Megantic Services Ltd v Revenue & Customs [2009] UKFTT 391 (TC)

FTT-Tax

Megantic Services Ltd v Revenue & Customs

[2009] UKFTT 391 (TC) · 2009-12-31

[1]In connection with this appeal HMRC have made two applications in relation to witness evidence. The first, which I consider below, is to adduce the witness evidence of Mr Michael Downer in relation to evidence (“the FCIB evidence”) relating to accounts and transactions referable to First Curacao National Bank (“FCIB”). This application was supported by witness statements of Mr Peter Birchfield, an HMRC officer who is the MTIC Technical and Coordination Team Leader for the South Division of National Compliance and Mr Andrew Letherby, a Higher Investigations Officer of HMRC, Criminal Investigations Directorate, posted to the Digital Forensics Group. A second application was for HMRC to be permitted to adduce the whole of a witness statement of Mr Roger Murcott in reply to the appellant’s evidence. By agreement, that second application was adjourned to the substantive hearing of the appeal. A third question, concerning the costs of certain applications in this appeal heard on 19 August 2008, was also deferred for consideration at a later date.

[2]This appeal is in relation to a disputed decision of HMRC dated 21 May 2007 that certain amounts claimed as a VAT credit by the Appellant in relation to monthly accounting periods ended 31 May 2006 and 30 June 2006 were not allowable input tax for the purposes of s 26 of the Value Added Tax Act 1994. The basis for HMRC’s decision is that, they assert, the relevant transactions in respect of which the input tax is claimed to be recoverable were connected with MTIC (Missing Trader Intra-Community) fraud and that the Appellant knew, or should have known, that the transactions were connected with the fraudulent evasion of VAT. HMRC say that the majority of the deal chains are linked to a contra-trader. I need say no more about the basis of HMRC’s decision or the appeal itself, but this background helps to explain the present dispute between the parties as to the FCIB evidence.

[3]There were originally two appeals. The first (“the first appeal”) was against a similar HMRC decision dated 9 March 2007. On an application by HMRC, heard in June 2008, to extend time limits and for a hearing fixed to take place from 25 June 2008 to 23 July 2008 to be vacated, and an application by the Appellant that the hearing should proceed on the basis of the evidence which had already been served, or that the appeals should be allowed because of non compliance by HMRC with directions of the Tribunal, the Tribunal (Dr Nuala Brice) directed that the first appeal be allowed, and gave directions for the further case management of this appeal as follows:

“(3) … (a) that on or before 25 June 2008 the Respondents shall serve on the Appellant copies of the statements of all the witnesses and copies of all the documents upon which they intend to rely at the hearing of the appeal such statements and documents to be indexed and paginated and contained in serviceable ring binders; no further evidence shall be adduced except with the consent of the Tribunal; (b) that no later than 15 July 2008 both parties shall notify the Tribunal centre of their dates to avoid for a pre-trial review in August 2008; (c) that on or before 30 July 2008 the Appellant shall serve on the Respondents copies of the statements of all the witnesses and copies of all the documents upon which it intends to rely at the hearing of the appeal; (d) that a pre-trial review be held in August 2008; and (e) that no later that one week before the date of the pre-trial review the Appellant shall inform the Respondents and the Tribunal of the issues it intends to contest in the appeal and, in particular, whether it wishes to contest the identification of the deal chains and/or the existence of the tax losses and/or that the tax losses were connected with fraud and/or that the deals were connected with fraud”

[4]The matter came before Dr Brice again on 19 August 2008 in respect of an application on the part of the Respondents for a short extension of time (from 25 June 2008 to 9.30 am on 26 June 2008) in which to serve on the Appellant copies of their witness statements and documents as referred to in Direction (3)(a) of the June 2008 directions, and to adduce certain additional evidence comprising certain documents and witness statements that had not been served until 2 and 3 July 2008. This was documentation that had previously been served in a different form, together with signed versions of witness statements that had been served unsigned. I was informed by Mr Black that certain material had also been served and an application had been made for that material to be adduced as additional evidence. However, at the hearing before Dr Brice Mr Black had not pursued that application. As a result Dr Brice granted the short extension of time and made the following direction in respect of the further evidence:

