The Commissioners of HM’s HM Revenue and Customs v Dempster (t/a Boulevard)
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BRIGGS,Mr Justice Briggs |
| Judgment Date | 24 January 2008 |
| Neutral Citation | [2008] EWHC 63 (Ch) |
| Docket Number | Case No: CH/2007/APP/0380 |
| Court | Chancery Division |
| Date | 24 January 2008 |
[2008] EWHC 63 (Ch)
MR JUSTICE BRIGGS
Case No: CH/2007/APP/0380
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Miss Rebecca Haynes (instructed by Solicitor for HMRC, East Wing, Somerset House, London WC2 1LB) for the Appellant
Miss Sadiya Choudhury ( instructed by Avetoom & Co, 11 Cotswold Close, Kingston Hill, Surrey, KT2 7JN) for the Respondent
Hearing date: 17 th January 2008
Approved Judgment
I direct that pursuant to CPR PD 39A paragraph 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
This is an appeal by the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) against a decision (“the Decision”) of the London VAT Tribunal (Howard Nolan and Shahwar Sadeque) promulgated on 3 rd May 2007, which allowed the appeal of Mr Noel Dempster against HMRC's decision by letter dated 9 th September 2004 to refuse his claim for an input VAT credit in the sum of £156,998.89 in respect of his accounting period 1 st January to 31 st March 2004.
Mr Dempster's claim was based upon two alleged supplies of computer software by Abacus Business Systems Limited (“Abacus”) in January 2004, supported by invoices from Abacus, dated respectively 12 th and 26 th January, and which differed from each other only in their respective dates and invoice reference numbers. Their otherwise identical contents may be summarised as follows. Each of them confirmed an order from Mr Dempster, trading as Boulevard, from an address in Brixton, London for:
“20,000 Educational Software 'V Ware' 01 Licences @ £22.00 £440,000.00.”
to which VAT in the sum of £77,000.00 was added, giving a gross invoice amount in each case of £517,000.00. Mr Dempster claimed the whole of the aggregate of those two VAT amounts as a credit on the basis that he had made a zero-rated supply of the same goods to Spectrum Enterprises Corp (“Spectrum”), a Canadian customer of his.
In order to decide whether to accept or reject Mr Dempster's claim, HMRC had sought and obtained from him a compact disc purporting to contain a copy of the software which was the subject matter of his claim. That CD had written on it:
“Smart Soft
Demo CD
SSP-02
Smart Soft Package No 02
All rights reserved to MST Limited
2003”
HMRC obtained a report on the contents of that CD (the “SmartSoft Disc”). Neither the CD's packaging nor its contents included any reference to V Ware software or licences, nor (to summarise a point with which I shall have to deal in due course) were the contents, taken as a whole or individually, primarily educational in nature.
The reasons given by HMRC for refusing Mr Dempster's claim were, first, that they were not satisfied that taxable supplies had occurred in accordance with the claimed transaction, and, secondly, that the contents of the SmartSoft Disc were inconsistent with the description of the relevant goods contained in the supporting VAT invoices. HMRC adhered to both those grounds in the course of Mr Dempster's appeal to the Tribunal. In their Statement of Case HMRC amplified the first of those grounds by alleging, in paragraph 21, that:
“the taxable supplies in question are a sham, in that all the parties involved intended the documents to give the appearance of a chain of sale, which did not, in fact, exist.”
Miss Haynes, who appeared for HMRC both before the Tribunal and before me, but who did not settle the Statement of Case, accepted that, taken as a whole, the Statement of Case asserted dishonesty against Mr Dempster, albeit that no express use of that word, or express reference to fraud, was made.
The Tribunal rejected both HMRC's grounds for refusing Mr Dempster's claim. As to the first, in summary, they concluded that although Mr Dempster was in many respects a thoroughly unsatisfactory witness, it had not been established that he knew that the transactions which gave rise to his claim were shams in the relevant sense, so that even if they had in fact been part of an attempted VAT fraud (as to which they made no finding one way or the other), he was not disabled from pursuing a VAT credit in respect of supplies of computer software which they found had taken place.
As to the second ground, I have had some difficulty in discerning precisely the basis upon which the Tribunal rejected HMRC's case, due to an infelicity in the language of the critical part of their Decision. The appeal was argued by Miss Haynes and by Miss Choudhury who appeared for Mr Dempster on the basis that the Tribunal had decided that, as a matter of fact, the VAT invoices relied upon did sufficiently describe the software actually supplied.
HMRC's grounds of appeal, as developed in submissions, may be summarised as follows. As to the first issue (sham), the Tribunal's decision was vitiated by errors of law both as to the nature of a sham, and as to the type or extent of knowledge necessary to visit Mr Dempster with the consequences. Alternatively, they submit that the Tribunal's decision in relation both to sham and knowledge was perverse. As to the second issue (misdescription of goods) they simply submit that the decision was perverse.
SHAM
There was, as between counsel, no discernible difference as to the legal definition of sham, or as to its consequences. Subject to one caveat by Miss Choudhury, to which I shall return, both invited me to treat as a sufficient definition the following description given by Diplock LJ in Snook v London and West Riding Investments Limited [1967] 2 QB 786 at 802:
“As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a 'sham' it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure (1882) 21 C.D. 309, C.A. and Stoneleigh Finance Ltd. v. Phillips [1965] 2 Q.B. 537), that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a 'shammer' affect the rights of a party whom he deceived.”
To that general principle Miss Choudhury reminded me of an exception, identified by Arden LJ in Hitch & ors v. Stone (Inspector of Taxes) [2001] STC 214, at 234, namely that it is not invariably necessary to show, in relation to multi party transactions, that every party to it knew it was a sham. In my judgment that exception to the general requirement to show knowledge is of no relevance to the present case.
As to the effect of a finding of sham in relation to a transaction relied on for the purposes of a claim to a VAT credit, it was (inevitably) common ground that if a purported supply was fictitious, in the sense that the documents relied upon purported to identify a supply which in fact did not take place at all, then no VAT credit could be claimed: see for example McNicholas Construction Co Ltd v. CCE [2000] STC 553, per Dyson J at paragraph 50. There was however an issue as between counsel's submissions on the question whether any element of sham in the documentation of a transaction is sufficient to deprive it of VAT consequences, regardless whether that element is of itself relevant to the question whether the underlying transaction constituted a taxable supply.
Miss Haynes submitted that once it is shown that a transaction was a sham in any respect, then subject to the question of knowledge, it could not be relied upon for the purposes for a claim for a VAT credit. Miss Choudhury submitted that for a transaction to be deprived of its ordinary VAT consequences, it must be a sham in some relevant sense, relevant that is to its VAT consequences. To the extent that it matters, I am inclined to agree with Miss Choudhury's narrower submission. For example, the parties may, for some reason unconnected with its VAT consequences, deliberately misstate the date of a transaction in the documents recording it. In my judgment it is only where the difference between the truth and the misstatement affects the VAT consequences of the transaction (for example by removing it from one accounting period to another) that such a misstatement is of relevance to the VAT outcome.
Of greater materiality to the present case was Miss Choudhury's submission that it is important to distinguish between, on the one hand, a sham (in which the parties do not intend to create as between them the rights and obligations recorded in the documents) and a transaction in which the parties' intended rights and obligations are correctly recorded in the documents, but which is capable of being described as uncommercial or artificial, for example where it forms part of a pre-arranged composite transaction the only purpose of which is to obtain a tax advantage. This distinction is precisely encapsulated in the following paragraph of the judgment of Arden LJ in Hitch v. Stone (supra):
“67 Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to...
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