Revenue and Customs Comrs v Fairford Group Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 July 2014 |
| Neutral Citation | [2014] UKUT 329 (TCC) |
| Date | 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0329 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Hon Mr Justice Simon, Judge Colin Bishopp
Howard Watkinson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants and respondents to the cross-appeal
James Pickup QC and Simon Gurney, counsel, instructed by Bark & Co, appeared for the respondents and appellants in the cross-appeal
Procedure - MTIC appeal - Application to strike out part of appellant's case - Evidence served by respondents but no contrary evidence served by appellant - Appellant requiring respondents to prove their case but advancing no positive case of its own - First-tier Tribunal refusing to strike out - Whether jurisdiction to strike out - Yes - Whether discretion reasonably exercised - Yes - Guidance to FTT offered.
[1]This is the hearing of two appeals arising from the decision of Judge John Brooks in the First-tier Tribunal (Tax Chamber) ("FTT"): an appeal of the Commissioners for Her Majesty's Revenue and Customs ("HMRC") and a cross-appeal of the two Respondents ("the Taxpayers").
[2]The appeals raise issues as to the jurisdiction of the FTT to strike out the whole or a part of an appellant's case, and whether such powers should have been exercised in the present case.
[3]On 1 April 2014, the FTT decided that it had jurisdiction under rule 8(3)(c) of the First-tier Tribunal (Tax Chamber) Rules 2009 ("the FTT Rules") to strike out part of the Taxpayers' appeal, but that it should not exercise that power on the facts of the case. The Taxpayers challenge the first part of this decision and HMRC challenge the second part. Each appeal is brought with the permission of the FTT.
[4]The Taxpayers' appeals, directed by the FTT to be heard together, are against HMRC's decision to deny input tax deduction for the VAT periods 03/06 and 06/06 on the basis that the Taxpayers' transactions were connected with the fraudulent evasion of VAT and that they knew, or should have known, of the connection.
[5]The alleged connection forming the basis of HMRC's decision is with a Missing Trader Intra-Community ("MTIC") fraud. The fraud in this case is said to involve both the "vanilla" version, where transactions carried out by the Taxpayers can be traced directly to a fraudulent tax loss, and the "contra-trading" version, where the transactions carried out by the Taxpayers can be traced through a "clean" chain to a trader involved in covering up the tax losses of fraudulent defaulting traders in an apparently distinct but in reality linked "dirty" chain. The appeals relate to 36 transactions, and more than £13 million of input tax.
[6]On 21 and 29 August 2008 the Taxpayers served Notices of Appeal challenging HMRC's decisions to deny input tax deduction for the VAT periods 03/06 and 06/06 respectively. It is unnecessary to refer further to the grounds advanced as they have been overtaken by events.
[7]In Blue Sphere Global Ltd v R & C CommrsVAT[2009] BVC 580, Sir Andrew Morritt C identified at [29] the four questions which the FTT must consider and answer in such cases.
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(2) Was there a VAT loss?
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(3) If so, did this loss result from a fraudulent evasion?
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(4) If there was a fraudulent evasion, was the appellant's transaction that is the subject of the appeal connected with that evasion?
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(5) If such a connection was established, did the appellant know, or should it have known, that its purchases were connected with a fraudulent evasion of VAT?
[8]In Mobilx Ltd (in administration) v R & C CommrsVAT[2010] BVC 638 the Court of Appeal, having agreed with this analysis, made clear at [81] that in MTIC appeals the burden of proving all four elements of the Blue Sphere Global test rests on HMRC.
[9]In Red 12 Trading Ltd v R & C CommrsVAT[2010] BVC 166 at [84] Christopher Clarke J gave further guidance as to what HMRC needed to prove:
… What is needed for an MTIC fraud to work is an importation without payment of VAT, a trader who disappears without accounting to HMRC for the output tax it has received, and an export which generates an entitlement to claim back input tax. The original importer will make the most profit from failing to pay over output VAT. For that reason the defaulter is usually the original importer; but any company in the chain which defaults at any stage in the chain will make a profit from not accounting for the VAT, assuming that it has sold on at a profit. In order to justify denial of the right to deduct input tax there must be knowing participation in a transaction connected with fraudulent evasion of the tax. If that is established, the right is lost. It would be inconsistent with that principle, and an unmerited boon to fraudsters, to require the authorities to prove that the defaulter was the original importer …
[10]HMRC's case, as set out in its Statements of Case, is that the Taxpayers' transactions, and the other associated chains of transactions, were orchestrated as part of overall schemes to defraud the Revenue. Its primary case is that the Taxpayers had actual knowledge that their transactions were connected with fraud. In the alternative, HMRC's case is that the Taxpayers should have known that their transactions were connected with the fraudulent evasion of VAT.
[11]There were considerable delays in bringing on the Taxpayer's appeal and a hearing was finally fixed for 25 days from 10 March 2014. By this stage HMRC had served witness statements and exhibits in relation to the 16 traders who, they allege, were either fraudulent defaulting traders or traders whose VAT registration numbers had been hi-jacked by fraudsters to occasion fraudulent VAT defaults.
[12]There was an application to adjourn the hearing of the appeal due to the ill health of Mr Bassi, a director of both Taxpayers; and on 13 February 2014 HMRC applied to strike out part of the Taxpayers' case on the basis that there was no reasonable prospect of their succeeding in showing that (1) defaulting and hijacked traders did not occasion tax losses and (2) the tax losses were not occasioned by fraud. Two points may be noted. First, the burden of proving those two matters remained with HMRC throughout; and secondly, the intent of HMRC was to focus the Taxpayers' attention on the first two of the Blue Sphere questions.
[13]HMRC's application noted that it had served witness statements demonstrating the chains that connected the Taxpayers' transactions to those of the defaulting or hijacked traders, in some cases directly and in others via four identified contra-traders.
[14]Although HMRC had taken the opportunity of the Taxpayers' application to adjourn the hearing to make its own application to strike out, there had been earlier correspondence in which HMRC had sought to identify the real issues between the parties in the appeals.
[15]On 1 December 2011 HMRC wrote to Bark & Co (the solicitors representing the Taxpayers) noting that they had had the bulk of HMRC's evidence for approximately 7 months. On the issue of the (then 15 day) estimate they pointed out:
The estimate...
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