Galvin v Revenue and Customs (PROCEDURE : Other) [2016] UKFTT 577 (TC)
FTT-Tax
Galvin v Revenue and Customs (PROCEDURE : Other)
[2016] UKFTT 577 (TC) · 2016-06-06
[54]Mr Douglas-Jones also submitted that even if a penalty was in point, the amount of tax evaded would need to recognise both outputs and inputs. As Reddrock was operating a “barter” system, if supplies to it were fictitious, there would be a reduction in both its input and output tax – and so the amount of tax evaded would be considerably less than the amount on which the penalty was assessed. Submissions on behalf of HMRC55. Mr Watkinson noted that Mr Galvin had made an application for reinstatement of his appeal under Tribunal Rule 8(5), rather than appealing against the striking out order. Mr Watkinson submitted that if Mr Galvin’s position was that the decision had been improperly made, he should have appealed against it. In Mitchell the Master of the Rolls states at paragraph 44 of the judgment: An application for relief from a sanction presupposes that the sanction has in principle been properly imposed. If a party wishes to contend that it was not appropriate to make the order, that should be by way of appeal or, exceptionally, by asking the court which imposed the order to vary or revoke it under CPR 3.1(7).56. The Master of the Rolls went on to say at paragraph 45 “On an application for relief from a sanction, therefore, the starting point should be that the sanction has been properly imposed and complies with the overriding objective”.57. Therefore, submitted Mr Watkinson, Mr Douglas-Jones cannot submit that the striking out order was wrongly made, or that Mr Galvin had complied with the Tribunal’s directions. Nor is there any question that Mr Galvin did not receive the Tribunal’s directions, as he responded to them.58. Mr Watkinson went on to make submissions on the nature and purpose of unless orders, and the manner in which I should exercise my discretion when considering relief from sanctions. He referred me to the decision of the Court of Appeal in BPP Holdings (which I discussed above), and referred me also to the decision of the Court of Appeal in Hytec Information Systems Limited v Council of City of Coventry [1996] EWCA Civ 1099 and the following summary from the judgment of Ward LJ of the issues to be considered in any consideration whether to grant relief from an unless
order
1. An unless order is an order of last resort. It is not made unless there is a history of failure to comply with other orders. It is the party's last chance to put his case in order; 2. Because that was his last chance, a failure to comply will ordinarily result in the sanction being imposed; 3. This sanction is a necessary forensic weapon which the broader interests of the administration of justice require to be deployed unless the most compelling reason is advanced to exempt his failure; 4. It seems axiomatic that if a party intentionally or deliberately (if the synonym is preferred), flouts the order then he can expect no mercy; 5. A sufficient exoneration will almost inevitably require that he satisfies the court that something beyond his control has caused his failure to comply with the order; 6. The judge exercises his judicial discretion in deciding whether or not to excuse. A discretion judicially exercised on the facts and circumstances of each case on its own merits depends on the circumstances of that case; at the core is service to justice; 7. The interests of justice require that justice be shown to the injured party for the procedural inefficiencies caused the twin scourges of delay and wasted costs. The public interest in the administration of justice to contain those two blights upon it also weigh very heavily. Any injustice to the defaulting party, though never to be ignored, comes a long way behind the other two; 59. Nor, submitted Mr Watkinson, does Mr Galvin’s status as a litigant in person excuse him from compliance. Mr Watkinson drew my attention to the fact that the principal director of Altion Law (Mr Galvin’s current legal representatives) is his son, and Mr Galvin gave no reason as to why he did not take legal advice at the time he received the Tribunal’s directions. Mr Watkinson also asserted that Mr Galvin is not a “naïf abroad”, as he has been engaged in multiple legal actions. Although Mr Watkinson acknowledged that Mr Galvin’s status as a litigant in person ought to be a factor taken into consideration, it is not enough to excuse Mr Galvin’s non-compliance. 