“that the Tribunal consents to the service by the Respondents on 2 and 3 July 2008 only of (1) signed witness statements which did not differ from unsigned versions served by 26 June 2008 and (2) copy exhibits which had already been served by 26 June 2008 as documents in the appeal; any other witness statements or documents served by the Respondents after 26 June 2008 shall not be admitted in the appeal”

[5]This brings me to the first issue I have to consider in relation to the FCIB evidence. The question is whether the direction made by Dr Brice on 19n August 2008 precludes the admission of any further evidence, including therefore the FCIB evidence. I am satisfied that it does not. I accept Mr Brown’s argument in this respect that Dr Brice’s direction in August 2008 referred specifically to the additional evidence that HMRC had originally sought to adduce at that time, and which had been served (as it had to be in any event, by way of disclosure). It is clear to me that the direction refers to witness statements or documents that had at that time actually been served by HMRC after 26 June 2008, and was not intended to preclude the power of the Tribunal to consent to the admission of further evidence on a further application in accordance with the June 2008 directions. In any event, the Tribunal has power, under rule 6(5) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the Tribunal Rules”) to amend, suspend or set aside an earlier direction. Mr Trollope argued that the June 2008 hearing had been a seminal moment and that at that time HMRC had been given their last chance to put their house in order. But Dr Brice expressly made her direction subject to possible consent to further evidence, so it is clear that her direction was not intended to close that particular door.

[6]There is thus no impediment to HMRC’s application by virtue of the prior directions. I turn therefore to the merits of the application itself. Mr Black referred me to the approach set out by Lightman J in Mobile Export 365 Limited, Shelford IT Limited v Revenue and Customs Commissioners

[2007] STC 1794

, a case also concerned with investigation into MTIC fraud. I set this out as follows (at [20]):

“[20] I now turn to giving certain directions and guidance to the tribunal. (1) The tribunal must decide which of the outstanding appeals should be consolidated or otherwise heard together. In the absence of countervailing considerations, there must be powerful reasons of expedition and economy why (so far as practicable) all related appeals are heard at the same time. There is plainly a degree of urgency in obtaining the final decision in these cases in view of the potential cash flow implications for taxpayers of being kept out of money to which they may have a claim. (2) In the current and all future appeals the tribunal should determine once and for all whether to accede to applications to admit or exclude evidence and in particular on the current appeals the evidence of Mr Bycroft, Mr Barnett and Mr Stone on which the commissioners wish to rely. The presumption must be that all relevant evidence should be admitted unless there is a compelling reason to the contrary. As I have already said, problems of complying with any previous timetable for trial are no longer relevant. A timetable for further sequential witness statements (beyond the currently served witness statements) in default of agreement between the parties must be directed. (3) The tribunal cannot (as it has proposed in the decision) decide to admit evidence on the basis that it can later reverse this decision if it considers it just. The tribunal must (at least in any ordinary case such as the present) make a final decision either way.”

There is clearly a need, in cases of this nature, to avoid delay. For this reason Mr Justice Lightman makes it clear that the Tribunal should make final determinations whether or not to admit evidence. There remains nonetheless a presumption that all relevant evidence should be admitted unless there is a compelling reason to the contrary. In the case of this appeal, whilst recognising the need for active case management to enable matters to proceed to a hearing as expeditiously as possible, it is also the case that there is currently no timetable for a trial, though I made it clear to the parties, and they both concurred, that progress ought to be made and that I would accordingly, whatever the outcome of HMRC’s application, direct that a pre-trial review be listed in January or February 2010.

