Greener Solutions Ltd v Revenue & Customs [2010] UKFTT 412 (TC)

FTT-Tax
Greener Solutions Ltd v Revenue & Customs
[2010] UKFTT 412 (TC) · 2010-08-26
[43]“A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax § 59 and Kittel § 53). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct. ” On the meaning of “should have known” Moses LJ said:
“50. The traders contend that mere failure to take reasonable care should not lead to the conclusion that a trader is a participant in the fraud. In particular, counsel on behalf of Mobilx contends that Floyd J and the Tribunal misconstrue § 51 of Kittel . Whilst traders who take every precaution reasonably required of them to ensure that their transactions are not connected with fraud cannot be deprived of their right to deduct input tax, it is contended that the converse does not follow. It does not follow, they argue, that a trader who does not take every reasonable precaution must be regarded as a participant in fraud. 51. Once it is appreciated how closely Kittel follows the approach the court had taken six months before in Optigen , it is not difficult to understand what it meant when it said that a taxable person “knew or should have known” that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. In Optigen the Court ruled that despite the fact that another prior or subsequent transaction was vitiated by VAT fraud in the chain of supply, of which the impugned transaction formed part, the objective criteria, which determined the scope of VAT and of the right to deduct, were met. But they limited that principle to circumstances where the taxable person had “no knowledge and no means of knowledge” (§ 55). The Court must have intended Kittel to be a development of the principle in Optigen . Kittel is the obverse of Optigen . The Court must have intended the phrase “knew or should have known” which it employs in §§ 59 and 61 in Kittel to have the same meaning as the phrase “knowing or having any means of knowing” which it used in Optigen (§ 55). 52. If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel . A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”
He concluded:[59]“59. The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel .[60]The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion. ” 15. In relation to the standard of proof, it used to be said that the more serious the allegation the less likely it is that the event occurred and the stronger (or more cogent) should be the evidence before a court concludes that the allegation is established on the balance of probability. The House of Lords in In re B [2009] AC 11 has clarified this. As Lord Hoffmann (with whom, Lord Rodger and Lord Walker agreed) said:
“There is only one rule of law, namely that the occurrence of the fact in issue must be proved to have been more probable than not. Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities. If a child alleges sexual abuse by a parent, it is common sense to start with the assumption that most parents do not abuse their children. But this assumption may be swiftly dispelled by other compelling evidence of the relationship between parent and child or parent and other children. It would be absurd to suggest that the tribunal must in all cases assume that serious conduct is unlikely to have occurred. In many cases, the other evidence will show that it was all too likely. If, for example, it is clear that a child was assaulted by one or other of two people, it would make no sense to start one’s reasoning by saying that assaulting children is a serious matter and therefore neither of them is likely to have done so. The fact is that one of them did and the question for the tribunal is simply whether it is more probable that one rather than the other was the perpetrator.”
Lady Hale (with whom Lord Scott, Lord Rodger and Lord Walker agreed) said:
“70…Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts. The inherent probabilities are simply something to be taken into account, where relevant, in deciding where the truth lies. 72. As to the seriousness of the allegation, there is no logical or necessary connection between seriousness and probability. Some seriously harmful behaviour, such as murder, is sufficiently rare to be inherently improbable in most circumstances. Even then there are circumstances, such as a body with its throat cut and no weapon to hand, where it is not at all improbable. Other seriously harmful behaviour, such as alcohol or drug abuse, is regrettably all too common and not at all improbable. Nor are serious allegations made in a vacuum. Consider the famous example of the animal seen in Regent’s Park. If it is seen outside the zoo on a stretch of greensward regularly used for walking dogs, then of course it is more likely to be a dog than a lion. If it is seen in the zoo next to the lions’ enclosure when the door is open, then it may well be more likely to be a lion than a dog.” 16. Our understanding is that the dangers of the old formulation were first, that it could be misunderstood to be increasing the civil standard of proof to something above the balance of probability; and secondly, that it was illogical to start with considering the seriousness of the allegation in a vacuum and assume that all serious allegations were unlikely and therefore needed cogent proof. Now one starts with determining the likelihood of the allegation having regard to the surrounding circumstances and not in a vacuum. Having done so the only question is whether the allegation is proved to the balance of probabilities. In other words, the inherent probability itself includes the particular circumstances. Actual knowledge 17. Since it is conceded that Mr Murray knew of the fraud, if his knowledge is attributed to the Appellant the Appellant must have knowledge of the fraud. 18. We start with the law on attribution of knowledge to companies in particular circumstances. The principles are stated in Meridian Global Funds Management Asia v Securities Commission [1995] 2 AC 500 , in which Lord Hoffmann dealt with the exceptional cases where the company’s primary rules of attribution do not answer the question in relation to a particular legal rule as follows: “One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.”
