Revenue and Customs Commissioners v Pacific Computers Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 July 2016 |
| Neutral Citation | [2016] UKUT 350 (TCC) |
| Date | 28 July 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Mann, Judge Roger Berner
Michael Holland QC with Christopher Foulkes and Howard Watkinson, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Alistair S Webster QC, instructed by Morrisons Solicitors LLP, appeared for the respondent
Value added tax – Denial of input tax recovery as connected with MTIC fraud – Whether FTT erred in law in its approach to the evidence and submissions – Whether FTT erred in law in not giving proper weight to evidence of witnesses whose witness statements were unchallenged – Whether FTT erred in law in refusing to admit certain evidence tracing money movements contained in a schedule evidenced in an unchallenged statement – Whether FTT erred in law in making unspecified findings of fact – HMRC's appeal allowed and case to be re-heard by a fresh panel at the FTT.
The Upper Tribunal (UT) allowed HMRC's appeal against the decision of the First-tier Tribunal (FTT) ([2015] TC 04239) that the recovery of input tax had been wrongly denied on the basis that there was a connection with fraud.
In this detailed case on missing trader intra-Community (MTIC) fraud, HMRC successfully appealed from the FTT regarding the facts. The dispute is not of general interest, so only a brief headnote has been prepared.
The basis for HMRC's decision to deny PCL recovery of input VAT was (1) that PCL's transactions in computer processing units (“CPUs”) and iPods formed part of a scheme to defraud HMRC, and (2) that PCL knew or should have known that was the case.
PCL had accepted that (1) HMRC had proved that in respect of each relevant transaction there had been a VAT loss, (2) such a loss had been fraudulent and (3) each of PCL's relevant transactions was connected with the fraudulent evasion of VAT. Accordingly, the only issue before the FTT was whether HMRC had proved, on the balance of probabilities, that PCL either knew, or should have known, of the connection with fraud.
The FTT had held that HMRC had failed to show (1) that PCAL had actual knowledge of or involvement in fraud and (2) that PCL had the means of knowledge or ought to have known that the only reasonable explanation of PCL's involvement in the transactions was fraud.
HMRC argued that what was required to answer the questions before the FTT was a consideration of all the circumstances of the transaction and the evidence of those circumstances, and for the FTT to consider what inferences ought to be drawn from that evidence (para. 10 of the decision).
PCL argued that HMRC's grounds of appeal amounted to no more than an attack on findings of fact and value judgments of the FTT, which were submitted to be findings that the FTT had been entitled to make and conclusions it was entitled to reach (para. 15 of the decision).
HMRC argued that the FTT had failed to have proper regard to the evidence of contrivance in the deal chains, including through the fraudulent conduct of participants in the chains, the circularity of fund flows and Carouselling of products, and the control which the orchestrators of the fraud must have exerted over the transactions in the chain. In particular, HMRC argued that the FTT had erred in law by:
1) giving insufficient weight to the evidence of some of HMRC's witnesses whose evidence was agreed;
2) disregarding the evidence of Officer Clarke and a schedule of evidence based on his unchallenged statement; and
3) purporting to find whatever unspecified facts were necessary to be found in order to justify the decision. This reversed the proper approach of finding specified facts and then reaching a decision based on them, with transparent reasoning, capable of review by the parties and any tribunal.
At para. 75 of the decision, the UT held that the FTT had failed properly to examine the evidence before it. That failure was to the following factors:
1) the FTT had effectively closed its mind to a material part of the evidence put forward by HMRC, which was unchallenged;
2) the FTT had misunderstood the case as put by HMRC, and accordingly asked itself the wrong question in relation to the evidence of orchestration and contrivance; and
3) in considering the evidence put forward by PCL, the FTT had failed to test that evidence by reference to the surrounding circumstances, including in particular the orchestrated and contrived nature of the fraud with which PCL's transactions were connected.
The FTT had failed to appreciate, and thus had failed to address, the link that HMRC made between the evidence of fraudulent behaviour on the part of the companies through the submission that (1) the deal chains had been orchestrated by fraudsters and (2) all companies involved, including PCL, must have been instructed so as to facilitate the fraud, and so PCL must have known, or should have known, of the connection to fraud (para. 80 of the decision).