60. As regards Article 6 of the European Convention, Mr Watkinson submitted that this cannot be a lifeboat that saves Mr Galvin from an ocean of his own making, and that Mr Galvin’s Article 6 rights are not engaged where his own failings have led to his appeal being struck out. 61. In relation to the amount of the penalties, the penalties are measured by reference to the amount of VAT evaded or sought to be evaded by the taxpayer’s conduct (s60(1) VAT Act). Mr Watkinson noted that the findings of the First Tier Tribunal in the Original Appeal was that invoices on which credit for input tax had been claimed were entirely fictitious and that no supplies had been made to Reddrock in relation to them, and therefore it must follow that the amount of tax sought to be evaded was the input tax on the fictitious invoices. The amount of output tax incurred by Reddrock was irrelevant to the measure of tax evaded or sought to have been evaded by Reddrock’s conduct. Mr Watkinson went on to say that if Mr Galvin now wished to claim that Reddrock had not made the supplies recorded on its VAT return (and therefore wanted to receive a refund of the output VAT it had apparently overpaid), then he would need to explain why these incorrect entries had been made on Reddrock’s VAT return. 62. As regards the conduct of Officer Wells, a decision taken by an officer for later VAT periods can, submitted Mr Watkinson, have no logical relevance to Mr Galvin’s conduct in prior VAT periods. The fact that Mr Galvin may have subsequently received genuine taxable supplies on which he could genuinely claim input VAT credit is irrelevant to his earlier conduct. 63. Mr Watkinson submitted that for Mr Galvin to succeed in his application for reinstatement of his appeal, Mr Galvin will need to satisfy the Tribunal that something beyond his control caused his failure to comply with the Tribunal’s directions. Mr Galvin has made no submission to this effect, and therefore Mr Watkinson submitted that the application must be dismissed. Discussion 64. I note that Mr Galvin has not appealed against the striking out of his appeal, but has instead applied under Tribunal Rule 8(5) for his appeal to be reinstated. Following the decision of the Court of Appeal in Mitchell , my starting point is that the striking out was properly imposed and complied with the overriding objective. For that reason, I have taken no account of the fact that Mr Galvin was given only 14 days to respond to the Tribunal’s directions. 65. I then turn to the three stages identified in Denton : first, the seriousness and significance of Mr Galvin’s failure; secondly, the reason for the default; and finally all the circumstances of the case. 66. The making of an unless order is a serious matter. As stated by Ward LJ in Hytec , it is an order of last resort, and the applicant will need to advance the most compelling reasons to explain his failure. 67. The reason for the default advanced by Mr Douglas-Jones was that Mr Galvin was a litigant in person – and that he had not appreciated that he needed to particularise his grounds for opposing HMRC’s application to strike out the appeal. Mr Douglas-Jones told me that the reason why Mr Galvin was unrepresented was because his previous solicitors (Dunham Solicitors LLP) had gone into liquidation (although I note that Altion Law – Mr Galvin’s current lawyers – represented Reddrock in his appeal to the Upper Tribunal against the Original Appeal decision). The fact that Mr Galvin was, at the relevant time, a litigant in person, may in some circumstances be relevant to a decision to make an unless order, or to order a strike out. Although I am aware that Mr Galvin is now represented by his son’s firm, it cannot be the case that a litigant should be expected to obtain informal legal advice from friends or relatives (and indeed, there are often compelling reasons why obtaining advice from legally qualified friends or relatives may be inappropriate). Nonetheless, in the circumstances of this case, I consider that the fact that Mr Galvin was a litigant in person does not, of itself, excuse his behaviour. I note that the Senior President, in his judgment BPP Holdings at paragraph 39 states that I remind HMRC that even in the tribunals where the flexibility of process is a hallmark of the delivery of specialist justice, a litigant in person is expected to comply with rules and orders … 68. I note that Mr Douglas-Jones does not assert that there were any factors outside Mr Galvin’s control that caused his failure to comply with the Tribunal’s direction. 69. I agree with Mr Douglas-Jones that the imposition of civil penalties under s60 and s61 VAT Act are criminal proceedings for the purposes of Article 6 of the European Convention. However the fact that this appeal is within the scope of Article 6 does not prevent the Tribunal from exercising its case management powers, including the power to strike out the appeal for failure by the appellant to comply with directions. 