HM Revenue & Customs v Infinity Distribution Ltd [2016] EWCA Civ 1014

Case No A3/2015/2773[2016] EWCA Civ 1014
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
MR JUSTICE PETER SMITH
FTC/111/2013
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 25/10/2016
Before
LADY JUSTICE ARDENLORD JUSTICE UNDERHILLLORD JUSTICE BRIGGS
Between
The Commissioners for Her Majesty's Revenue and CustomsAppellantInfinity Distribution Limited (In Administration)Respondent
Mr Jeremy Benson QC, Ms Lucy Wilson-Barnes and Mr James Puzey(instructed by General Counsel and Solicitor To Her Majesty's Revenue and Customs) for AppellantMr Malcolm Davis-White QC and Mr Hugh Miall (instructed by Morgan Rose Solicitors) for RespondentHearing Hearing dates: 5 October 2016
Judgment
[1]As Mr Jeremy Benson QC said when opening this appeal from the Upper Tribunal (Tax and Chancery Chamber), its outcome may be reached alternatively by a short route, or a long route. On its face, it is about aspects of a case management decision by the First tier Tribunal (Tax Chamber) to refuse to allow the deployment of items of evidence, on grounds of relevance and prejudice. But the skeleton arguments, both here and in the UT, raise serious and difficult issues about the basis upon which Her Majesty’s Revenue and Customs may refuse to allow deductions of VAT or zero rating in the context of intra-community exports, issues as to the burden of proof and issues as to the adequacy or otherwise of HMRC’s pleaded case in these appeals. If the respondent trader’s arguments on these issues are correct, and there will not be found, or implied, any view of mine either way on those issues, then this would, on the face of it, justify the striking out of all or the main part of HMRC’s case, rather than merely selected parts of the evidence in support. No strike out application of that kind has been made in these proceedings and it is probable that the resolution of the underlying legal issues would be better achieved once the relevant facts have been found, rather than on the artificial and arid battleground constituted by assumptions that one side’s or the other’s pleaded case is true.[2]It became clear to us during the hearing of this appeal that it could, and indeed should, more proportionately, justly and reliably be determined by taking the short rather than the long route to its solution, without deciding the underlying and difficult legal issues, but rather assuming, without deciding or expressing any view, that HMRC might succeed in their case about them at trial.[3]The result is that this judgment, which sets out my reasons for disposing of this appeal by the shorter route, is much shorter than would otherwise have been necessary, as indeed was the hearing to which it relates. I mean no discourtesy to counsel by not dealing with the underlying issues raised in their lengthy skeleton arguments. In my view the determination of this appeal turns on a relatively short analysis of two main points.[4]The case management decision of the FtT, by Tribunal Judge David Porter on 1st November 2012, related to a group of conjoined appeals by Infinity Distribution Limited (In Administration). They need not be listed individually, but fall into two distinct groups. The first group (“the Invalid Invoice Appeals”) arise from the refusal of HMRC to permit Infinity to deduct VAT allegedly paid by it in relation to taxable supplies to it of mobile phones, upon the ground that the VAT invoices upon which the claims to deduct were based were invalid by reason of non-compliance with Regulation 14(1)(g) or (h) of the Value Added Tax Regulations 1995, which require that a VAT invoice contain particulars which include a description sufficient to identify the goods or services supplied and, for each description (in relation to goods), the quantity of the goods. In short, HMRC’s case is that, although each VAT invoice purported to identify particular types of mobile phones manufactured by Samsung and Sony Ericsson, no such supply could in fact have occurred, because at the relevant time either none, or an insufficient number of, those types of phone had been manufactured and put into the market.[5]The second group, (“the Zero Rated Appeals”), arise from the refusal of HMRC to allow Infinity to zero rate its own supplies of mobile phones, on the basis that they were exported to another member state, on the ground that there had in truth been no such export. In short, HMRC’s case in this regard is that the CMRs submitted by Infinity as evidence of export are unreliable, because they derive from a notoriously fraudulent freight forwarding agent called Magic Transport, with a track record of pretending and certifying that exports had occurred, contrary to the truth.[6]The way in which the argument proceeded in this court means that the two groups of appeals need, for the most part, to be dealt with separately. But they share this common feature, namely that HMRC do not advance a positive case in either group of appeals that Infinity was either implicated in any fraudulent evasion of VAT or knew of it, that it ought to have known of it, acted in bad faith or that it failed to take reasonable steps to satisfy itself that it was not participating in such an evasion of tax. The nearest which HMRC came to addressing any of those questions is to be found in paragraph 39 of their Statement of Case, where it is said, in relation only to the Zero Rated Appeals, that :
“Accordingly, the Commissioners do not consider that the Appellants acted in good faith and/or they took every reasonable measure to ensure that their supply did not lead to their participation in tax evasion, in accordance with the ECJ decision in Teleos PLC and Others v The CommissionersCustoms and Excise, C- 4039-04.”