He also said: “It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. Sometimes, as in In re Supply of Ready Mixed Concrete (No. 2) [1995] 1 A.C. 456 and this case, it will be appropriate. Likewise in a case in which a company was required to make a return for revenue purposes and the statute made it an offence to make a false return with intent to deceive, the Divisional Court held that the mens rea of the servant authorised to discharge the duty to make the return should be attributed to the company: see Moore v. I. Bresler Ltd. [1944] 2 All E.R. 515. On the other hand, the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule.” 19. Attribution can be made even though the employee was doing something that was expressly forbidden, as was the case in In re Supply of Ready Mixed Concrete (No.2) [1995] 1 AC 456, or if he was deliberately concealing information from the company. Such an approach has been applied by the Tribunal in Mobilx Limited v HMRC (2008) VAT Decision 20687 in which an employee of Mobilx, Mr Thompson was a director of another company, Greystone, which carried on a similar business with the same group of suppliers and customers and had decided to cease such business because of the danger of fraud. He did not disclose this to the directors of Mobilx and continued to assist them in carrying on the business. His knowledge as a director of Greystone was attributed to Mobilx, although there was no finding of actual knowledge of the connection with fraud. 20. The context in which attribution is relevant is the application of Kittel where knowledge is critical to the VAT result. For this reason one would in principle attribute the knowledge of someone, whether an employee or not, dealing with a transaction in which Kittel is relevant, to the company engaged in the transaction. If such knowledge were not attributed to the company the directors could close their eyes to the fraud by leaving the transactions to employees.[21]There is, however, an exception to the attribution rule referred to as the Hampshire Land principle (from In re Hampshire Land [1896] 2 Ch 743 ). In that case the same person was company secretary of both the lender and the borrower, and in the latter capacity knew that the borrowing had not been properly authorised. That knowledge was not attributed to the lender so that the lender could claim in the liquidation of the borrower. It was accepted at p 749 that if the company secretary had been guilty of fraud his knowledge would not have been attributed to the lender “because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud.” The decision was that the same extended to a breach of duty. 22. An example of the application of the principle is the House of Lords decision in JC Houghton & Co v Nothard Lowe & Wills Ltd [1928] AC 1 of which Lord Walker summarised the facts in Stone & Rolls v Moore Stephens [2009] 1 AC 1391 at [137] as follows:[138]“Two brothers, the Lowes, owed duties to two different trading companies, NLFP (an old-established company) and NLW (a new joint venture company partly owned by a competitor). The Lowes committed NLW to commercial arrangements that were against its best interests, and favourable to NLFP. The issue was whether the Lowes' guilty knowledge estopped NLW from obtaining relief. This House held that there was no estoppel. Viscount Dunedin observed (at p 14):
‘My Lords, there can obviously be no acquiescence without knowledge of the fact as to which acquiescence is said to have taken place. The person who is sought to be estopped is here a company, an abstract conception, not a being who has eyes and ears. The knowledge of the company can only be the knowledge of persons who are entitled to represent the company. It may be assumed that the knowledge of directors is in ordinary circumstances the knowledge of the company. The knowledge of a mere official like the secretary would only be the knowledge of the company if the thing of which knowledge is predicated was a thing within the ordinary domain of the secretary's duties. But what if the knowledge of the director is the knowledge of a director who is himself particeps criminis, that is, if the knowledge of an infringement of the right of the company is only brought home to the man who himself was the artificer of such infringement? Common sense suggests the answer, but authority is not wanting.’
He then referred to Hampshire Land . Similarly Viscount Sumner said of the Lowes (at p19): ‘Their silence was accordingly a notable breach of duty. It has long been recognised that it would be contrary to justice and common sense to treat the knowledge of such persons as that of their company, as if one were to assume that they would make a clean breast of their delinquency. Hence, for the purpose of estopping the company, some knowledge other than theirs has to be brought home to other directors, who can be presumed not to be concerned to suppress it. This was laid down, following earlier cases, in Re Hampshire Land Co, and was even then treated as incontestable.’”[23]Another example is the Court of Appeal decision in Belmont Finance Corp Ltd v Williams Furniture [1979] 2 Ch 250 in which, Belmont's directors agreed to buy a company, Maximum Finance Limited, for £500,000, although it was said to be worth £60,038. Maximum's ex-shareholders then bought all the shares in Belmont for £489,000, so committing an offence under section 54 of the Companies Act 1948. Later Belmont, in liquidation, brought proceedings for misfeasance against its former holding companies and various individuals including its directors. Lord Walker in Stone & Rolls v Moore Stephens summarises the decision as follows:
“142. For present purposes there are two essential points to note in regard to the complicated manoeuvres undertaken in Belmont. First, there was a purchase (of the shares in Maximum) at a gross overvalue, and this (quite apart from section 54 of the Companies Act 1948) was a breach of fiduciary duty by those of Belmont's directors who were complicit (see especially the judgment of Goff LJ in Belmont (No 2) at p 411). Secondly, as part of the same prearranged plan the £0.5m extracted from Belmont was then recycled by purchasing the shares in Belmont, so infringing section 54. The former shareholders in Belmont did not suffer under the prearranged scheme, since they wanted to sell the company and were no worse off through the purchase of Maximum at an overvalue (but they were held accountable as constructive trustees). The real victims, after predictions as to Maximum's profit-earning capacity proved mistaken, were Belmont's creditors (and especially its depositors, who apparently took priority to the debenture-holders). 143. Looking at the earlier Belmont decision again in the light of the fuller facts in Belmont (No 2) I think that Buckley LJ was right to say that Belmont was a victim. It lost over £0.4m in assets (though its former shareholders did not suffer that loss until the court made them accountable) and, on the Hampshire Land principle, the guilty knowledge of some of the directors was not to be attributed to Belmont. Section 54 was certainly enacted to protect company funds and the interests of shareholders as well as creditors, as Scarman LJ said in Wallersteiner v Moir [1974] 1 WLR 991, 1032-1033 but I do not see that this undermines the reasoning of Buckley LJ (who referred to Wallersteiner v Moir at p 261).”
