Ronald Hull Junior Ltd v Revenue and Customs (PROCEDURE : Other) [2018] UKFTT 198 (TC)
FTT-Tax
Ronald Hull Junior Ltd v Revenue and Customs (PROCEDURE : Other)
[2018] UKFTT 198 (TC) · 2018-02-01
[65][65].....It is true that there may well be no correlation between the amount of output tax of which the fraudulent trader has defrauded HMRC and the amount of input tax which another trader has been denied. But the principle is concerned with identifying the objective criteria which must be met before the right to deduct input tax arises. Those criteria are not met, as I have emphasised, where the trader is regarded as a participant in the fraud. Earlier, in Calltell Telecom Ltd [2009] EWHC 1081 (Ch) Floyd J had ruled [94] “there is no principle which requires HMRC to acknowledge a claim for repayment to the extent that the claim exceeds HMRC’s tax loss”. 56. And then in S &I Electronics [ 2012] UKUT 87 (TCC) the Upper Tribunal referred to §65 of Mobilx and said: [57] It is now clear, therefore, that the FTT was mistaken in thinking that input tax should be denied only to the extent of the tax loss. The position is rather that a trader who falls to be treated as a participant in tax fraud loses the right to any input tax credit, whatever the extent of the tax loss. It follows that, but for S&I’s cross-appeal, we would have upheld HMRC’s appeal and decided that HMRC had been entitled to disallow the relevant input tax claims in their entirety rather than merely to the extent of the proven tax loss. 57. In conclusion, there is binding authority that HMRC do not need to plead or seek to prove there was no double recovery. Therefore, documents relevant to that issue are not relevant. (c) Proof of loss 58. Under the Kittel doctrine, HMRC do have to prove loss; they must also prove that the loss was fraudulent but what Mr Firth is seeking with this application, as explained in his post-hearing submissions, is documents that may show that there was no loss to HMRC. He considers that HMRC must disclose documents which show the defaulters’ entitlement to input tax because that may demonstrate that there was no loss to HMRC. 59. As I understand it, the appellant’s position is that it is possible BMC’s suppliers were all VAT registered, all charged BMC VAT and issued valid VAT invoices, and BMC sold to the appellant at a loss (or at least no profit) on the net price. And that could be true of the other defaulter as well. The appellant’s case is that legally, if those were the facts, there would be no loss to HMRC and so the question of whether BMC acted fraudulently, and whether or not the appellant knew or ought to have known about it, would be irrelevant and the appellant would win its appeal. 60. There would be a loss to HMRC if any of BMC’s suppliers were not VAT registered or registrable, or if any of its suppliers failed to issue an invoice, or if BMC made a profit on the net price. This is because otherwise BMC would not be entitled to input tax at least equal to the VAT it failed to account for and there would be a loss to HMRC. I have already said that HMRC does not need to prove that the loss equals the assessment/input tax denial. 61. HMRC’s point is that the defaulters and BMC in particular had no input tax entitlement whatsoever as(i) they failed to submit their VAT returns, a prerequisite under Reg 29 to a claim for input tax credit(ii) they did not hold valid VAT invoices and(iii) they were not entitled to input tax credit in any event as they knew or ought to have known their transactions were connected with fraud (presumably their own fraud). 62. I agree with the appellant that the failure to claim the input tax on a return is irrelevant to the question of loss to HMRC. If HMRC had already received the entire tax at issue in this appeal from the appellant’s suppliers’ suppliers, it is irrelevant that the appellant’s suppliers did not claim the input tax on a return. HMRC would have no loss. 63. I also agree that Mr Chapman’s point at §61 (iii) is not pertinent: it is circular. The appellant’s suppliers could only be denied their input tax on Kittel grounds if their transactions were linked to fraudulent tax loss: so this point by HMRC is only a good point if there was a loss, the very thing which Mr Firth is seeking to challenge. 64. My conclusion is that the VAT invoices issued by the appellant’s suppliers’ suppliers in respect of the goods sold to the appellant in the disputed transactions are relevant because if the amount of them equalled or exceeded the amount of output tax on which the appellant’s suppliers defaulted, that may indicate HMRC suffered no loss; moreover if the invoices showed that HMRC suffered only a small loss, that might bring into question whether the loss was intended (and therefore fraudulent). 