For the avoidance of any doubt, counsel for HMRC made it clear both to the FtT and the UT and repeated in this court, that they intended to advance no positive case of fraud, participation or knowledge of fraud, bad faith or failure to take reasonable steps against Infinity, taking the view that the burden of proof in relation to such matters lay squarely on Infinity. The purpose of paragraph 39 was, it was said, merely to put Infinity to proof of those matters, if it wished to advance its own case in relation to them as part of its Zero Rated Appeals. As for the Invalid Invoice Appeals, HMRC’s case was and remains that, if they succeed in showing that the relevant VAT invoices were invalid, then issues as to fraud, participation, knowledge, bad faith or failure to take reasonable steps by Infinity in relation to those transactions are entirely irrelevant.[7]HMRC have served a single body of evidence in the conjoined appeals. The main thrust of their evidential case in relation to the Invalid Invoice Appeals was material designed to demonstrate, by reference for example to information from the manufacturers in question, that the market for mobile phones could not have included sufficient numbers of the particular types referred to in the relevant invoices for there to have been genuine supplies of phones relating to that type. Infinity made no objection to the introduction of that evidence.[8]HMRC also served a witness statement from one of their case officers, a Mr Wafer, which sought to prove criminal convictions of various named individuals for (in summary) conspiracy and cheating the public revenue in connection with the supply of mobile phones, some of whom were said to be beneficially interested in, or concerned in the management of, one of Infinity’s suppliers of mobile phones under the relevant transactions, namely Future Communications (UK) Limited. I will call it “the Wafer statement”.[9]HMRC also served a lengthy witness statement, running to some 279 paragraphs, from one of their higher officers, Jayne Holden (“the Holden statement”). This evidence was deployed in relation to both the Invalid Invoice and Zero Rated Appeals. It contained numerous assertions that Infinity was itself guilty of, or alternatively knew of, fraud and dishonesty in connection with the relevant transactions, detailed assertions of fraud by other persons, upstream and downstream, in the relevant chains of supply and, in particular, a detailed evidential case seeking to prove that Magic Transport, the freight forwarder which provided the CMRs in relation to the transactions underlying the Zero Rated Appeals, could not be trusted to produce a CMR of any probative value whatsoever, by reason of its habitual participation in VAT fraud and because of other aspects of its affairs tending to show that it was not a genuine freight forwarding agent at all. I will refer to that last part of the Holden statement as “the Magic Transport evidence”.[10]The FtT is, when hearing tax appeals, not bound by the rules of evidence applicable in a court of law. The Tribunal Procedure (First tier Tribunal) (Tax Chamber) Rules 2009 provide, at rule 15(2), that:
“The Tribunal may – (a) admit evidence, whether or not the evidence would be admissible in a civil trial in the United Kingdom; Or (b) exclude evidence that would otherwise be admissible – (i) … (ii) … (iii) if it would otherwise be unfair to admit the evidence.” (a) admit evidence, whether or not the evidence would be admissible in a civil trial in the United Kingdom; Or (b) exclude evidence that would otherwise be admissible – (i) … (ii) … (iii) if it would otherwise be unfair to admit the evidence.”