[24]In Stone & Rolls v Moore Stephens the Hampshire Land principle was fully explored although ultimately the case was not decided on the basis of it. The issue was whether the auditors were liable for losses incurred by a company where the fraudster was the sole directing mind and will and the beneficial owner of the company. As Lord Phillips said at [44] “The cases demonstrate some confusion as to the precise nature and scope of the Hampshire Land principle and doubt has even been expressed as to whether it exists.” Lord Walker summarises the authorities on the principle as follows: “144. In all these cases there was a company which was the victim of a fraud or serious breach of duty, and the court held that it was not to be prejudiced by the guilty knowledge of an individual officer who could not be expected to disclose his own fault. (The fact that duties were owed to two different companies in Hampshire Land and Houghton is, I think, an irrelevant coincidence). This principle is sometimes referred to in the United States of America as the "adverse interest" exception to the usual rule of imputation (see for instance Rudolph and Tanis, "Invoking In Pari Delicto to Bar Accountant Liability Actions Brought by Trustees and Receivers" (2008) ALI-ABA Study Materials). It is applied, typically, in cases in which the corporate victim is the claimant and the defence seeks to rely on the corporate victim's notice, knowledge or complicity. It will be necessary to consider some recent English cases which do not fit so neatly into the same mould. Lord Walker decided the case on the basis that the principle would have applied but for the fact that the company and the fraudulent person were effectively the same. He disagreed with the Court of Appeal at [145] that the principle applies only to the company’s claims against others and not its liability to others on the basis that it was a general principle of agency that can apply to any issue as to a company’s knowledge (Lord Mance agreed with the Court of Appeal on this point (see paragraph 28 below)).[25]Lord Brown agreed with Lord Walker saying at [198]: “The Hampshire Land exception recognises that in reality agents will not disclose to their principals the fact that they are committing fraud, least of all when they are defrauding the principals themselves, and that it would be contrary to common sense and justice for the law to presume otherwise.”26. Lord Phillips decided the case on the basis of the ex turpi causa principle applied to a one-man company issue, saying at [55] that the Hampshire Land principle did not have any application. However, he described the principle at [43] in this way: “The important point to note is that Hampshire Land is an exception to the normal rules for the attribution of an agent's knowledge to his principal. It is not a rule about the attribution of conduct. Hampshire Land applies where an agent has knowledge which his principal does not in fact share but which under normal principles of attribution would be deemed to be the knowledge of the principal. The effect of Hampshire Land is that knowledge of the agent will not be attributed to the principal when the knowledge relates to the agent's own breach of duty to his principal. The rationale for Hampshire Land has been said to be that it is contrary to common sense and justice to attribute to a principal knowledge of something that his agent would be anxious to conceal from him.”27. Lord Scott dissenting on the result, and so not attributing the fraudulent person’s fraud to the company, did not reach that result by applying the principle. He said of the principle:[106]“ In re Hampshire Land Company [1896] 2 Ch.743 established the rule that the knowledge of an officer of a company of his own fraud or breach of trust directed at third parties will not necessarily be imputed to that company (see the statement of the rule by Rimer LJ in paragraph 39 of his judgment in the Court of Appeal). Where the knowledge in question was the officer's knowledge of his own fraud or breach of duty, Vaughan Williams J declined in In re Hampshire Land Company to hold that the knowledge was to be attributed to the company (see pp 749-750). In particular, if the director in breach of duty has an adverse interest to that of the company, the knowledge of the breach of duty will not be imputed to the company: see J.C.Houghton and Co. v Nothard, Lowe and Wills Ltd [1928] AC 1 where Lord Sumner said that it would be ‘… contrary to justice and common sense to treat the knowledge of such persons as that of their company, as if one were to assume that they would make a clean breast of their delinquency’ (p.19).” 28. Lord Mance, also dissenting on the result without relying on the Hampshire Land principle said that it pointed towards the same result:[227]“227. Though not essential to my reasoning, I also consider that the principle established in In re Hampshire Land Company, Belmont Finance and Attorney General's Reference (No 2 of 1982) points towards the same result It prevents a company being treated as party to a fraud committed by its officers “on” or “against” the company, at least in the context of claims by the company for redress for offences committed against the company: Belmont Finance , 261D-H, per Buckley LJ, and 271F-G, per Goff LJ, and Attorney General's Reference (No 2 of 1982) , p.640A-B, per Kerr LJ; and see Edwards Karwacki Smith & Co. Pty. Ltd. v Jacka Nominees Pty. Ltd. (1994) 15 ACSR 502, 515-517. Thus, in Belmont Finance the company's directors were party to an illegal conspiracy, “part and parcel” of which was that the company bought shares at an inflated price (p.264A), but their knowledge of this illegality was not imputed to the company and did not bar the company suing them for the conspiracy. ” However, he also said:[234]“234. … In distinguishing between primary and secondary victims, the Court of Appeal in the present case was, however, influenced by reasoning in McNicholas Construction Co. Ltd. v Customs and Excise Comrs [2000] STC 553 (Dyson J) and in Bank of India v. Morris [2005] 2 BCLC 328 (Court of Appeal). Both those cases were (as Rimer LJ noted) concerned with claims against the company by injured third parties, rather than claims by the company against others in breach of duty to it. So it is not clear why the Hampshire Land issue arose at all, and in my view the statements in them are of no assistance in resolving any issue of attribution in the present context.” 