[7]Mr Trollope submitted that, in the context of HMRC’s repeated non-observance of the Tribunal’s directions, there could be no justification for the lateness of HMRC’s application in respect of the FCIB evidence. He referred me to Mr Downer’s witness statement and the chronology of events referable to the FCIB evidence, starting in October 2008 when Mr Downer carried out an analysis of the FCIB material with reference to the Appellant and was asked to make a statement detailing the findings of that analysis. A further meeting was held in February 2009 with the HMRC officers dealing with the Appellant’s case, when further material was produced, and this was subsequently analysed and incorporated into Mr Downer’s statement. The Appellant was first notified that reliance might be placed on such evidence by a letter dated 16 March 2009, followed by an indication to the same effect given at the directions hearing on 19 March 2009. The statement was signed by Mr Downer on 14 July 2009 and HMRC made their application that they be permitted to adduce it as evidence on 21 July 2009.

[8]Mr Trollope also referred me to the fact that FCIB’s business was effectively closed down in September 2006 following a joint Anglo-Dutch investigation and a raid on FCIB’s premises. From Mr Letherby’s statement, HMRC, through its Prosecution Office (RCPO), made requests of the Dutch public prosecutor in January 2007 to provide a copy of the FCIB server. This request was complied with in March 2008 when digital evidence in the form of an external hard disk drive, containing a number of forensic images, was supplied. Mr Trollope submitted that HMRC were in a position to read and/or view the material contained on the server effectively from the time of the original raid on FCIB. From at least the time of the receipt of the digital evidence HMRC knew both the nature and the detail of the contents of the information on the server and were able to view this. Furthermore, HMRC knew that there was banking material that might well be relevant to this appeal, having regard to the information, supplied to HMRC during 2007 that FCIB were the Appellant’s bankers. Despite all this, Mr Trollope said, there was no mention in HMRC’s amended statement of case (dated 1 December 2008) of the FCIB material.

[9]Mr Trollope submitted that, in light of what HMRC knew and were aware of, it would be unconscionable for them to seek to rely upon this material at such a late stage when they have had every opportunity of indicating that they might or would seek to rely upon it prior to the final date for service of the material relied upon (a reference to the date of 25 June 2008 in the June directions).

[10]Whilst I am mindful, as Lightman J in Mobile Export 365 Limited makes clear that I should be, of the need to avoid delay, I do not consider that there has been inordinate delay by HMRC in producing the FCIB evidence in this case. That cannot therefore in my view be a reason that would compel me, against the presumption that relevant evidence should be admitted, to exclude this evidence. The information obtained from the FCIB servers was originally accessed in relation to criminal proceedings, and I accept that those proceedings themselves would necessarily have priority over civil proceedings such as those in this appeal. Furthermore, this appeal is far from being the only one for which relevant information might be obtained from the FCIB server. Of itself those factors would not excuse any unreasonable delay, but I do not consider the chronology to which I was referred by Mr Trollope to have been unreasonable in the circumstances, and it is not in my view a delay of such a kind as would compel the FCIB evidence not to be admitted. The process is evidently a lengthy one, and I do not consider that there is any evidence that HMRC were dilatory from October 2008 to the date of their application in July 2009. For the period from March 2008 to October 2008, according to the evidence of Mr Letherby, it had been necessary to build a replica server between April 2008 and June 2008 in order to establish the integrity of the data that had been obtained, and the process of making the encrypted data available in readable form and testing was not completed until September 2008. I am accordingly satisfied that HMRC were not dilatory in this period either. It is apparent that the process of analysing the FCIB data with respect to the Appellant was begun as soon as it reasonably could have been and it has been processed in a way that has not given rise to unreasonable delay. Finally, in light of the fact that only initial work had been undertaken by Mr Downer by the time the amended statement of case was served on 1 December 2008, I do not consider that omission of reference to the possibility of the FCIB evidence being sought to be admitted can be the subject of criticism, or can be a factor in determining this application.

[11]Mr Trollope also submitted that the FCIB evidence would greatly amplify and exacerbate the size and complexity of the material to be examined and assimilated at the hearing and would impose an enormous and costly burden on the Appellant. This would considerably lengthen the preparation time required and add very significantly to the costs of preparation of this appeal. I do not consider that this would be a reason to exclude the FCIB evidence. This case is a complex one in any event, and the evidence is already of voluminous proportions. However, it would not in my view be a correct approach to managing that complexity to exclude wholesale evidence that is relevant to the appeal.

