Daryanani and Others (t/a Teletape)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 April 2012 |
| Neutral Citation | [2012] UKFTT 319 (TC) |
| Date | 30 April 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 319 (TC)
Judge Barbara Mosedale
Mr R Holland, solicitor, of Dass Solicitors, appeared for the Appellant
Mr A Westwood, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Procedure - application for stay of proceedings pending five references to the CJEU - application refused
The First-tier Tribunal decided that the issues in any of the references to the Court of Justice of the European Union ("CJEU") would not be of material assistance in resolving the appeals. The Tribunal concluded that it was fairly remote that the CJEU's decision on the issues raised in those references - the privity of contract issue, the question of the incorporation of Kittel into UK law, and due diligence issue - would render the hearing in the taxpayers' appeals superfluous or indeed materially affect the Tribunal's understanding of the law. Although the CJEU decision might materially change the conclusion of the Tribunal hearing these appeals, it would not affect the Tribunal's fact-finding role.
The taxpayers jointly appealed against HMRC's decision denying their input tax claim of approximately £12.5m in the VAT period of the second quarter of 2006. HMRC's denial was based on the grounds that the input tax was not repayable to the taxpayers under the law as stated by the CJEU in Kittel v Belgium; Belgium v Recolta Recycling SPRLECASECAS (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 ("Kittel"). HMRC held that the taxpayers entered into transactions that were connected with the fraudulent evasion of VAT and that they knew or ought to have known this. Such transactions were part of an organised Missing Trader Intra-Community ("MTIC") fraud.
The taxpayers applied for a direction that their appeals be stayed pending the release by the CJEU of their decision in these five references: Mahagében Kft v Nemzeti Adóés Vámhivatal Dél-dunántúli Regionális Adó FoigazgatóságaECAS (Case C-80/11) ("Mahagében"), Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó FoigazgatóságaECASECAS (C-142/11) (2011/C 179/17) ("Dávid"), Bonik EOOD v Direktor na Direktsi Obzhalvane I upravlenie na izpalnenieto, VarnaECASECAS (C-285/11) (2011/C 238/13) ("Bonik"), Tóth v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó FoigazgatóságaECASECAS (C-324/11) (2011/C 282/06) ("Tóth"), and SIA Forvards V v Valsts ienemumu dienestsECASECAS (C-563/11) (2012/C 13/17) ("SIA Forvards") (collectively, "the five references").
The taxpayers referred to the decision of the Inner House of the Court of Session in R & C Commrs v RBS Deutschland Holdings GmbHVAT[2008] BVC 16 ("RBS Deutschland"), which overturned the Tribunal's refusal to stay the appeal pending the decision of the CJEU in Halifax plc v C & E CommrsECAS (Case C-255/02) [2006] BVC 377. There the Inner House ruled that a Tribunal or court might sist (stay) proceedings against the wish of a party if it considered that a decision in another court would be of material assistance in resolving the issues before the Tribunal or court in question and that it was expedient to do so.
The taxpayers also referred to the Upper Tribunal decision in Mynt Ltd v R & C Commrs (PTA/140/2011) ("Mynt"), where the appeals were stayed pending the decision of the CJEU in Mahagében, Dávid, Bonik, and Tóth.
HMRC had alleged and the taxpayers had denied that their transactions were connected with the fraudulent evasion of VAT, and that even if they were, the taxpayers denied that they knew this or should have known this. In addition, the taxpayers considered that there were issues between them which were raised in the five references made to the CJEU: first, whether input tax could be denied where there was no privity of contract between the fraudster and the taxpayer reclaiming input tax; second, whether Kittel could be applied to deny a taxpayer's right to recover input tax if it has not been expressly enacted into UK law; and third, whether the perceived inadequacies of the trader's due diligence was relevant.
The taxpayers' position was that the references in Mahagében and Dávid raised the issue of privity of contract. If the CJEU were to rule that the law as explained in Kittel only applied where there was privity of contract between the fraudster and the taxpayer, then that should necessarily conclude the present appeals in favour of the taxpayers as it was neither alleged that there was privity of contract between them and the defaulter nor that they were in conspiracy with the defaulter.