70. I find Mr Douglas-Jones argument relating to the quantum of tax evaded to be nonsense. He submitted that Reddrock’s barter system means that where fictitious input VAT claims have been made, there must also have been corresponding fictitious output VAT – leading to a reduction in the overall amount of VAT evaded (and therefore in the penalty suffered). However when he was asked by me to explain in more detail why this was so, he was unable to do so. Even if there was some merit in this argument, I agree with Mr Watkinson that the measure of VAT sought to be evaded by the creation of fictitious inputs is not reduced merely because the amount of outputs has been overstated. 71. I also agree with Mr Watkinson that the fact that subsequent VAT assessments made by Officer Wells were reversed on review is irrelevant to the issues before me. The mere fact that assessments were overturned on review does not of itself bring into question the reliability of Officer Wells as a witness in the Original Appeal, or provide grounds to re-open the Original Appeal. Even if it did, it is clear that the Tribunal’s finding that invoices were fabricated was not based on the uncorroborated evidence of Officer Wells. 72. I have addressed the submissions made by both parties in respect of the repeal of s60 and s61 VAT Act earlier in this decision. 73. I have considered also Mr Douglas-Jones submission that the Tribunal in the Original Appeal made no express finding of dishonesty on the part of either Reddrock or Mr Galvin. I disagree, as I consider that the factual findings of the Tribunal amount to findings of dishonesty. In the Original Appeal the Tribunal found that Reddrock had claimed credit for input tax on fictitious transactions, and lists subsequently produced by Reddrock in support of the invoices did not refer to items actually ordered and supplied, but were a mechanism used to manufacture documentary evidence to support the invoices. 74. Although the Tribunal did not describe Reddrock’s actions in terms as “dishonest”, I am in no doubt that Reddrock’s actions were dishonest and amounted to fraud – it is impossible to read the Tribunal’s findings in the Original Appeal in any other way. Indeed, this was acknowledged by Reddrock in its appeal to the Upper Tribunal. Paragraph 24 of its skeleton argument before the Upper Tribunal states that “there would appear prime facie to be a finding of fraud by the FTT [in the Original Appeal]”. 75. I am satisfied that the Tribunal made findings of fraud in the Original Appeal. Alternatively, they are findings of fact, but the only conclusion that can follow from a finding that Reddrock created fictitious invoices, is that it was dishonest. In either case, the burden of proof that falls on HMRC was amply discharged. The Tribunal made unequivocal factual findings, and there is no suggestion that HMRC were given any benefit of any doubt. 76. Nor do I consider that it makes any difference that it was Reddrock (and not Mr Galvin) that was a party to the Original Appeal. He was the sole director of Reddrock, and entered into each of the relevant transactions that relied upon the fictitious invoices. Mr Galvin was the controlling mind of Reddrock (there is no suggestion that there was some other person acting as a shadow director who controlled Reddrock). Reddrock was Mr Galvin’s alter ego and any knowledge possessed by Mr Galvin must be imputed to the company. Any fraud perpetrated by Reddrock can only have been undertaken by and through Mr Galvin. Conclusion 77. Having considered all of the factors, I have decided to dismiss Mr Galvin’s application for reinstatement, and his appeal remains struck out. HMRC’s application to strike out Mr Galvin’s appeal 78. As HMRC’s cross-application was argued before me, and in case this decision is appealed, I set out below the reasons why (if I had reinstated the appeal) I would have allowed HMRC’s application to strike it out on the ground that it has no reasonable prospect of success. 79. I have power under Tribunal Rule 8(3)(c) to strike out an appeal if it has no reasonable prospect of success. The Upper Tribunal has considered the exercise of this power in HMRC v Fairford Group plc and anr [2015] STC 156 : [46] In our judgment an application to strike out in the FTT under r8(3)(c) should be considered in a similar way to an application under CPR 3.4 in civil proceedings (whilst recognising that there is no equivalent jurisdiction in the FTT Rules to summary judgment under Pt 24). The tribunal must consider whether there is a realistic as opposed to a fanciful (in the sense of it being entirely without substance), prospect of succeeding on the issue at a full hearing, see Swain v Hillman [2001] 1 All ER 91 and Three Rivers [2000] 3 All ER 1 at [95], [2003] 2 AC 1 per Lord Hope of Craighead. A “realistic” prospect of success is one that carries some degree of conviction and not one that is merely arguable, see ED & F Man Products Limited v Patel [2003] EWCA Civ 472 , [2003] 24 LS Gaz R 37. The tribunal must avoid conducting a “mini trial”. As Lord Hope observed in Three Rivers , the strike-out procedure is to deal with cases that are not fit for a full hearing at all. 80. The principal issues to be considered in relation to HMRC’s application are essentially these:(a) Did the findings of the Tribunal in the Original Appeal amount to findings of dishonesty? And if they did, did such findings satisfy the burden of proof, which falls on HMRC in the case of penalty appeals?