Umaad Butt v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Rose,Lord Justice Peter Jackson,Lord Justice Gross |
| Judgment Date | 03 April 2019 |
| Neutral Citation | [2019] EWCA Civ 554 |
| Court | Court of Appeal (Civil Division) |
| Date | 03 April 2019 |
| Docket Number | Case No: A3/2017/2452 |
[2019] EWCA Civ 554
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
(Newey J and Judge Sinfield)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Gross
Lord Justice Peter Jackson
and
Lady Justice Rose
Case No: A3/2017/2452
Rory Mullan and Harriet Brown (acting pro bono under licence from the Bar Pro Bono Unit) for the Appellant
Jeremy Benson QC and Karen Robinson at the first hearing, Sarabjit Singh QC at the second hearing (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing dates: 12 February 2019 and 25 March 2019
Approved Judgment
The Appellant, Mr Umaad Butt appeals against a decision of the Upper Tribunal (Tax and Chancery Chamber) (Newey J and Judge Sinfield) released on 8 August 2017 and reported at [2017] UKUT 325 (TCC). The Upper Tribunal upheld the FTT in dismissing Mr Butt's appeal against the imposition upon him by HMRC of a penalty of £3,137,483 under section 61 of the Value Added Tax Act 1994 (‘ VATA’). Section 61 is ancillary to section 60 VATA. Together they provide, broadly, that where a company dishonestly evades VAT, it can be subject to a penalty and a director of the company whose dishonesty has been attributed to the company can be made liable to pay the whole or part of that penalty.
A penalty was imposed on a company Waterfire Ltd (‘Waterfire’) after HMRC refused a claim by Waterfire for input tax credit of £6,792,184. The claim was refused on the grounds that the company through its directors knew or ought to have known that the transactions in relation to which input tax was claimed were connected with fraud, namely a missing trader intra-Community (‘MTIC’) fraud. Mr Butt was one of two directors of Waterfire and owned 50 per cent of the shares in the company.
The FTT upheld the imposition of the penalty on Mr Butt and the Upper Tribunal dismissed his appeal. He now appeals to this court with the permission of David Richards LJ on a single point of law. Mr Butt argues that the domestic legislation setting out the circumstances in which a penalty can be imposed does not, on its face, cover Waterfire's situation. The only basis on which HMRC have purported to impose the penalty on Waterfire and hence on Mr Butt is by putting a gloss on the wording of the statute, that gloss arising from the decision of the Court of Justice of the European Union in Kittel v Belgian State; Belgian State v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2006] ECR I-6161, [2008] STC 1537 (‘ Kittel’). Mr Butt argues that it is impermissible as a matter of EU and domestic law to extend the circumstances in which a criminal penalty can be imposed by modifying the wording of the domestic law to be consistent with EU law. A criminal penalty can only be imposed by the clear wording of the domestic legislation. Without that, HMRC do not have power to impose a penalty on Waterfire or Mr Butt.
The legislation
Sections 60 and 61 VATA were in force from 1 September 1994 and were repealed on 1 April 2008. Section 60 provided:
“ 60 VAT evasion: conduct involving dishonesty
(1) In any case where—
(a) for the purpose of evading VAT, a person does any act or omits to take any action, and
(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),
he shall be liable, … to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded by his conduct.
(2) The reference in subsection (1)(a) above to evading VAT includes a reference to obtaining any of the following sums—
(a) …;
(b) a VAT credit;
…
in circumstances where the person concerned is not entitled to that sum.
(3) The reference in subsection (1) above to the amount of VAT evaded or sought to be evaded by a person's conduct shall be construed—
(a) in relation to VAT itself or a VAT credit as a reference to the aggregate of the amount (if any) falsely claimed by way of credit for input tax and the amount (if any) by which output tax was falsely understated;
(b) …
…
(7) On an appeal against an assessment to a penalty under this section, the burden of proof as to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners.”
Section 61 VATA provided:
“ 61 VAT evasion: liability of directors etc
(1) Where it appears to the Commissioners—
(a) that a body corporate is liable to a penalty under section 60, and
(b) that the conduct giving rise to that penalty is, in whole or in part, attributable to the dishonesty of a person who is, or at the material time was, a director or managing officer of the body corporate (a “named officer”),
the Commissioners may serve a notice under this section on the body corporate and on the named officer.
(2) A notice under this section shall state—
(a) the amount of the penalty referred to in subsection (1)(a) above (“the basic penalty”), and
(b) that the Commissioners propose, in accordance with this section, to recover from the named officer such portion (which may be the whole) of the basic penalty as is specified in the notice.
(3) Where a notice is served under this section, the portion of the basic penalty specified in the notice shall be recoverable from the named officer as if he were personally liable under section 60 to a penalty which corresponds to that portion; and the amount of that penalty may be assessed and notified to him accordingly under section 76.”
It is common ground in the present appeal that the VAT evasion for which Waterfire was made liable under section 60 took the form of seeking to obtain a VAT credit when it was not entitled to that credit and so was alleged to fall within section 60(2)(b). The basic penalty imposed on Waterfire was the amount of the tax it had sought to evade by claiming the VAT credit, that is £6,792,184. The penalty imposed on Mr Butt was calculated as 50 per cent of the penalty imposed on Waterfire after that penalty was reduced by 10 per cent.
The term “VAT credit” is defined in section 25 VATA. That section provides that a taxable person must account for and pay VAT by reference to its prescribed accounting periods. Section 25 then goes on:
“(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.
(3) If either no output tax is due at the end of the period, or the amount of the credit exceeds that of the output tax then, … the amount of the credit or, as the case may be, the amount of the excess shall be paid to the taxable person by the Commissioners; and an amount which is due under this subsection is referred to in this Act as a “VAT credit”.”
Section 26 VATA sets out what input tax is allowable under section 25:
“(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business—
(a) taxable supplies;
(b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;
(c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection.”
Section 26(3) and (4) then provide for the kinds of regulations that the Commissioners may make “for securing a fair and reasonable attribution of input tax to supplies” within subsection (2). Regulations have been made by the Commissioners for the purposes of section 26 but none of those regulations is relevant to the issues raised by this appeal.
MTIC frauds and the judgments in Kittel and Mobilx
The courts have on many occasions had to describe what is involved in an “MTIC fraud”. The FTT in this case reproduced the explanation in Red 12 Trading Ltd v The Commissioners for HM Revenue and Customs [2009] EWHC 2563 (Ch) at [2] – [7] and I do not need to repeat that explanation here. There is no doubt that MTIC frauds became widespread throughout the EU. They threatened a serious diminution in public revenues if national tax authorities could not resist paying an input tax credit claimed by a company which was a link in the chain of the fraud but which was able to present genuine invoices showing that it had paid VAT to its supplier on the supply of the goods which it had sold on.
The Court of Justice of the European Union (‘CJEU’ or ‘the Court’) addressed this issue in Optigen Ltd and others v Customs and Excise Commissioners (Joined Cases C-354/03, C-355/03 and C-484/03) [2006] Ch 218, (‘ Optigen’), a reference from the English High Court. In that case the Commissioners refused claims for a deduction of input tax amounting to about £23.7 million on purchases of microprocessors. The question referred by the High Court stated that the circumstances of the case involved an innocent trader. HMRC nevertheless refused input tax deduction on the ground that the participants in an MTIC fraud had no genuine business motive but only the aim of misappropriating VAT funds. The result was, HMRC argued, that all the transactions comprising the chain were not part of an economic activity and fell entirely outside the VAT system. The Court was therefore asked whether in relation to such a trader's acquisition and sale of goods the trader was a...
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