29. The principle has been considered in relation to VAT by Dyson J in McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000] STC 553 in which the site managers of a construction company, McNicholas Construction (“MC”), engaged labour who did not hold a certificate entitling them to be paid without deduction of tax. They arranged for “sub-contractors” registered for VAT who held certificates entitling them to pay the labour without deduction of tax to issue an invoice for VAT to MC as if the sub-contractors had actually engaged the labour, which it was found they had not. It is important to analyse the nature of the fraud and the relevance of knowledge. The Tribunal found:
“[27] … By contrast MC's position has been neutral. It has paid amounts purporting to be VAT to the alleged subcontractors and has recovered them as input tax. It has avoided having to deduct income tax from these payments. The loss or damage to MC would arise, if at all, from the successful assessment (with or without penalties) to recover the input tax wrongly deducted by it; but that does not make it the victim of its employees' fraud such as to exclude the attribution to it of the employees' knowledge and actions.” … [263] Our overall impression is that MC through its employees provided its self-employed workforce with the facility of payment without proper deduction of income tax. It did this so as to keep its existing workers and to encourage new labourers to work at MC sites; in some instances, no doubt, MC responded to the expectations of and pressures put on it by gangermen and by the likes of Mr C Lee and his backers. Nonetheless the means by which the facility was provided was fraudulent and dishonest and MC's acts of claiming relief for input tax for the amounts shown as VAT on the VAT-only invoices issued in the names of the bogus subcontractors in respect of non-existent supplies were equally fraudulent and dishonest. Those employees of MC, who had suspicions and who ought to have worked at stamping out the frauds, simply did not want to know. … [278] In reaching, the conclusions set out above, we have taken into. account the argument for the Commissioners that MC benefited financially from its participation in the frauds. We do not find this argument convincing. So far, as the fraud on the Inland Revenue is concerned, the position of MC is neutral. For this purpose we have to compare like with like, ie comparing the position of self-employed laboured being engaged through genuine subcontractors with the position of bogus subcontractors. There was a suggestion in the Commissioners' approach that MC's position using self-employed workers and bogus subcontractors should be compared with what would have happened had those workers been directly employed by MC. If the latter comparison were used, there would no doubt be a financial advantage to MC from using self-employed labourers; it would have been exonerated from sick pay and holiday pay obligations, from NI contributions and from related administration costs. But that is not a true comparison m the present context to which we now turn. This is the situation where MC used only self-employed labour. Either MC pays the labourers under deduction of income tax, applying the SC 60 system, in which case MC hands the income tax over to the Inland Revenue; or it pays the bogus subcontractor gross on the strength of his 714 certificate. The cash outgoing on the part of MC is exactly the same in both ways. So far as the VAT side is concerned, MC’s position is also neutral. Either it pays "VAT" to the bogus subcontractor in. response to a "VAT invoice" and deducts that "VAT" as its own input tax or it pays the labourers direct and is not charged VAT. [279] There may well be a commercial advantage to MC in participating in the frauds…. The more likely conclusion is that expressed in paragraph 263 above. MC was, we think, providing the facilities to the labourers to enable them to be paid without deduction of tax and incidentally to enable the organisers of the frauds to siphon off profits. MC was doing this knowingly but it was not actually benefiting in cash terms. If anything it achieved the commercial advantage of satisfied gangmasters and a contented workforce who regarded themselves as entitled to expect that lump fraud facilities would be available to them.” 30. What the fraudulent site mangers set out to do was to assist the labourers in receiving their pay without any tax deduction thus assisting the labourers to defraud the Inland Revenue. No harm or benefit (other than a possible commercial advantage) was intended for MC but the unintended consequence (although intention to evade VAT was inferred as being foreseeable consequence of its actions) of its entering into the transactions was that MC paid what was ostensibly VAT to the sub-contractors, which, not being VAT on any supply, was not deductible as input tax. The appeal was against an assessment to recover the input tax deducted (there was no penalty assessment). MC claimed that it was the victim of the fraud, and accordingly that the acts of the site mangers should not be attributed to it in determining whether Customs could make an assessment outside the normal time limits (which applies only if there is conduct involving dishonesty within the provisions relating to fraudulent evasion of VAT). Attribution of knowledge had no relevance to whether the assessments were otherwise valid. Dyson J agreed with the Tribunal that MC was not the victim of the fraud, saying: “ 51. I turn now to consider the Hampshire Land principle. Mr Purle submits that the Tribunal was in error in not treating the case as falling within the principle. He contends that MC was in a very real sense a victim of the fraud in that it paid the VAT shown on each of the invoices, and, if the Commissioners' argument is accepted, they were not entitled to claim input relief. On any view, the company suffered a cash flow detriment in paying the VAT and only subsequently being credited with the input relief. 