(b) Is it an abuse of process for Mr Galvin (who was not a party to the Original Appeal) to challenge findings made by the Tribunal in the Original Appeal?(c) Are Mr Galvin’s rights under Article 6 of the European Convention engaged? 81. There are in addition a couple of other subsidiary points. Dishonesty 82. For HMRC to be able to assess penalties under s60, the conduct must involve dishonesty. And in the case of penalties, the burden of proof to show dishonesty rests with HMRC. 83. Mr Douglas-Jones submitted that the issues to be determined in relation to s60 and s61 VAT Act are different to the issued that were considered in the Original Appeal. In particular there are different elements to the statutory provisions, a different burden of proof, and Mr Galvin was not himself a party to the Original Appeal. Mr Galvin could not have raised in the Original Appeal issues relevant to s60 and s61. 84. Mr Douglas-Jones submitted that the Tribunal in the Original Appeal made no express finding of dishonesty on the part of either Reddrock or Mr Galvin. To the extent that the Tribunal made findings, these related to the question of HMRC’s assessment for VAT. In such cases, the burden of proof rests on the taxpayer to displace HMRC’s assessment. For these reasons, the question of whether Reddrock’s actions amounted to dishonesty for the purposes of s60 VAT Act was not determined in the Original Appeal. 85. Mr Douglas-Jones also submitted that Mr Galvin has an arguable case that the invoices produced by Reddrock in the Original Appeal supported actual supplies in the light of the evidence that Officer Wells’ assessment for later VAT periods was overturned on review. 86. In the Original Appeal the Tribunal found that Reddrock had claimed credit for input tax on fictitious transactions, and subsequently produced by Reddrock in support of the invoices did not refer to items actually ordered and supplied, but were a mechanism used to manufacture documentary evidence to support the invoices. Although the Tribunal did not describe Reddrock’s activities in terms as “dishonest”, for the reasons I have given earlier in this decision in relation to Mr Galvin’s application for reinstatement, I am in no doubt that Reddrock’s actions were dishonest and amounted to fraud. 87. Nor is it relevant that assessments made by Officer Wells in relation to subsequent VAT periods were reversed on review. The fact that Reddrock may have made actual supplies in later periods does not affect the findings by the Tribunal that it was fraudulent in the periods considered in the Original Appeal. Abuse of process 88. So the question arises whether Mr Galvin can challenge the findings of dishonesty made by the Tribunal against Reddrock (and against him also) in this appeal – or whether to do so would amount to an abuse of process. 89. The law relating to abuse of process was helpfully summarised in Judge Mosedale’s decision in Foneshops Ltd v Revenue and Customs [2015] UKFTT 0410 (TC): 29. […] the doctrine of abuse of process is not part of the doctrine of res judicata , and it is still applicable to tax cases. In Littlewoods [3] , Henderson J held that HMRC were unable to advance the position that the tax was not due in defending the claim for interest because to do so would be an abuse of process, irrespective of the non-application of issue estoppel to tax cases: [250]. So the fact that issue estoppel does not apply to tax cases appears to be no bar to a court concluding that re-opening a decided issue is an abuse of process. 30. HMRC relied on Hunter v Chief Constable of the West Midlands Police [1982] AC 529 for a statement of what abuse of process was: “…[abuse of process] concerns the inherent power which any court of justice must possess to prevent misuse of its procedure in a way, which although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of justice into disrepute among right-thinking people” page 536 C per Lord Diplock. 