour of one of the parties, will resolve the proceedings.
[10] Mr Watkinson originally questioned whether the proposed preliminary issue was such a succinct, knockout point but withdraw this objection. And I agree with Mr Firth that the proposed preliminary issue is such a point.
[11] It is succinct. It is a pure point of law. No evidence needs to be heard as the point arises on the assumption that HMRC can prove every factual allegation that they make; in particular, it arises on the assumption that HMRC can prove connection to fraud and knowledge or means of knowledge of that connection on the part of the appellant.
[12] It is also a knock-out point. If the appellant is right, then the appellant will win its appeal even if HMRC can prove all the factual allegations which it makes. HMRC would lose the appeal even if all the matters left outstanding until the substantive hearing were resolved in their favour, so if the appellant is right on the proposed preliminary issue, a further hearing would be pointless and could be dispensed with.
[13] And, as a point of pure law, it is a relatively short one. There are only a few senior authorities that would need to be considered (Mobilx Ltd (in Administration) v R & C Commrs [2010] BVC 638 and Butt v R & C Commrs [2019] BVC 20 in the Court of Appeal and a few ECJ authorities, of which the most important is Kittel.) I accept Mr Firth is likely to be right in estimating it would require no more than a day; I would not be surprised if it required only half a day. In fact, counsel largely covered the arguments that they would make in the preliminary issue hearing in today's hearing with me and that hearing in its entirety took only about an hour and a half.
[14] This is a point very much in favour of a preliminary issue: as Mr Firth pointed out, the warning against preliminary issue hearings given by the House of Lords in the leading case of Tilling v Whiteman [1980] AC 1 would not appear to apply here:
… If [the practice of allowing preliminary points to be taken] cannot be confined to cases where the facts are complicated and the legal issue short and easily decided, cases outside this guiding principle should at least be exceptional.
Here the facts to be decided in the substantive hearing are complicated and the legal issue proposed for the preliminary hearing short and easily decided.
[15] I have already agreed with Mr Firth that the proposed preliminary issue hearing would be short and would not require any exchange of evidence. And Mr Watkinson did not dissent from Mr Firth's suggestion that the substantive hearing would be likely to take two weeks and would require significant exchange of evidence.
[16] The proposed hearing has, therefore, the potential for significant savings.
[17] HMRC did not suggest that the proposed preliminary issue hearing would prejudice the substantive hearing (other than delaying it which I deal with below). I consider that it would not prejudice the...
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