R & C Commissioners v McCord (t/a Hi-Octane Imports)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 June 2021 |
| Neutral Citation | [2021] UKUT 153 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 153 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Judge Jonathan Richards, Judge Guy Brannan
Lucy Wilson-Barnes, instructed by the General Counsel and Solicitor to HM Revenue and Customs appeared for the appellants
Joe Brolly, instructed by Finucane Toner Solicitors appeared for the respondent
Value added tax – Missing trader fraud – Whether FTT entitled to conclude that there was no fraudulent loss of VAT – No – Appeal allowed.
HMRC successfully challenged the conclusion of the FTT in an MTIC case that there had been no fraudulent evasion of VAT. The UT remade the FTT's decision upholding HMRC's disallowance of input tax on transactions where the evidence before the FTT demonstrated that the appellant should have known of a connection to fraud.
The appellant (“Hi-Octane”) was a car dealer in Northern Ireland. HMRC disallowed input tax claimed on certain vehicles bought for resale by Hi-Octane on Kittel grounds ((Joined Cases C-439/04 and C-440/04) [2008] BVC 559). The conditions for HMRC to disallow input tax recovery on purchases by Hi-Octane were (para. 3):
- There needed to be a loss of VAT.
- That loss needed to result from fraudulent evasion.
- Hi-Octane's purchases of vehicles needed to be connected with that fraudulent evasion.
- Hi-Octane either needed to know, or have the means of knowing, that its purchases were connected
At the FTT ([2018] TC 06812) 16 car purchases were considered. The cars were purchased from two suppliers, “QAL” and “PM”, and sold to customers in either the UK or the Republic of Ireland. In respect of purchases from QAL, the FTT did not accept that limbs 1–3 of the Kittel test were met and, because of the absence of a VAT loss resulting from fraudulent evasion, allowed Hi-Octane's appeal in relation to these transactions.
In respect of purchases from PM, the FTT accepted that limbs 1–3 of the Kittel test were met. Where cars were sold to Irish purchasers, the FTT further accepted that limb 4 of the test was met. However, where cars were sold to UK purchasers the FTT concluded that Hi-Octane neither knew nor had the means of knowing of a connection to fraud.
HMRC appealed to the UT, putting forward “a number of grounds and sub-grounds for appeal”. These were grouped together by the UT as the “Procedural Challenge” and the “Factual Challenge” (para. 6). As the UT found in HMRC's favour on the Procedural Challenge, the Factual Challenge was not considered.
The essence of the Procedural Challenge was that, in its skeleton argument, Hi-Octane had expressly conceded that a loss of VAT “as set out by the Respondent” (i.e. HMRC) had occurred (para. 13 & 14). In its decision the FTT expressed a number of reservations regarding HMRC's evidence that tax loss had occurred. However, these were not raised with HMRC counsel during the hearing, the first HMRC knew of the reservations was when they received the Decision (para. 18).
The UT allowed HMRC's appeal on the Procedural Challenge, stating “on opening the FTT's decision, [HMRC] would have seen that they had failed in a material aspect of their case on a ground that was not even in dispute. The word “ambush” is sometimes overused in litigation. We do not consider it an overstatement to say that in these proceedings regrettably HMRC were ambushed, not by their opponent, but by the FTT itself” (para. 25).
The UT decided that the decision of the FTT should be re-made, substituting the conclusion that in relation to purchases from QAL, limbs 1–3 of the Kittel test were met for its conclusion that they were not (para. 28). The UT concluded that the FTT's findings made it clear that, when considering limb 4 of the Kittel test, it would have concluded that the “knew or should have known test” was met in respect of sales to Irish customers but not met in respect of sales to UK customers (para. 34).
In its decision the FTT determined that there was no fraudulent evasion of VAT without discussing the issue with either the appellant or HMRC in the course of the hearing. HMRC was therefore denied the opportunity to address the FTT's concerns regarding its evidence. Given that the appellant had, in its skeleton argument, accepted that fraudulent evasion of VAT had taken place, the UT reached the expected conclusion.
[1] The appellants (“HMRC”) appeal against a decision (the “Decision”) of the First-tier Tribunal (Tax Chamber) (the “FTT”) released on 12 November 2018. The hearing before us took the form of a fully remote video hearing, neither party having argued that the hearing should be in a different format.
[2] The Decision concerned what HMRC considered to be a case of “missing trader” or “MTIC” fraud. The Respondent, to whom we will refer as “Hi-Octane” after the trading name that he used for his business as a sole trader, incurred input tax in his 9/12 and 10/12 VAT periods on 16 transactions for the purchase of vehicles. In an ordinary case, he would be entitled to credit for that input tax against any output VAT due in those periods and a repayment of VAT to the extent his input tax exceeded output tax. However, HMRC formed the view that the principle formulated in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 applied so that Hi-Octane was not entitled to input tax credit. By decision letters dated 12 September 2014, HMRC refused Hi-Octane's claim for a repayment of VAT of £52,919.05 in respect of the 9/12 period, and determined that instead Hi-Octane owed £13,777.37 for that period. HMRC also refused Hi-Octane's claim for a VAT repayment of £27,074.83 for the 10/12 period, agreeing only to repay the lesser sum of £4,020.67.
[3] Hi-Octane appealed to the FTT against HMRC's decision. It was common ground before the FTT, as before us, that in order for HMRC to be entitled to invoke the Kittel principle to deny Hi-Octane credit for input VAT, the following four requirements needed to be present:
- There needed to be a loss of VAT.
- That loss needed to result from fraudulent evasion.
- Hi-Octane's purchases of vehicles needed to be connected with that fraudulent evasion.
- Hi-Octane either needed to know, or have the means of knowing, that its purchases were connected.
[4] HMRC's case on issues (1), (2) and (3) was that Hi-Octane had purchased its vehicles directly from Q Autos Limited (“QAL”) and Patrick McGourty (“PM”), both of whom had fraudulently failed to account for VAT that was due. Its case on issue (4) was that Hi-Octane either knew, or should have known, that its purchases were connected with fraud.
[5] As is usual for this kind of dispute, the FTT was taken through the details of each transaction of purchase and sale. The FTT reached the following conclusions:
- It did not accept HMRC's case that QAL was responsible for any loss of VAT in connection with the various transactions. Accordingly, limb (1) of the Kittel test was not satisfied in relation to purchases from QAL (transactions 1, 6, 7, 8, 9, 10, 11, 12, 14, 15 and 16). It followed that, in the FTT's judgment, HMRC were not entitled to deny or restrict Hi-Octane's input tax credit in respect of any purchase from QAL.
- It accepted HMRC's case that PM was responsible for a fraudulent evasion of VAT. It concluded that limbs (1) to (3) of the Kittel test were satisfied in relation to purchases from QAL (transactions 2, 3, 4, 5 and 13). It followed that Hi-Octane could be denied credit for input tax on these purchases provided that limb (4) of the Kittel test was satisfied.
- Where Hi-Octane's customer was based in the UK, as distinct from the Republic of Ireland (transactions 1, 6, 9, 10, 11, 13, 15) then the FTT concluded, to the extent relevant, that Hi-Octane could not have...
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