52. It is necessary first to examine the scope of the Hampshire Land principle. It has been variously described as an exception to the general rule of attribution, or a special rule of attribution. In the Hampshire Land case, money was lent by a building society to a company. The secretary of the building society and the company was the same person, Mr Wills. He knew that there was an irregularity in the authorisation given by the company in that the shareholders had not been told, as required, that the borrowing was in excess of the directors' borrowing powers without the shareholders' consent. The question was whether the building society could prove in the company's winding-up, or were prevented from doing so on the grounds that Mr Wills' knowledge of the irregularity was to be attributed to the building society. Vaughan Williams J held that his knowledge could not be attributed to the building society. He said: ‘... common sense at once leads on to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be received where the common agent is himself guilty of fraud. It seems to me that if you assume here that Mr Wills was guilty of irregularity — a breach of duty in respect of these transactions — the same inference is to be drawn as if he had been guilty of fraud. I do not know, I am sure, whether he was guilty of actual fraud; but whether his conduct amounted to fraud or to breach of duty, I decline to hold that his knowledge of his own fraud or his own breach of duty is, under the circumstances, the knowledge of the company [sc. the society].’ 53. This decision was approved and applied by the House of Lords in J C Houghton and Co v Nothard, Lowe and Wills Ltd [1928] AC 1. That was a case in which the directors who had the relevant knowledge were parties to what Viscount Dunedin said was “a fraud on the true interests of the company” (page 15). He regarded it as a matter of “common sense” that in those circumstances the knowledge of the directors should not be attributed to the company. So too did Viscount Sumner who said (page 19): ‘It has long been recognised that it would be contrary to justice and common sense to treat the knowledge of such persons as that of their company, as if one were to assume that they would make a clean breast of their delinquency’. 54. In Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] 1 Ch 250 , the principle was applied in relation to an alleged conspiracy by two directors to sell shares in the company at an overvalue in order to finance the purchase of the company's share capital in breach of section 54 of the Companies Act 1948 . The question was whether the company was debarred from seeking relief in relation to the purchase of the shares on the grounds that, through its directors, it was aware of what was going on. Buckmaster LJ asked whether the company could sensibly be regarded as a party to the conspiracy, and concluded that it could not be so regarded. The purpose of the alleged conspiracy was to deprive the company of some of its assets. The company was the party at which the conspiracy was aimed. It was the victim of the conspiracy. He explained that it was: ‘a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.’ 55. In my judgment, the Tribunal correctly concluded that there should be [no [1] ] attribution in the present case, since MC could not sensibly be regarded as a victim of the fraud. They were right to hold that the fraud was “neutral” from MC's point of view. The circumstances in which the exception to the general rule of attribution will apply are where the person whose acts it is sought to impute to the company knows or believes that his acts are detrimental to the interests of the company in a material respect. This explains, for example, the reference by Buckmaster LJ to making “a clean breast of their delinquency”
. It follows that, in judging whether a company is to be regarded as the victim of the acts of a person, one should consider the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective. As the Tribunal pointed out, in Pioneer Concrete the company suffered a large fine for contempt of court on account of the wrongful acts of its managers. The fact that their wrongful acts caused the company to suffer a financial penalty in this way did not prevent the acts and knowledge of the managers from being attributed to it. 56. The Hampshire Land principle or exception is founded in common sense and justice. It is obvious good sense and justice that the act of an employee should not be attributed to the employer company if, in truth, the act is directed at, and harmful to, the interests of the company. In the present case, the fraud was not aimed at MC. It was not intended by the participants in the fraud that the interests of MC should be harmed by their conduct. In judging whether the fraud was in fact harmful to the interests of MC, one should not be too ready to find such harm. In my view, the cash flow point made by Mr Purle comes nowhere near being serious enough to trigger the principle. Looking at the facts of this case from a common sense point of view, there was no VAT fraud or harm to the interests of MC. The Tribunal were entitled to reach this conclusion. It was the correct conclusion to reach. ” 31. Lord Walker in Stone & Rolls at [154] said that he found it difficult to understand why as a matter of fact the fraud was “neutral” (see [55] quoted above) from the company’s point of view. It seems that the origin of this statement was the passages quoted above from the Tribunal’s decision. MC was not financially involved in the fraud apart from an unintended VAT disadvantage. Hence “one should consider the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective.” On that basis MC was not the victim of any fraud aimed against it, and the Hampshire Land principle did not prevent attribution of the fraudster’s conduct to MC to enable the making of assessments outside normal time limits (attribution was irrelevant to the in-time assessments). It seems to us that the attribution would not have applied in an action by McNicholas re-claiming from the sub-contractors the “VAT” they had paid, which would have been a normal Hampshire Land situation. 