[11]Notwithstanding that greater liberty of case-management discretion, no-one doubts that the FtT, like a civil court, will usually treat the question whether proffered evidence is relevant as a cardinal factor in deciding whether it should be admitted or excluded. The admission of evidence which is irrelevant is as detrimental to the economical and proportionate conduct of tribunal proceedings as it is in relation to court proceedings. Nonetheless, where irrelevant material is mixed up with relevant material, it may frequently be disproportionate to spend time before a final hearing disentangling the two, if the admission of the irrelevant alongside the relevant material causes no unfairness or inconvenience calling for active case management.[12]Infinity protested the admission of the whole of the Wafer statement, and of those parts of the Holden statement which I have summarised, including the Magic Transport evidence, on the ground that, since HMRC were advancing no positive case of fraud, it was both irrelevant and unfairly prejudicial. Judge Porter ordered the whole of the Wafer statement and precisely specified parts of the Holden statement (including the Magic Transport evidence) to be struck out. In written reasons for his decision released on 27th December 2012 he said this, in relation to the Wafer statement:
“8. Mr Wafer’s evidence does no more that reveal that, Dilwar Ravjani, the beneficial owner and controller of Future, Haidar Ali Ravjani, a director of Future, Roshan Ara Hussain the secretary to Future, Zafar Baidar Chishti, an accountant to the Ravjani Group of companies and Rajesh Gathani a phone trader for Future, between 1 November 2005 and 2 June 2006 cheated HMRC and, apart from Haidar Ravjani, were found to be guilty. His statement provides no evidence of any connection with the transactions, the subject of this appeal. It also appears that Haidar Ali Ravjani was not found guilty. 9. Mr Wafer’s statement can do no more than establish that some, but not all, of the owners and workers of Future were involved in fraudulent activities. By implication, HMRC are suggesting that the Appellant could not have been acting in good faith and could not have taken reasonable measures when dealing with such a company. There is a considerable difference in failing to act in good faith and taking reasonable measures and suggesting that the Appellant knew or ought to have known that Future was fraudulent. As HMRC have not pleaded fraud Mr Wafer’s witness statement is highly prejudicial to the Appellant’s case.”
[13]In relation to the Holden statement, he continued:
“10. I directed that parts of Ms Holden’s witness statement should be struck out for the reason that they implied fraud on behalf of the Appellant as indicated above. If HMRC wish to rely on fraud, as they would in a missing trader case, they should plead it. In Armitage v Nurse CH 241 at 254-7 Millett LJ said: “The general principle is well known. Fraud must be distinctly alleged and as distinctly proved…” and as Buckley LJ said in Belmont Finance Corporation Limited v Williams Furniture Limited [1979] CH 250, 268: “An allegation of dishonesty must be pleaded clearly and with particularity…” 11. Those of us who have dealt with a number of Missing Trader Cases are familiar with the position of Magic Transport in the fraudulent schemes. The Appellant received details from Magic Transport sufficient, it says, to confirm that the goods the subject of this appeal existed. HMRC are relying on the fraudulent activities of Magic Transport as evidence that the Appellant could not have acted in good faith – the Teleos test. As pleaded, the case relies on the fact the goods did not exist. Any evidence which suggest that the Appellant must have or ought to have known of the frauds committed by Magic Transport is highly prejudicial and not sustainable on the pleadings. 12. I confirm that all direct and indirect references to Magic Transport in the statement of Ms Holden in the ruling at 10.21 are to be struck out.” “The general principle is well known. Fraud must be distinctly alleged and as distinctly proved…” “An allegation of dishonesty must be pleaded clearly and with particularity…”
[14]HMRC’s appeal to the Upper Tribunal was heard by Peter Smith J and dismissed, in May 2015. He did not think it necessary to undertake a separate analysis of the Invalid Invoice and Zero Rated Appeals. In his view the starting point was that:
“The case (by which he meant all the appeals) in reality is one of fraud.”