65. So I agree that the appellant should have disclosed to them VAT invoices issued to any of the alleged defaulters which do or might relate to the goods which were supplied to the appellant in transactions the subject of this appeal. Those invoices are potentially relevant to the question of loss and possibly even to the question of fraud. What I am unclear about is the extent to which they have already been disclosed, because the parties have been addressing the much wider application made for all ‘documents relating to the alleged defaulting trader’s VAT position’ and so it was never made clear whether the invoices have been disclosed. 66. The appellant has not justified the application in these much wider terms. I can see no relevance in any other documents, but I am persuaded that the appellant should have sight of the invoices to the extent that they have not already had them. Internal documents 67. So far as the application for general disclosure of internal documentation is concerned, HMRC have taken the view that internal documents were not relevant and they have not disclosed them as part of the general disclosure exercise. Relevance to Kittel case. 68. I agree with HMRC that HMRC’s internal communications are not relevant to the case based on Kittel . The Kittel question is whether the appellant knew or ought to have known the transactions the subject of this appeal were connected to fraud, if indeed it is proved that they were. HMRC’s contemporary opinions and policies are not relevant to that question. 69. Even if the appellant is right to say that at the time of the impugned transactions, HMRC had no suspicions that any of the five companies were involved in fraud, it is not relevant to the question of whether at the time the appellant knew or ought to have known that there was (if there was) fraud in its supply chain. The appellant seems to suggest it is relevant: if HMRC did not suspect, says the appellant, how can it be said the appellant ought to have known of fraud? But the question of means of knowledge is objective and is not tested against what HMRC suspected or did not suspect. 70. Mr Firth says it is clear that HMRC officers changed their views about the appellant: earlier visit reports (say the appellant) showed HMRC officers were satisfied with the appellant’s mode of trading. Later those same officers made the accusation that the appellant knew or ought to have known its trading was connected with fraud. It has the right to know, says the appellant, how HMRC got from the one view to the other. It has the right to have its mind set at rest, says Mr Firth, that HMRC really did change its mind and why. 71. But the opinions of HMRC officers are simply not relevant to the question of whether the appellant actually knew or ought to have known of the fraud: what HMRC thought at the time or thought later (subject to the issue of best judgment) is not relevant to the determination which the Tribunal must make. Relevance to allegation assessment not to best judgment? 72. Mr Firth’s position was also that HMRC’s assessing officer’s views are relevant because it is now the appellant’s case that the assessments were not to best judgment because (it says) the assessing officer had not genuinely formed the view that the supplier’s defaults were fraudulent. 73. I have already commented that the appellant has not pleaded this case. The evidence of the opinion of the assessing officer on this matter is therefore strictly irrelevant because it is not actually a part of the appellant’s case. 74. Nevertheless, I recognise that the appellant may seek to amend its grounds of appeal and if it does so successfully, I accept that the opinion of the assessing officer on the reason for the supplier’s default may become relevant. So it makes sense to consider whether to order disclosure now: the appellant might fairly say that without the disclosure it won’t know whether or not it can make out this case. 75. On the other hand, however, it is wrong to order disclosure where there is no real basis for an allegation: that allows one party to put the other to unnecessary expense and encourages nuisance disclosure applications. So there is a fine line to be drawn between what is a fishing expedition and what is a justified application. It was said by the Court of Appeal in Shah v HSBC [2011] EWCA Civ 1154 at [49] that there must be an ‘evidential basis’ for believing documents sought to be disclosed will contain relevant material. If there is not, it is a fishing expedition and disclosure should not be ordered. 76. Here, I do not consider that there is here any such evidential basis. The appellant alleges that Officer Payne’s positive view of the appellant given a few years before his assessment indicates that his later assessment was not to best judgment: what evidence there is, however, is that he simply changed his mind about the appellant. There is no evidence to suggest that Officer Payne did anything other than change his mind: the fact that a few years before the officer expressed a qualified positive view of the appellant does not form an evidential basis for alleging that his later assessment was in bad faith. The application is therefore a fishing expedition. I refuse it. Allegation of breach of duty by HMRC? 77. The appellant also suggested that it was a part of its case that HMRC owed it a duty to prevent fraudulent trading and that, if BMC’s trading was proved to be fraudulent, the assessment on the appellant should be discharged because HMRC failed to prevent BMC’s fraudulent trading. There would be, said Mr Firth, a breach of the appellant’s legitimate expectations. 