[12]A further ground for objection to the admission of the FCIB evidence was that the process by which the material was obtained from the Dutch authorities had not been adequately explained and that in this respect there had been inadequate disclosure. In relation to this I had the witness statement of Mr Letherby which explained the process by which the information on the FCIB server had been obtained. The letters of request made by the RCPO to the Dutch prosecuting authority were made under the EU Mutual Assistance Convention of 29 May 2000. The measures agreed by that Convention are incorporated into our domestic law by the Crime (International Cooperation) Act 2003. By section 7 of that Act a judicial authority (a judge or justice of the peace) or a prosecuting authority designated by the Secretary of State may request assistance in obtaining outside the UK any evidence specified in the request for use in proceedings or investigation. By section 19(2) the evidence obtained pursuant to such a request for information may not without the consent of the appropriate overseas authority be used for any purpose other than that specified in the request.

[13]Mr Trollope argued that if the letters of request said that the FCIB material was required for the prosecution of MR X, a person wholly unrelated to the Appellant or the personnel involved, or any part of the investigation connected with or said to be connected with the Appellant, if that was the purpose of the requests then HMRC are not permitted to use it in these proceedings. Mr Trollope sought disclosure of the letters of request. I do not agree with Mr Trollope. Section 9(2) permits the use of the relevant evidence if the appropriate overseas authority has consented to its use for a purpose other than that specified in the request. Mr Black confirmed to the Tribunal that the relevant consent had been obtained. This was not something, he said, that he was bound to disclose. On the other hand, if there was material that undermined that position or contradicted it, he would be bound to disclose that. Mr Black undertook, without prejudice, to consider Mr Trollope’s request for disclosure. It may be, as Mr Black suggested, that the authority for the use of the FCIB evidence could be produced to the Tribunal. I am satisfied that this deals with Mr Trollope’s point on the Crime (International Cooperation) Act 2003, and that this is not a reason for refusing HMRC’s application with regard to the FCIB evidence.

[14]Mr Trollope referred me next to section 3 of the Banker’s Books Evidence Act 1879, which provides that a copy of an entry in a banker’s book shall in all legal proceedings be received as prima facie evidence of such entry and of the matters recorded therein. Sections 4, 5 and 6 make provision as to the conditions upon which a copy of a banker’s book shall be received in evidence. In summary, entries in bankers’ books shall not be received in evidence under the Act unless it is proved that the relevant document is a copy of one of the ordinary books of the bank and that the entries were made in the ordinary course of business and that the book was in the custody of the bank.

[15]Mr Trollope recognised that the Tribunal has the power, under rule 15 of the Tribunal Rules, to admit evidence that would otherwise be inadmissible in civil proceedings. However, he submitted that in the circumstances compliance with the provisions of the 1879 Act is highly desirable. In the case of the FCIB evidence, he argued, there was an absence of authoritative evidence as to the internal operation of the bank, the nature or extent of its business, the maintenance of its records and the proper interpretation of the ledger sheets. It would leave the Tribunal in a state of uncertainty as to what reliance, if any, could be placed on the documents and what inferences could be drawn from them. I do not agree with Mr Trollope that compliance with the 1897 Act is desirable. It is, as Mr Black submitted, simply inappropriate. Section 3 of the Act refers to an entry in a banker’s book being “received as prima facie evidence of such entry, and of the matters, transactions, and accounts therein recorded.” It is designed to allow hearsay evidence to be relied upon, subject to certain safeguards where the evidence is sought to be received as evidence by virtue of the Act, and not otherwise. HMRC are not seeking to rely on the 1879 Act to this effect, and accordingly it is not necessary, and in my view not appropriate, for any provisions of that Act to apply to the FCIB evidence.