He concurred with Judge Porter’s view that the Wafer statement was irrelevant in the absence of any positive case of fraud by HMRC. In addition, he held that the prior convictions of a third party were inadmissible pursuant to the decision in Hollington v Hewthorn [1943] KB 587. More generally he derived what he regarded as a principle applicable generally to challenges by HMRC to VAT deduction or zero rating based upon apparently compliant documents, which he summarised in the following concise terms, in paragraph 24:
“24 I draw the following conclusions from the Authorities: 1) The presentation of documentation which appears on its face to be correct raises a prima facie piece of evidence that the trader in question is entitled to relief sought and that the documents are genuine. 2) Those documents are not conclusive and can be challenged if it can be shown that the trader either participates in the fraud or failed to take reasonable care to avoid being involved in the fraud. 3) In accordance with established principles if it is going to be alleged that there was wrongdoing or failure to take reasonable care the burden is on the party which alleges that. That party in question is HMRC and it is not for the trader to prove that he was not fraudulent nor that he had taken reasonable precautions to avoid being involved in a fraud.” 1) The presentation of documentation which appears on its face to be correct raises a prima facie piece of evidence that the trader in question is entitled to relief sought and that the documents are genuine. 2) Those documents are not conclusive and can be challenged if it can be shown that the trader either participates in the fraud or failed to take reasonable care to avoid being involved in the fraud. 3) In accordance with established principles if it is going to be alleged that there was wrongdoing or failure to take reasonable care the burden is on the party which alleges that. That party in question is HMRC and it is not for the trader to prove that he was not fraudulent nor that he had taken reasonable precautions to avoid being involved in a fraud.”
[15]In preparation for the appeal to this court, the parties squared up for a full battle on the question whether Peter Smith J’s summary of the principles was correct. That would have involved the long route to the resolution of this appeal which, as I have said, we decided during the hearing that we should avoid. My reasons for taking the shorter route will shortly appear. At this stage I merely make it clear that I express no view one way or the other on the correctness of the principles which the judge there stated. The essence of it is that HMRC may only challenge a trader’s claim to deduct or zero rate, if backed by apparently compliant documents, by demonstrating fraud, together with participation, knowledge, bad faith or a failure to take reasonable steps by the trader concerned. By contrast, HMRC’s case is that they are under no such constraint. The judge’s statement of the principle may be right or wrong in relation to deduction and zero rating, or it may be right in relation to one and wrong in relation to the other. That is not a simple matter, or one which need be, or should be, determined on these appeals about the admission of evidence.[16]Although not I think apparent from the appeal papers, Mr Benson QC very helpfully explained that the scope of his challenge to the tribunals’ striking out of parts of his evidence was limited in important respects. He said that HMRC wished to rely on the Wafer statement only in relation to the Invalid Invoice Appeals, and that he sought only to extricate the Magic Transport evidence from the wreckage of the disallowance of large parts of the Holden statement, and to deploy it only in relation to the Zero Rated Appeals. He therefore made no attempt to re-introduce into HMRC’s evidence those parts of the Holden statement which, as I have summarised, appeared to assert fraud, participation, bad faith or knowledge of fraud on the part of Infinity. In my view that concession was sensibly made. For as long as HMRC’s stance in these proceedings abjured any positive case of that kind against Infinity, it was in my view highly unsatisfactory, and verging on abusive, that their evidence should at the same time do precisely that, and pursue no other legitimate purpose. As the judge said, if a positive case of fraud, dishonesty or bad faith is to be advanced in civil litigation (whether in a court or a tribunal) it must be distinctly advanced and set out with the requisite particularity. If (as here) no such positive case is advanced, then evidence purporting to substantiate such misconduct is inherently objectionable, unless it is shown to serve some other legitimate purpose.[17]I do not suggest that there was deliberate abuse. It seems to me more likely that there was an insufficient meeting of minds between those deciding for HMRC to present the case on a deliberately narrow basis, and those charged with the preparation of the necessary evidence. But regardless of the absence of abusive intent, the outcome is equally unsatisfactory for the opposing party, which is likely to be embarrassed and prejudiced in the preparation of its case by not knowing whether it has to answer those serious allegations or not and, if so, not having clearly been presented with the requisite particulars of them.