The taxpayers submitted that there was a real chance that the CJEU would rule that privity of contract was a prerequisite to the application of Kittel. This was because the UK government chose to put in oral submissions to the CJEU in Mahagében and Dávid. It was their view that the UK Government advised the CJEU not to depart from their decision in Kittel.
The taxpayers also considered that the question of whether Kittel had been properly implemented into national law would also arise. They further submitted that as six years had already passed since the facts at issue in this appeal occurred, the evidence would be no more stale in two years' time.
(2) Whether any of the five references would be of material assistance in resolving the appeal.
(3) Whether the decision of the CJEU in the five references would render the hearing in the present appeals superfluous.
Held, dismissing the taxpayers' application:
The Tribunal held that the issues in the five references would not be of material assistance in resolving the appeals. It found that the test applied in Mynt appeared to be different than in RBS Deutschland in that the test of expediency was not explicitly applied. But then the issues were different: in Mynt, the question was whether to stay an appeal to a higher court; in RBS Deutschland and in the present appeals, the question was whether to stay an appeal at first instance. The critical difference was that here, there had been no hearing and no facts had been found. It was right therefore to balance whether the references would be of material assistance in the resolution of the present appeals against questions of whether it was expedient to stay a case at first instance. The Tribunal thus decided that it should apply the test in RBS Deutschland.
Mr Justice Roth in POWA (Jersey) Ltd v R & C CommrsVAT[2012] BVC 1596 had ruled that the Court of Appeal's decision in Mobilx Ltd (in Administration) v R & C CommrsVAT[2010] BVC 638 ("Mobilx") impliedly held that privity of contract was not part of Kittel doctrine. The Tribunal was bound by these rulings. However, the Tribunal in this case was not being asked to depart from the Court of Appeal's ruling on privity of contract; it was merely asked to stay the hearing of this appeal until the CJEU had issued its decisions in references which were considered by the taxpayers to raise this issue. Therefore, that the Court of Appeal had ruled that privity of contract was not a pre-requisite to the application of Kittel was not a reason per se to refuse a stay.
The Tribunal also held there was no question that Kittel was part of UK law (Mobilx considered). The Court of appeal in Mobilx decided that the Value Added Tax Act 1994 should be read to be consistent with the CJEU's reading of the Sixth Council Directive 77/388/EEC in Kittel. However, the Tribunal found that the only question asked in the five references pertinent to this issue appeared to be whether the Council Directive 2006/112/EC required that the formalities be expressly laid down by means of legislation in the form of an act of the Member State's highest legislative body or whether it allowed those formalities not to be laid down by means of legislation, but to constitute an administrative (and tax investigation) practice and case-law. The question appeared to be asked in the context of the formalities of tax deduction. The rule in Kittel would not commonly be regarded as a rule of formality: it was not a rule requiring a document to be held, but a rule about actual or constructive knowledge. The Tribunal said that there was only a remote possibility that the CJEU's answer to that question would determine the appeals in favour of the taxpayers.
In respect of the issue of due diligence, the Tribunal found that it was difficult to see how the questions about due diligence raised in Mahagében and Dávid could be relevant to the taxpayers' appeals as UK law was quite different. There was no legal requirement to carry out due diligence in the UK. While a failure to carry out due diligence per se or to carry out a particular commercial check or a failure to respond to results of due diligence might be relevant in cases of alleged MTIC fraud in this country, that was only in connection with the question of knowledge or means of knowledge. There was no bar to recovery merely because due diligence had not been carried out.
Finally, the Tribunal found that in the balance in this case were five references, four of which - Mahagében, Dávid, Bonik and Toth - the Upper Tribunal had identified as potentially relevant to appeals involving Kittel. Therefore, in any event, any stay would only be appropriate behind the said four references. In respect of those four references, the Tribunal, however, concluded that on the privity of contract issue, the question of the incorporation of Kittel into UK law, and due diligence issue, it was fairly remote that the CJEU's decision on any of the issues would render the hearing in these appeals superfluous or indeed materially affect the Tribunal's understanding of the law. It was more likely that the CJEU might restrict, in cases without privity of contract between taxpayer and fraudster, the meaning of connection in the Kittel sense to cases where the fraud was proved to be organised MTIC fraud. Although that might materially change...
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