32. It may arise that the company is a secondary victim of a fraud directed at a third party. Of this situation Lord Walker said:[173]“173. …There is in my opinion a clearer and firmer basis on which to determine what (if any) significance to give to the notion of a company being the secondary victim of the fraud (aimed at a third party) of one or more of its directors. It is necessary to keep well in mind why the law makes an exception (the adverse interest rule) for a company which is a primary victim (like the Belmont company, which was manipulated into buying Maximum at a gross overvaluation). The company is not fixed with its directors' fraudulent intentions because that would be unjust to its innocent participators (honest directors who were deceived, and shareholders who were cheated); the guilty are presumed not to pass on their guilty knowledge to the innocent.[174]… McNicholas and Bank of India may be best analysed as depending on a special rule of attribution required by the scheme of the legislation relating to VAT or fraudulent trading (as the case may be). It is not necessary to the disposal of this appeal, or prudent, to address every situation that may be described as involving a secondary victim. ”[2]The reference to Bank of India is to Morris v Bank of India [2005] 2 BCLC 328 in which a manager of the Bank of India had authority to enter into transactions with BCCI that assisted BCCI to engage in fraudulent trading, the definition of which requires an intent to defraud creditors of the company or of any other person. The transactions consisted in BCCI depositing money with the Bank of India (“BoI”) (which was a benefit to the BoI which wanted to show high deposits at its year end) which made loans guaranteed by BCCI indirectly to people with overdrawn accounts with BCCI, thus making it look as if the interest on the overdrawn accounts was being serviced. The Court of Appeal followed McNicholas in attributing the manager’s knowledge to the BoI to make it liable for fraudulent trading even though his breach of duty was not aimed at harming the Bank. The Court of Appeal said:
“The potential liability of BoI under section 213 [of the Insolvency Act 1986] is irrelevant in deciding whether BoI was a victim of Mr. Samant [the manager] and whether his knowledge should be attributed to it for the purposes of section 213. ”
Thus in both McNicholas and Bank of India knowledge was attributed to a company in circumstances where the breach of duty was not aimed at harming the company although it had adverse consequences for the company not intended by the person breaching his duty to the company, in the form of permitting assessments outside normal time limits to recover the input tax deduction and liability for fraudulent trading respectively. But where a company is a secondary victim of fraud the same reason for not attributing guilty knowledge to the innocent is present. 33. The principle we derive from these authorities is that the Hampshire Land principle is of general application and applies to prevent the knowledge of the agent in breach of his duty to the company being attributed to a company where the company is a victim of his fraud. In determining whether there is a fraud against the company “ one should consider the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective.” And “In judging whether the fraud was in fact harmful to the interests of MC, one should not be too ready to find such harm.” Application of the law to the facts 34. As set out in paragraph 20 we are concerned with Kittel for which in principle Mr Murray’s knowledge should be attributed to the Appellant. The issue is therefore whether the Hampshire Land exception applies which depends on whether on the facts the Appellant is a victim of Mr Murray’s fraud. We consider that it is. Mr Murray was engaged by the Appellant to do all acts relating to the Transaction short of signing the contracts. He owed a duty to the Appellant to enter into a genuine commercial transaction. Instead he presented to the Appellant a transaction that he knew was connected to a fraud on HMRC with the result that (if his knowledge were attributed to it) no input tax was recoverable by the Appellant, thus involving the Appellant in a considerable loss because , in the words of the ECJ in Kittel at [57], the Appellant “aids the perpetrators of the fraud and becomes their accomplice.” If the Appellant had known of the connection with fraud they would not have entered into the Transaction. Mr Murray knew that unless the Appellant entered into the Transaction, he would not benefit from a share of profits from a transaction which he knew was connected to fraud. This result was “ the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective” because the effect of the Transaction cannot be judged without taking his knowledge into account. Naturally he hoped that the connection with fraud would not be discovered because otherwise there would be no profit to share, but the same would be true if he were stealing from the Appellant. That was a fraud by Mr Murray against the Appellant in a real sense. In our view this makes the Hampshire Land principle applicable. 