The Wafer statement and the Invalid Invoice Appeals

[18]It seemed to me, when preparing for the hearing of this appeal, as it evidently did to both tribunals, that the Wafer statement was manifestly irrelevant. All it did was to seek to prove certain convictions for tax fraud, without any necessary connection with the transactions the subject matter of these proceedings, still less any probative value in advancing HMRC’s case that mobile phones of the types identified in the relevant invoices could not have been available in the market in sufficient quantities for there to have been genuine supplies to which the invoices related. It is, for example, by no means an invariable characteristic of VAT fraud that there are no underlying goods being supplied.[19]In response to the court’s early expression of this concern, Mr Benson QC was constrained to acknowledge that, on its own, the Wafer statement and the convictions referred to did not on their face appear to carry significant weight in proving HMRC’s case on the Invalid Invoice Appeals. Rather, he submitted that when those convictions were illuminated by reference to the prosecution’s Opening Notes in the criminal cases in which the convictions occurred, then the requisite connection could be shown to exist. He was constrained to acknowledge that no reference to the Opening Notes had been made before the FtT, and a full transcript of the hearing in the UT demonstrated that they had not been referred to there either. HMRC’s skeleton arguments were similarly silent in relation to them both in the tribunals and in this court.[20]In my judgment this belated attempt to rely upon the contents of the Opening Notes, which were not even deployed in this court, but merely referred to, is a wholly insufficient basis for disturbing what otherwise appears to have been a perfectly reasonable, and indeed inevitable, conclusion that the Wafer statement and the convictions referred to in it were of no probative value in advancing HMRC’s case and therefore irrelevant. Mr Benson QC tried to escape from his difficulties by submitting that counsel for Infinity in the tribunals below (who did not appear before us) knew what the Opening Notes contained, because he had been involved as counsel in the relevant criminal proceedings. Again, that is beside the point.[21]No attempt was made to introduce the Opening Notes by the admission of fresh evidence on appeal and, if it had been, it would in all probability have failed. This court hears appeals from the tax tribunals based on error of law. Since neither of the tribunals were invited to deal with the Wafer statement by reference to the link supposedly provided by the Opening Notes, there plainly cannot have been a relevant error of law in what is otherwise a perfectly reasonable analysis of the irrelevance of the Wafer statement, and its contents, viewed on their own.[22]That is sufficient to require this appeal to be dismissed, in relation both to the Wafer statement and the Invalid Invoice Appeals. It is therefore unnecessary to address the additional ground, namely prejudice, for the FtT’s decision or the additional grounds relied upon by Peter Smith J in the UT.[23]Nor would it be right for this court, in dismissing this part of the appeal, nonetheless to make some conditional order permitting the introduction of the Wafer statement, if the Opening Notes are served, and demonstrate the requisite connection. If that course is to be pursued, it must be by a fresh application to the FtT for the admission of late evidence, about the merits and outcome of which I express no view of any kind.

