The Queen (on the application of Ingenious Construction Ltd) v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Sir Ross Cranston |
| Judgment Date | 18 August 2020 |
| Neutral Citation | [2020] EWHC 2255 (Admin) |
| Date | 18 August 2020 |
| Docket Number | Case No: CO/2542/2020 |
| Court | Queen's Bench Division (Administrative Court) |
[2020] EWHC 2255 (Admin)
Sir Ross Cranston
Sitting as a High Court judge
Case No: CO/2542/2020
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Andrew Young (instructed by LEXLAW) for the Claimant
James Puzey, Joshua Carey &; Laura Stephenson (instructed by HMRC) for the Defendant
Hearing dates: 12 AUGUST 2020
Approved Judgment
Introduction
This is an application by Ingenious Construction Limited (“ICL” or “the company”) for interim relief and permission to apply for judicial review of the decision of the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) dated 29 June 2020 to refuse to reinstate its VAT Registration pending an appeal to the First-tier Tribunal Tax Chamber (the “Tribunal” or “FTT”). That appeal is on the substantive issue of HMRC's decision to cancel ICL'S VAT registration. ICL contends that the decision to cancel has prevented it from trading and unless its registration is quickly restored by means of urgent interim relief it will become unable to pursue its appeal to the Tribunal.
ICL's application for urgent interim relief came before Holman J on the papers late on 22 July 2020. While sympathetic, Holman J decided that he should not make an order given that HMRC had only been served 24 hours previously and had not had the opportunity to respond to the claim or the application for interim relief. He ordered that the matter be listed for an oral hearing to consider the application for urgent interim relief and, if there was time, the application for permission. He also ordered that HMRC's Acknowledgment of Service be filed and served by 6 August 2020.
Background
ICL is predominately concerned with supplying construction services for remodelling domestic property, for example, constructing and extending a basement room. It appears that the work is conducted mainly in higher value properties. The company was first registered for the purposes of VAT on 11 December 2012. Its directors are Mr Giles Ellis and Mr Paul Morris.
HMRC began inquiries into ICL's tax position in July 2019. There was correspondence and meetings. The company was placed on what is called Trader Monitoring, which involves bi-monthly visits and monthly phone calls.
HMRC's concerns are illustrated in their letter to the company of 13 December 2019. In that letter HMRC stated that in respect of ICL's VAT returns in the second half of 2018 and the first part of 2019, 60 of its transactions (where the whole chain had been established) commenced with a defaulting trader, resulting in a loss to the public revenue that exceeded £233,263.00. The letter warned that HMRC could deny the company its input tax credit. It stated that ICL should satisfy itself that it had undertaken sufficient due diligence, commensurate with the perceived risk, to satisfy itself as to the integrity of its suppliers and customers and of the underlying supply chains.
On 23 April 2020 HMRC wrote to ICL's directors to indicate that they had obtained information that led them to believe that ICL had been using its VAT registration solely or principally for fraudulent purposes. HMRC's position was, the letter continued, that the right to VAT registration, or to remain registered for VAT, did not arise when the principal aim of that registration was to facilitate a fraud on the VAT system. Reference was made to Case C-527/11, Ablessio in the Court of Justice of the European Union.
The letter continued that ICL would be deregistered for VAT with effect from 6 April 2020. After outlining HMRC's understanding of the law entitling it to cancel a VAT registration, the letter set out the factors which it considered indicated that ICL was principally or solely registered to abuse the VAT system by facilitating VAT fraud:
“Ingenious Construction Ltd had back-to-back transactions with Fraudulent Defaulters (RWR Contract Management Ltd [“RWR”]– Shelton Solutions Ltd [“Shelton”] – Kernow Contracting Services Ltd [“Kernow”]). Whilst Ingenious Construction Ltd may satisfy the formal requirements for VAT registration under Schedule 1 of the VAT Act 1994, HMRC considers that the VAT registration is being used to facilitate VAT fraud, and in accordance with the principles recited above, its VAT registration should be cancelled.”
The letter then explained that ICL could request that the decision be reviewed within HMRC or it could appeal to the Tribunal. Asking for a review or lodging an appeal, the letter explained, would not result in automatic reinstatement of its VAT registration number.