35. Standing back and regarding the Hampshire Land principle as one of common sense, it seems right that where the recovery of input tax paid by it to NEX depends on the state of the Appellant’s knowledge, the knowledge of Mr Murray who was trying to benefit by persuading the Appellant to enter into a transaction that he knew was connected with fraud, should not be attributed to it. 36. Accordingly we conclude that the Hampshire Land principle is applicable here with the result that Appellant did not know of the connection of the Transaction with the fraud. Ought to have known 37. We start by considering the new formulation of the law on the standard of proof. The problem we now face is that at the time of the deals in question our understanding is that nobody in the industry knew of the inherent degree of probability of fraud in mobile phone deals. Suppose that it had been generally known that on average one in every thousand transactions in mobile phones was connected to fraud. This was not something that could be completely ignored but equally it was not something that put a trader on notice that any odd feature of the transaction was likely to indicate fraud; the inherent probability was essentially de minimis. But suppose the probability had been generally known to be that on average one in ten such transactions was connected to fraud, then fraud is something that the trader should be actively looking out for and any odd feature would almost certainly put him on notice that fraud might be indicated. Naturally the nature of the odd feature is also relevant. An odd feature that was more consistent with fraud than not could indicate that fraud of the importer in a particular chain was more likely than not. What makes it even more difficult is that (with hindsight, and therefore something that cannot be taken into account in determining the inherent probability) we now know that the inherent probability was rapidly changing. What this evidence did not do was to give any measure of the inherent probability that was generally known at the time of the Transaction in September to November 2006, although this is after the judgment in Kittel and the announcement of the reverse charge in July 2006 then intended to apply from 1 October 2006. Indeed this evidence points to the fact that circumstances were changing so rapidly that nobody was likely to have an up-to-date view on the inherent probability of fraud but by the time of the Transaction this must have been greatly reduced. 38. We have set out above the facts that were within the knowledge of the officers of the Appellant on the basis that, as we have decided, Mr Murray’s knowledge is not to be attributed to it. The factors relied upon by Mr Foulkes as indicating to a reasonable trader that the Transaction was connected with the fraudulent evasion of VAT are: (1) The Appellant knew about MTIC fraud. As mentioned HMRC investigated the Appellant for possible connection with MTIC fraud in relation to its core business, discussed MTIC fraud with them, and concluded that they there was no connection. Mr Bruce-Payne and Miss Sexton had read Notice 726. (2) Mr Murray revealed to the Appellant the identities of the supplier and customer without any guarantee of working further with the Appellant. The contrary argument is that at least Mr Bruce-Payne was expecting a continuing relationship, although Miss Sexton thought that Mr Murray was looking for a profit to enable him to expand MBG. Having seen the witnesses we consider that the Appellant would not have considered itself free to use this information if it had not entered into a continuing relationship with Mr Murray and would not have considered that it had the expertise to enter into further deals in new phones. (3) The goods were not adequately described. Mr Fletcher’s evidence made a distinction between the lower degree of specification of goods in a grey market transaction driven by the seller, as in an arbitrage dumping transaction, and the greater degree of specification in one driven by the buyer, as in volume shortage. Here the transaction is driven by the seller, NEX, as CEMSA came into the transaction later but even so there is no information about the charger (in particular whether 2- or 3-pin) or the manual. (4) The goods had recently been imported and were being exported again. This is certainly not to be expected in the grey market. However, a possible and quite innocent explanation is that a proposed deal in the UK may have failed and so the goods were being exported again. (5) There were no written terms and conditions. The contrary argument is in its core business that the Appellant dealt with Tesco without written terms although there were some terms on the back of their invoices. There was no evidence about whether the invoice for the Transaction, which was prepared by the Appellant, had any terms on the back. The only term on the front was the retention of title. (6) The goods were sent to a warehouse in Calais for a Spanish customer who was not a retailer. The contrary argument is that there are provisions in the VAT Directives for triangular trading in which the goods are delivered to a different country to that of the buyer (recently considered by the ECJ in Facet BV , Cases C-536/08 and C-539/08, [2010] STC 1701) and so such trading cannot be unusual in general. (7) The Appellant was able to take control of the goods before paying NEX while selling to CEMSA with a title retention condition. Here both NEX and the Appellant gave lengthy credit to their respective purchasers between the date of invoice (7 and 28 September 2006) and payment on 15 or 16 November 2006). (8) The Appellant (through MBG) was able to find a customer that NEX, which stated that it had been in the business since 2002, could not; and could find a supplier that CEMSA, which stated that it had worked in the international market for 30 years could not. The contrary argument is that NEX may not have been able to finance the VAT and so was willing to give someone else part of the profit on the deal that it could have made itself. (9) The Appellant was able to negotiate a lower price from NEX to maintain its margin. We have found that this was not true and was said by Mr Murray to give the impression that he was doing a good job, but it was reasonable for the Appellant to