78. Putting aside that this does not appear to be a part of the appellant’s pleaded case, it is clear that the Tribunal has no jurisdiction to determine whether HMRC was in breach of any public law duty to taxpayers. Such a complaint must be made, if at all, to the Administrative Division of the High Court in an action for judicial review. The jurisdiction of the Tribunal is plain: it must uphold the appellant’s appeal unless it is satisfied that the appellant knew or ought to have known its impugned transactions were connected to fraud. It is quite irrelevant to that determination for the Tribunal to consider whether HMRC could have done more to prevent fraudulent trading. 79. Mr Firth does not agree. He says that HMRC’s (alleged) failures are relevant to the question of whether the appellant ought to have known of the fraud (if proved). I do not agree with him. If the appellant has constructive knowledge of the fraud, it must be denied the input tax despite any failings by HMRC. 80. Therefore, HMRC’s policy papers are not relevant to the matter before the Tribunal: even if the policy papers might be relevant to the question of whether HMRC was in breach of its duty, as that is not a question this Tribunal can address, HMRC’s internal papers are not relevant to these proceedings. The spreadsheet 81. I note that one specific item of disclosure was requested in respect of Carwood: a spreadsheet. HMRC’s position was that this had been disclosed and the application unfounded. Mr Firth appeared to accept that: however, if for any reason it appears the document has not been disclosed, the appellant is at liberty to revert to the tribunal. Conclusion and Directions 82. I dismiss the appellant’s application for summary determination of any aspect of this appeal. 83. I dismiss the appellant’s application for disclosure in very large part, but to the extent that any remain undisclosed, HMRC are to disclose to the appellant any VAT invoices issued to any trader alleged to be in default in the statement of case where the invoices do or may relate to goods which were supplied to the appellant in the transactions the subject of this appeal. 84. The directions made following the previous hearing remain in force but need to be updated to deal with the slippage of time. HMRC have served their witness statements and made disclosure. It seems to me that the appropriate directions are now: (1) Not later than one month after the date of release of this decision the respondents shall disclose to the appellant to the extent that they have possession or control of them VAT invoices issued to any of the alleged defaulters which do or might relate to the goods which were supplied to the appellant in transactions the subject of this appeal (save to the extent that they have already been disclosed); or by the same date confirm (if true) to the appellant that all such documents in the possession or control of HMRC have already been disclosed. (2) Not later than two months after compliance with the above direction, the appellant shall send or deliver to the respondents statements from all witnesses on whose evidence it intends to rely at the hearing setting out what that evidence will be and including as exhibits all documents relied on by the appellant in this appeal and shall at the same time notify the Tribunal that it has done so. (3) Not later than two months after compliance with above direction (1), the appellant shall provide disclosure to the respondents as set out at CPR 31 (save to the extent the documents were disclosed by HMRC) and at the same time shall notify the Tribunal that it has complied with this Direction; (4) Not later than two weeks after compliance with directions (2) and (3), both parties shall provide a time estimate and dates to avoid for a case management hearing to take place in a period of time between one and three months after the due date for provision of listing information. The Tribunal will set down this hearing shortly after the due date for compliance irrespective of whether either party provides its dates to avoid and an application for a postponement on the grounds that the dates are inconvenient is unlikely to succeed if the direction was not complied with. Either party seeking any particular case management direction should notify the other party and Tribunal of this no later than 2 weeks before the hearing; skeletons should be exchanged 7 days before the hearing. 85. 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. BARBARA MOSEDALE TRIBUNAL JUDGE RELEASE DATE: 26 MARCH 2018