31. The statement in Hunter is very general and there might be room for doubt whether it extends to the circumstances in this case. However, the authorities of Littlewoods at §250 and SCF Finance Co Ltd v Masri [1987] 1 QB 1028 are more specific. Abuse of process appears to be very like issue estoppel save perhaps for flexibility where there are special circumstances: “a litigant who has had an opportunity of proving a fact in support of his claim or defence and has chosen not to rely on it is not permitted afterwards to put it before another tribunal….. …it would be an abuse of process of the court to raise in subsequent proceedings matters which could and should have been litigated in earlier proceedings…” page 1049 C-F, per Ralph Gibson LJ delivering the unanimous judgment of the Court of Appeal, also citing Lord Kilbrandon in the Privy Council that abuse of process “ ‘is limited to cases where reasonable diligence would have caused a matter to be earlier raised; moreover, although negligence, inadvertence or even accident will not suffice to excuse, nevertheless ‘special circumstances’ are reserved in case justice should be found to require the non-application of the rule.’ “ And unlike issue estoppel, abuse of process applies to tax cases. So I find that abuse of process does prevent previously litigated issues being re-tried between the same parties in tax cases unless there are special circumstances. 90. The fact that Mr Galvin was not directly a party in the Original Appeal does not prevent the doctrine of abuse of process from applying. This point was considered by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1 . Lord Diplock in his speech says the following (at 32D): Two subsidiary arguments were advanced by Mr. ter Haar in the courts below and rejected by each. The first was that the rule in Henderson v. Henderson did not apply to Mr. Johnson since he had not been the plaintiff in the first action against GW. In my judgment this argument was rightly rejected. A formulaic approach to application of the rule would be mistaken. WWH was the corporate embodiment of Mr. Johnson. He made decisions and gave instructions on its behalf. If he had wished to include his personal claim in the company's action, or to issue proceedings in tandem with those of the company, he had power to do so. The correct approach is that formulated by Sir Robert Megarry V.-C. in Gleeson v. J. Wippell & Co. Ltd. [1977] 1 W.L.R. 510 at 515 where he said: "Second, it seems to me that the substratum of the doctrine is that a man ought not to be allowed to litigate a second time what has already been decided between himself and the other party to the litigation. This is in the interest both of the successful party and of the public. But I cannot see that this provides any basis for a successful defendant to say that the successful defence is a bar to the plaintiff suing some third party, or for that third party to say that the successful defence prevents the plaintiff from suing him, unless there is a sufficient degree of identity between the successful defendant and the third party. I do not say that one must be the alter ego of the other: but it does seem to me that, having due regard to the subject matter of the dispute, there must be a sufficient degree of identification between the two to make it just to hold that the decision to which one was party should be binding in proceedings to which the other is party. It is in that sense that I would regard the phrase 'privity of interest . . . .'" On the present facts that test was clearly satisfied. 91. In this case, as Mr Galvin was the sole director of Reddrock, Reddrock can only have acted as his alter ego . In the light of the decision of the House of Lords in Johnson I find that it would therefore be an abuse of process for Mr Galvin to be able to re-litigate factual issues that were previously decided in the Original Appeal. 92. Mr Douglas-Jones made the point that it is not an abuse of process in a criminal trial to reconsider findings made in a previous civil trial. But that is to miss the point. In a criminal trial the standard of proof is “beyond reasonable doubt”, whereas in a civil trial it is on the “balance of probabilities” – so it is perfectly feasible for a finding to be made by the civil court on the balance of probabilities, but for that finding not to be supported beyond reasonable doubt. That issue does not arise in this case. Even though penalties may be “criminal” for Article 6 purposes, the standard of proof remains the balance of probabilities. Article 6 93. Mr Douglas-Jones submitted that to strike out Mr Galvin’s appeal would breach his rights under Article 6 of the European Convention. But as I discussed above in relation to Mr Galvin’s application to reinstate his appeal, his rights under Article 6 do not fetter the case management powers of this tribunal, and no authority was cited to me that would indicate that Article 6 would trump the doctrine of abuse of process. In