believe it. There is no evidence that he said that he had disclosed the amount of the margin to NEX. (10) Although the Appellant had access to authorised distributors such as Orange, they made a deal with NEX, a non-authorised distributor. Miss Sexton said that at the time this did not occur to her. (11) CEMSA’s trade reference was a Latvian company run by Mr Peter Gallagher. However, Mr Bruce-Payne did take up the reference on the telephone and was satisfied, although he did not keep a record of the conversation. (12) CEMSA, a Spanish company, was run by Mr Steve Russell and had an Isle of Man bank account. The contrary argument is that Mr Russell was stated to have 30 years import and export experience and had been a founder member in 1980 of a large telecommunications company in Spain selling his share in 1983, which does not arouse suspicions. (13) The Veracis report on NEX was out of date. The following features arise: (a) the business was 70% CPUs and 30% computers and the trade classification was “other computer related activities” without any mention of phones; (b) the Veracis report is dated 2 December 2005, some 10 months earlier; and (c) there is a large difference between the stated £8m per month turnover and the Veracis figure of £500K per month 10 months earlier. On the other hand the Appellant met Mr Williams and understood that he was then dealing in phones. (14) Both NEX and CEMSA declared enormous turnover but had few employees. The contrary argument is that both companies appeared to be substantial businesses. (15) The Dunn & Bradsheet report on CEMSA contained the following features: (a) the large increase in turnover since the 31 December 2004 accounts from Euros 9.8m to an estimated Euros 660m; (b) the low credit rating of Euros 6,611, which might be accounted for by the current liabilities exceeding current assets. The contrary argument is that the report did contain fairly full accounts for 2004 which showed a loss and an excess of liabilities over current assets. In any case the Appellant was not giving them any credit. (16) CEMSA’s Standard Industrial Classification was that of pharmaceutical goods wholesalers, although there was also reference to fabricacion y venta de componentes electronicos , and its own description referred to “import and export with a variety of products such as electronics, telephones, luxury goods, watches, crystal, perfumes, liquors, etc.” The contrary argument is that telephones are mentioned and the classification might reflect their major business. (17) Both NEX and CEMSA had accounts with FCIB. The contrary argument is that neither used such accounts in the Transaction and so there was nothing to alert the Appellant to this fact. (18) Neither the Appellant nor Mr Murray met CEMSA. The contrary argument is that the author of the Veracis report did so, included photographs of its offices and figures showing that it was of significant size. (19) No visit was made to 1st Freight. Such a visit might have revealed that the goods did not exist but we are unable to make a finding of fact that this was the case. (20) Although 1st Freight’s conditions required the payment of a £2,500 deposit this was never asked for or paid. Their invoice was paid after the goods had left. The contrary argument is that 1st Freight may have been satisfied about the Appellant’s credit worthiness, although there is no evidence on this. (21) The Appellant was not charged for warehousing of the 500 phones while the dispute with CEMSA over payment was resolved. The reason could be that they took up very little space and in any case this arose after the Appellant had entered into the Transaction. (22) The due diligence should have led to further investigation. We have dealt with some concerns about NEX and CEMSA above. There was no due diligence on Mr Murray. The contrary argument is that he was introduced by the Appellant’s financier Mr Mhitarian and they were not likely to do anything that might have upset him. 39. We have given some contrary arguments in relation to each item. What is more important is to look at the totality of the items in the context of the Transaction itself. Unusually in chains in other MTIC reported cases this one seems far more commercial in that the Appellant’s original purchaser went off, they were told that the purchase price had been renegotiated, and there was a delay in payment until 15 November 2006 as well as a dispute with CEMSA about the final amount of the payment resulting in retention of some of the phones. The Transaction does not satisfy Mr Fletcher’s description of a normal grey market transaction but it is not clear that a normal trader would have understood this at the time. We repeat the Court of Appeal’s test: 60. The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.” This is a high threshold which we do not consider HMRC has satisfied us on the balance of probabilities, taking the inherent probability of fraud into account, is the case here. 40. We therefore conclude that the Appellant neither knew nor should have known about the connection with the fraud and we allow the appeal. In view of Mr Murray’s knowledge of the connection with fraud, which we have decided is not to be attributed to the Appellant, MBG is, in accordance with the ex turpi causa principle, not entitled to a share in the profit on the Transaction (if there was a profit bearing in mind the time the input tax has been outstanding). 41. We therefore allow the appeal and direct that HMRC pay the Appellant’s costs determined under the former rules to be determined in default of agreement by a Taxing Master on the standard basis. Any further applications for interest or repayment supplement should be made within 30 days of the date of release of this decision. 42. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. JOHN F AVERY JONES TRIBUNAL JUDGE RELEASE DATE: 26 August 2010 [1] The word “no” is obviously included in error as the Tribunal had decided that there was attribution because the company was not the victim of the fraud.