Separately that day, 23 April 2020, HMRC wrote to ICL denying the company's right to deduct input tax of £241,727 for the period June 2018 until June 2019, without prejudice to the outcome of their review for other periods. HMRC was satisfied that those transactions related to the fraudulent evasion of VAT. The letter said that HMRC had taken into account features of trade evident from reviewing the transactions and activities of the company, including:
“100% of Labour/Payroll services the business received in the period were from Fraudulent Defaulters and amounts traced back to Tax Losses.
There was no evidence of any meaningful due diligence undertaken by Ingenious Construction Ltd on any of their clients or suppliers.
[ICL] had back-to-back transactions with Fraudulent Defaulters. (RWR Contract Management Ltd – Shelton Solutions Ltd – Kernow Contracting Services Ltd).”
The letter had a lengthy appendix listing the transactions.
HMRC issued an assessment on 5 May 2020 for the disallowed input tax of £241,727 plus interest.
ICL did not seek internal HMRC review. On 20 May 2020 its solicitors lodged an appeal with the Tribunal. They stated that the appeal was urgent and requested that it be expedited since the action of deregistering had a serious prejudicial impact on the company and was manifestly and obviously wrong.
The same day, 20 May 2020, ICL's solicitors also wrote to HMRC asking that it restore ICL's VAT registration pending the outcome of its client's appeal to the Tribunal. The letter said that ICL was in the business of legitimate construction services and it was wholly disproportionate to cancel its VAT registration and effectively bring its legitimate trading to an end.
On 21 May 2020 ICL's solicitors made a hardship application to HMRC under section 84 of the VAT Act 1994, referring to the impact of HMRC's actions and of the Covod-19 pandemic, which had severely affected the construction industry. They attached a letter from the company's accountants attesting to the severe prejudice should HMRC seek payment of the disputed assessment at the current time. There was reference to the cancellation of at least one otherwise profitable contract. The accountant's letter stated that the company's financial position had already deteriorated as at 31 March 2019, whereby their net assets had declined by nearly 90 percent compared to 12 months previously. After that, the letter continued, the company had become burdened with additional debt in an attempt to build a long term and sustainable future.
On 3 June 2020 FTT Judge Poole decided that it was appropriate that the Tribunal appeal be heard on an expedited basis and made directions for that to occur.
On 15 June HMRC refused to reregister ICL for VAT purposes: the company had been deregistered on the basis of abuse of the VAT system; HMRC maintained that the decision was correct; and they stated that they did not intend to restore VAT registration. HMRC took issue with the allegation of bad faith in the claim and that they were liable for misfeasance in public office. The letter drew attention to the decision of Thames Wines Ltd v Revenue and Customs Commissioners [2017] EWHC 452 (Admin) and to the need to issue judicial review proceedings promptly.
On 22 June 2020 ICL issued a letter before action in relation to a claim for judicial review in this court.
That same day, 22 June 202, HMRC applied to the Tribunal that its directions of 3 June 2020 be set aside in the absence of any evidence from ICL justifying expedition, and that other directions be made.
On 9 July, Judge Poole refused HMRC's application, although he extended the deadline until 29 July 2020 for HMRC's statement of case to be filed. He noted that “having themselves adopted the ‘nuclear option’ of de-registering the Appellant for VAT, it lies ill in their mouth to argue that the Tribunal's attempts to facilitate the speedy resolution of that dispute should be progressed without any priority at all, while the Appellant labours under the obvious difficulties inherent in carrying on making supplies which are, on their face, taxable (which HMRC do not dispute) whilst deprived of the benefit of VAT registration.”
HMRC responded to the pre-action protocol letter on 29 June 2020. They said, inter alia, that they were not suggesting that ICL was itself fraudulent, only that it was facilitating fraud.
This judicial review and the application for urgent consideration was filed on 20 July 2020.
The witness statements
Giles Ellis, director of ICL
In a witness statement for the applications before me Giles Ellis, one of the two directors of ICL, explains the background to the business, the devastating effect of HMRC's decision on it, the appeal to the Tribunal and the procedural steps outlined earlier in the judgment. He alleges that HMRC intended to stop ICL from trading, thereby destroying it, and are seeking to punish and make an example of it for the alleged wrongdoing of some of its contractors, even though HMRC have told the company that it had not been fraudulent:...
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