this context I note that the Tribunal Rule 8(4) provides that the Tribunal can only exercise its powers under Rule 8(3)(c) after having given the appellant an opportunity to make representations – as indeed has been done in this very application. I therefore find that Mr Galvin’s Article 6 rights are not breached by the striking out of his appeal on grounds that is has no reasonable prospect of success. Other matters 94. Mr Douglas-Jones also argued that the impact of the finding by in the Original Appeal that invoices were fictitious would have the effect of reducing not only Reddrock’s input tax credit, but would also reduce its output tax because of the barter system that it operated. As a consequence, the amount of VAT evaded (and therefore the amount of the penalty) would be reduced below the amount assessed by HMRC. 95. This point was raised by Mr Douglas-Jones in relation to the application for reinstatement, and for the reasons that I have given above, I find Mr Douglas-Jones submission misconceived. 96. Mr Douglas-Jones also made submissions relating to the repeal of s60 and s61 VAT Act, which I have addressed above, and which I also find to be misconceived. 97. I note that no submissions were made on behalf of Mr Galvin as to the recovery of the penalty from him under s61 VAT Act. Given that Mr Galvin was the sole director and controlling mind of Reddrock, it must follow that the allocation of any penalty under s61 could only be to Mr Galvin. Conclusions 98. I have found that the findings of the First Tier Tribunal in the Original Appeal amounted to a finding that Reddrock’s conduct was dishonest. As Mr Galvin was the controlling mind of Reddrock and it was his alter ego , the dishonesty of Reddrock reflected the dishonesty of Mr Galvin. It therefore follows that the conduct of Mr Galvin was also dishonest. 99. I found also that it would be an abuse of process for Mr Galvin to re-litigate these findings. 100. As Mr Galvin was the sole director of Reddrock, there can be no question but that under s61 VAT Act, the penalties assessed on Reddrock can and should be allocated only to Mr Galvin. 101. I have found that s60 and s61 VAT Act were in force at the relevant times. I have also found that the barter system operated by Reddrock does not give rise to any reduction in the amount of tax evaded, and there is therefore no corresponding reduction in the amount of penalties. 102. I have found that Mr Galvin’s rights under Article 6 are not breached by the use of this Tribunal of its case management powers, including the power to strike out an appeal which has no reasonable prospects of success. 103. For these reasons, I find that Mr Galvin’s appeal has no reasonable prospect of success, and therefore (if Mr Galvin had been successful in his application to have his appeal reinstated) I would have ordered that it be struck out. Amendment to grounds of appeal 104. Mr Galvin also applied for permission to rely upon a further ground of appeal, namely “that the impugned HMRC decision was in part achieved by applying non-existent law”. 105. I can deal with this quickly, as it relates to Mr Douglas-Jones submission that s60 and s61 VAT Act were repealed. I have addressed this argument in detail earlier in my decision. Given my finding that these provisions were in force at all material times, and that Mr Douglas-Jones’s submissions were without merit, it must follow that Mr Galvin’s application in this regard must fail. 106. I note that the application was only made in Mr Douglas-Jones’s skeleton argument, and no reasons were given as to why it was not included in the original grounds of appeal, or not made earlier. But given that I have in any event refused permission, I do not propose to take these points further. Decision 107. Mr Galvin’s application to reinstate his appeal is dismissed. 108. But even if I am incorrect in dismissing Mr Galvin’s application for reinstatement, I would have struck out his appeal in any event on the ground that it has no reasonable prospect of success. 109. Finally, I would not have given permission for Mr Galvin to amend his grounds of appeal. 110. 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. NICHOLAS ALEKSANDER TRIBUNAL JUDGE RELEASE DATE: 16 AUGUST 2016 Cases to which reference was made in skeleton arguments but not referred to in the decision: R v Ghosh [1982] QB 1053 In re H and others (minors ) [1996] AC 563 Han v Customs and Excise Commissioners [2001] 1 WLR 2253 R v Jones (Anthony) [2002] UKHL 5 Re B (children) [2008] UKHL 35 Activ8 Alarms Ltd v Revenue and Customs [2010] UKFTT 48 (TC) Brookes v Revenue and Customs [2016] UKUT 214 (TCC) Infocom IT (UK) Ltd v Revenue and Customs [2016] UKFTT 319 (TC) [1] [2012] UKFTT 46 (TC) [2] [2014] UKUT 0061 (TCC) [3] [2014] EWHC 868 (Ch)