[16]Both Mr Trollope and Mr Black referred me also to the Civil Evidence Act 1995 which governs the admission of hearsay evidence in civil proceedings. The expression “civil proceedings” is defined by section 11 of that Act to apply only to those proceedings in relation to which the strict rules of evidence apply. It was accepted by both parties that these proceedings, by virtue of rule 15, fall outside this definition, but I was urged by Mr Trollope to have regard to the 1995 Act in considering HMRC’s application. Like the Banker’s Books Evidence Act, the Civil Evidence Act facilitates the use of hearsay evidence, subject to its terms. However, it provides expressly, in section 1(3), that nothing in the Act affects the admissibility of evidence that is in any event, outside the terms of the Act, admissible. The Act therefore is not relevant to the question of admissibility in this appeal; the only matter for my consideration in this respect is if there is anything in the Act which, in the circumstances of this case, would lead me to conclude that there was a compelling reason why relevant evidence ought not to be admitted. The 1995 Act includes certain safeguards in relation to hearsay evidence. The principal safeguard is that in section 2 which provides that notice, and particulars of the evidence, is to be given to the other party. However, even a failure to comply does not render the evidence inadmissible. Section 2(4) makes this clear whilst also providing that failure to comply may be taken into account by the court in considering the exercise of its powers with respect to the course of proceedings and as a matter adversely affecting the weight to be given to the evidence. Mr Trollope also drew my attention to sections 8 and 9 of the 1995 Act, which set out provisions in relation to proof of statements contained in documents and proof of records of a business. Section 8 provides that statements contained in documents may be proved by copy documents authenticated in such manner as the court may approve. Section 9 enables documents that form part of the records of a business to be received in evidence without further proof if they are certified as part of those records by an officer of the business. These authentication requirements, argued Mr Trollope, are salutary. In this case, he said, there was no competent person to provide any kind of authentication or certification, and no competent person who could be subjected to cross-examination in this respect.

[17]There is no question but that in this case proper notice, and particulars, of the FCIB evidence have been given to the Appellant. In any event, it seems to me that Mr Trollope’s arguments are better suited to the weight to be given to the FCIB evidence and its probative value in the substantive proceedings than to its admissibility. I agree with Mr Black in this regard. This is again therefore not a compelling reason why the FCIB evidence should not be admitted. Although the 1995 Act is not applicable to these proceedings, I find that it supports this conclusion.

[18]Finally, Mr Trollope argued that the value of the FCIB evidence was extremely doubtful. As regards the documentary material, Mr Trollope questioned its relevance, and argued that it could not be demonstrated to be accurate or complete. Furthermore, he said, Mr Downer was not qualified to analyse the entries and interpret the entries on the server, and there was no competent witness who could be cross-examined as to the content of the material. Without rehearsing Mr Trollope’s detailed submissions in this respect, those submissions once more seem to me to go more to the question of the weight to be attached to that evidence, which will be more a matter for the Tribunal at the substantive hearing, than to its admissibility. I am satisfied that it is relevant evidence in the context of the issues in this case. Its probative value will be an issue to be considered by the Tribunal that hears the appeal.

[19]Rule 2 of the Tribunal Rules sets out the overriding objective of the Tribunal to deal with cases fairly and justly. This includes, by rule 2(2)(e), avoiding delay, so far as compatible with proper consideration of the issues. I am conscious, in a case such as this, where credit in respect of a considerable amount of input tax has been denied to the Appellant by HMRC, of the need to avoid delay. However, that cannot be at the expense of failing to enable the parties to present all the evidence that ought properly to be considered by the Tribunal having regard to the issues raised. In this respect there is currently no listing for the substantive hearing, and so I do not consider that admission of the FCIB evidence would prejudice the Appellant as regards the preparation of its case. This is, as I have stated previously a complex case. Rule 2(2)(a) provides that dealing with a case fairly and justly also includes “dealing with the case in ways which are proportionate to the importance of the case, the complexity of the issues, the anticipated costs and the resources of the parties”. I do not regard admission of relevant evidence of this nature as disproportionate. In my judgement the FCIB evidence is relevant evidence in this appeal and there is no compelling reason why it should not be admitted.

[20]I shall issue directions accordingly. ROGER BERNER TRIBUNAL JUDGE RELEASE DATE: 31 December 2009