The Magic Transport evidence and the Zero Rated Appeals

[24]Mr Benson QC had little difficulty in persuading me that the Magic Transport evidence is relevant for the purposes of enabling HMRC to challenge the weight and reliability of the CMRs proffered by Infinity as the basis for its zero rating claims, and now its appeals. Evidence that a person is in the habit of fabricating a particular type of document, and evidence that a purported freight forwarding agent has no business premises, or facilities for the storage or handling of goods, is plainly relevant to the weight which can be placed upon a CMR issued by such a person as evidence of export of goods. Furthermore, the facts about Magic Transport are pleaded with reasonable particularity at paragraph 38 of HMRC’s Statement of Case.[25]Mr Davis-White QC for Infinity did not seek to challenge that at all. Rather, he submitted (as Peter Smith J had held) that wherever the challenge to the reliability or authenticity of an apparently valid document proffered as evidence of export is based upon fraud of any kind, then HMRC must show, not merely that there was such a fraud, but that the trader seeking zero rating was implicated, knew about it, acted in bad faith or failed to take reasonable steps. Since HMRC put forward no positive case of that kind against Infinity, they had no legitimate basis for challenging the evidence of export.[26]This submission would, if correct, be a complete answer to HMRC’s case on the Zero Rated Appeals which, incidentally, constitute by far the largest part of the proceedings in terms of financial consequences. It would not merely justify refusing to permit HMRC from adducing the Magic Transport evidence, but from adducing any evidence, or indeed opposing the Zero Rated Appeals at all. It would, as Mr Davis-White QC was constrained to accept, be a strike out point. Yet no strike out application has been made in this respect, so that HMRC’s case on the Zero Rated Appeals is one which appears to be proceeding to a full hearing on the facts and the law, at which the FtT would in the ordinary course have to deal with the point of principle upon which Mr Davis-White QC relies. Furthermore, the Magic Transport evidence does not, separately from the other objectionable fraud-related evidence in the Holden statement, expressly or by any necessary implication contain any allegation of participation in or knowledge of fraud, bad faith or failure to take reasonable steps by Infinity. So it does not fall foul of the criticism that HMRC is at one and the same time abjuring and seeking to prove by evidence a case of misconduct of any kind against Infinity.[27]Looking at the matter as it must have appeared to the FtT, at a stage when the sophisticated arguments of principle about the necessary elements of HMRC’s case in a zero rated appeal had yet to be deployed, it would in my view have been wrong for the tribunal judge to have refused to admit evidence relevant to a case which a party wished to put forward as its positive case at trial, in circumstances where the party seeking to exclude it was not submitting that the case was itself liable to be struck out in its entirety. Nor is that the basis upon which Judge Porter struck out the Magic Transport evidence. He did so (at paragraphs 11 and 12 of his written reasons) because he regarded the Magic Transport evidence as being deployed not for the purpose of challenging the reliability of the CMRs, but for the purpose of proving a positive case that Infinity had not acted in good faith, which HMRC had declined positively to plead.[28]In my judgment it cannot be an objection to the deployment of evidence in support of a positive case that does not allege fraud or misconduct against a party to proceedings, that the same evidence is supportive of such a case, merely because that additional case is not being pursued. It not infrequently happens in civil litigation that the same evidence may serve more than one purpose. In the present context, the Magic Transport evidence is plainly supportive of a positive case that no real reliance can be placed on the CMRs as evidence of export. The fact that it might also constitute the first plank in a positive case of misconduct against Infinity which has not been pleaded is neither here nor there.[29]It follows that the only basis upon which Judge Porter’s decision to exclude the Magic Transport evidence could be justified is that HMRC has no case at all on the Zero Rated Appeals fit for trial, as is indeed implicit in Peter Smith J’s analysis. It is not in my view good or appropriate case management to decide an objection to the admissibility of part of the evidence in support of a pleaded case in that way. For as long as a party has a positive pleaded case to which evidence upon which it wishes to rely is relevant, then it seems to me that it ought to be admitted unless and until that case is itself struck out or abandoned. Where the question whether the pleaded case is fundamentally objectionable (or, as it used to be said, demurrable) depends, as here, upon a difficult question of legal analysis calling for sophisticated argument and mature reflection, then to argue it for the first time on an appeal against that case management decision (as happened here) seems to me to put the cart before the horse, and to involve a disproportionate and potentially unsatisfactory diversion from the management and preparation of the case for final hearing. As Arden LJ suggested during the course of argument, for as long as a party has a pleaded case which has not been struck out, then case management for the final hearing should not generally exclude evidence supportive of it.[30]For those reasons I would allow the appeal in relation to the Magic Transport evidence, and leave the question whether HMRC is entitled to resist a claim for zero rating in a case of this kind without alleging relevant fraud or misconduct by the appellant trader to be determined at the final hearing, when all the relevant evidence has been deployed and the relevant facts found.[31]I agree.[32]I also agree.

Cited in 3 later judgments