The failure by the FTT properly to address HMRC's submissions by reference to the available evidence was an error of law (para. 82 of the decision).
The UT allowed HMRC's appeal, set aside the decision of the FTT, and remitted the case to the FTT with the direction that it be re-heard in its entirety by a fresh panel (para. 89 of the decision).
This was a rare success for the taxpayer at the FTT, but it was expected that HMRC would appeal as part of their difficult fight against MTIC fraud. It will be interesting to see the result of the re-hearing at the FTT.
[1] This is the appeal of the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) from the decision of the First-tier Tribunal (“FTT”) (Judge Adrian Shipwright and Ms Susan Lousada) released on 20 January 2015, by which the FTT allowed the appeal of Pacific Computers Limited (“PCL”) from a decision of HMRC denying recovery of input VAT in the VAT accounting period 09/06.
[2] The case is one that falls into the category, by now well known, of MTIC, or missing trader intra-community fraud. The basis for HMRC's decision to deny PCL recovery of input VAT was that, so HMRC asserted, PCL's transactions in computer processing units (“CPUs”) and iPods in the relevant period formed part of an overall scheme to defraud the Revenue, and that PCL knew or should have known that was the case.
[3] By the time of the hearing before the FTT, PCL had accepted that HMRC had proved that in respect of each relevant transaction there had been a VAT loss, that such a loss had been fraudulent and that each of PCL's relevant transactions was connected with the fraudulent evasion of VAT. Accordingly, the only issue before the FTT was whether HMRC had proved, on the balance of probabilities, that PCL either knew, or alternatively should have known, of the connection to fraud.
[4] The FTT allowed PCL's appeal. It held, at [263], that HMRC had failed to show, first, actual knowledge of or involvement in fraud by PCL, and secondly that PCL had the means of knowledge or ought to have known that the only reasonable explanation of PCL's involvement in the transactions was fraud.
[5] It is from that decision that HMRC now appeal. HMRC say that the FTT erred in law in a number of material respects. It has eight specific grounds of appeal for which permission to appeal was given in this Tribunal by Judge Herrington. To some extent those individual grounds overlap and are symbiotic on one another. They are helpfully rationalised by HMRC into four broad complaints.
[6] The first broad complaint is that the FTT treated the evidence in relation to the overall scheme to defraud the Revenue as incapable of being probative of PCL's state of knowledge as to the impugned transactions. In doing so, HMRC submit that the FTT erred in law. The first consequence of the FTT's erroneous treatment of the probative value of this evidence was that it found, repeatedly, that there was “no evidence” to suggest that PCL knew or should have known that the impugned transactions were connected with fraud. These conclusions, say HMRC, were perverse. The second consequence was that the FTT deprived itself of meaningful evidence against which to judge the credibility of PCL's witnesses.
[7] HMRC's second broad complaint relates to the FTT's treatment of the agreed evidence of several witnesses who were not required for cross-examination by PCL. In short, the FTT refused to give significant weight to their evidence because they had not been cross-examined. The error of law, submit HMRC, is immediate and obvious. This unorthodox and unheralded approach by the FTT had serious ramifications for HMRC's case, not least in respect of the witness Mr. Clarke, who evidenced the production of banking records from the bank through which the money in the impugned transaction chains passed and on whose evidence the Commissioners relied as proving parts of the transaction chains. The FTT's erroneous approach to what weight to give to the evidence of witnesses who had neither been called nor cross-examined was adopted of its own motion. PCL's attack on the evidence of Mr. Clarke had been limited to criticisms of failure to produce underlying documents that PCL had not itself sought. HMRC submit that PCL's approach was erroneous but cannot be the source of the FTT's fundamentally erroneous approach to the relevant witnesses. It is notable, they say, that at no point did counsel for PCL endorse the FTT's fundamental error.
[8] HMRC's third broad complaint relates to the FTT's failure to give proper reasons for its decision. The FTT stated in its decision that in addition to the facts set out in the decision it had also found whatever other facts it needed to justify its decision. HMRC submit that plainly a tribunal should first find the facts in order to reach a decision, rather than reach a decision and seek to find facts to support it. Neither HMRC, nor any appellate tribunal...
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