“2. For the avoidance of doubt, we confirm that HMRC do not seek to allege dishonesty or fraud against CCA or Mr Trees. HMRC’s case is based on the Kittel test of knew or should have known.”
“[107] The Court of Appeal in the joined cases of E-buyer and Citibank[2017] EWCA Civ 1416 ruled at [97] that it was not necessary for HMRC to plead, particularise or prove dishonesty or fraud where the allegation was actual knowledge by the trader that its transactions were connected to fraud. The appellant’s position was that, subsequent to this, it had asked for CPR style disclosure from HMRC and HMRC had refused on the grounds that they made no allegations of fraud or dishonesty against CCA or Mr Trees. The appellant had chosen not to pursue the disclosure any further on the basis of this concession. [108] However, shortly before the hearing, it took the position that HMRC was putting a case to the tribunal that was inconsistent with their assurance that they made no allegations of fraud or dishonesty against the appellant. The appellant’s position was that allegations that were only consistent with fraud or dishonesty should be removed from HMRC’s statement of case, could not be made in submissions at the hearing, should not be put to any of the appellant’s witnesses, and that the Tribunal could not reach findings of fact on them. [109] The appellant identified the particular allegations to which it referred: there were about 10 of them. We do not need to set them all out in full; they can be summarised as either allegations that the appellant, acting by its director, was a participant in an overall scheme of fraud or allegations that the appellant was not a free agent. We understood that the implication of not being a free agent was that the appellant knew it was being directed in its trading so that it had to know that it was a participant in overall scheme of fraud. We set out examples of the allegations complained about: It is highly improbable that such a high proportion of the appellant’s deals would have led back to these defaulting entities if it were free to select its suppliers. It is implausible that the appellant was duped by all 15 counterparties in respect of the 156 deals. We note in passing that one of the allegations complained about (concerning IP addresses) was later withdrawn during the hearing for a different reason. [110] The appellant’s point was that Kittel deemed a person who had knowledge or means of knowledge of connection to fraud to be a participant in the fraud, but HMRC were going further and alleging that CCA was actually a knowing participant in the fraud. That, said the appellant, amounted to an allegation of fraud or dishonesty on the part of CCA which was inconsistent with HMRC’s statement that they made no such allegation. [111] HMRC’s point was, they said, that they did not allege that CCA was conspiring with the fraudsters, but they did say that CCA (by its director) was being manipulated by his suppliers and customers and instructed on what to do in its dealing such that it was obvious to Mr Trees and CCA that its deals had nothing to do with commercial activity. HMRC relied on what the Court of Appeal said in Citibank and E-buyer that it was possible to allege knowledge of connection to fraud without making an allegation of dishonesty. [112] Our ruling was given orally and recorded in the transcript; we only summarise it here. Firstly, we agreed that the effect of the Court of Appeal’s ruling was that it was possible to enter into a transaction knowing that it was connected to fraud without being dishonest – [78], [86] [107] and [120]. It followed that a pleading of knowledge of connection to fraud was not a pleading of dishonesty. [113] However, the appellant was wrong to say that that meant HMRC could not plead factors which supported the allegation of knowledge if they also supported an allegation of dishonesty or indeed necessarily were pleadings of dishonest behaviour. For this, we relied on statements by the judges of the Court of Appeal as follows: [85] ... It might be, of course, that if some or all of the allegations made in the Statement of Case were proved, that might (in theory, though not, of course, in practice) have allowed a tribunal to go on to make a finding that the taxpayer had been dishonest. But if HMRC does not seek such a finding, and if such a finding is not needed to support the conclusion that the taxpayer cannot recover its input tax, there is neither any need nor any utility in asking the FTT to undertake that exercise. Sir Geoffrey Vos [109] In summary, in my view, if HMRC do not wish and do not need to plead dishonesty, the concept of dishonesty should not be raising its head. As the Chancellor has observed, an analysis of whether the allegations amounted to dishonesty was unnecessary and inappropriate in litigation of this kind. Traders should not have to face a plea of dishonesty, HMRC should not be obliged to take on the burden of proving dishonesty, and judges should not have to address the added unnecessary complication of dishonesty simply on the basis HMRC seeks to prove actual knowledge of a fraud, in accordance with the Kittel test, and relies on facts and or inferences from facts that could support a finding of dishonesty. (our emphasis) Lady Justice Hallett [120] … Unless dishonesty is expressly alleged, the only question is whether the pleaded allegations are relevant to the issue of actual or constructive knowledge for the purposes of the Kittel test: …. For that reason, it is entirely irrelevant whether dishonesty is implicitly alleged in HMRC's statements of case. (our emphasis) Sir Terence Etherton [114] In conclusion, the allegations complained about were allegations which supported HMRC’s case that the appellant had actual or constructive knowledge of the (alleged) connection to fraud; even if the allegations were consistent with a state of dishonesty on the part of the appellant and/or its director, the allegations were not allegations of dishonesty. The Tribunal would not strike out the allegations and would reach a conclusion on the allegations, but, as HMRC accepted, the Tribunal would reach no conclusion about whether the appellant’s and/or its director’s behaviour was dishonest or fraudulent: nor would The Tribunal undertake the exercise of deciding whether the allegations were only consistent with a dishonest state of mind; we would only make a finding on whether or not HMRC had proved actual or constructive knowledge of connection to fraud. The Tribunal noted that it would not be open to HMRC’s counsel to suggest to the appellant’s witnesses that they were dishonest.”
“[73] It is true, as Mr Trees says, that the issue to be decided in his appeal is different: the FTT hearing his appeal will have to decide whether he was dishonest, not whether he knew the transactions were connected with fraud. But that does not give him an unfettered right to put forward any grounds of appeal. In Gore Wood, Lord Bingham approved the dictum that it would be an abuse of process to allow a person “to litigate a second time what has already been decided between himself and the other party to the litigation”
“HMRC raising a penalty assessment on me for dishonesty came right out of the blue. You can see from some of the comments made on page 18 of the decision that when my legal team asked for a CPR style disclosure from HMRC it refused on the grounds that they made no allegations of fraud or dishonesty against CCA or myself!!! On page 19 there are several references to “a connection to fraud without being dishonest” and dishonesty was not pleaded. If it had been it could have been dealt with by my legal team but HMRC have now gone back on what they said, waited until I no longer have legal representation and then come up with a penalty charge. The decision emphasises that HMRC accepted that the Tribunal would reach no conclusion about whether my behaviour was dishonest as this was not a requirement to determine if the company was trading in a fraudulent chain. There is even a reference to the Tribunal noting that it would not be open to HMRC’s counsel to suggest to the company’s witnesses that they were dishonest. I don’t believe HMRC have produced any conclusive evidence at all to demonstrate dishonesty, they can’t because there was no dishonesty on my part. This isn’t fair and I am appealing to the Tribunal to make things right.”
“[17] My notes of the Hearing record HMRC’s Counsel as saying that HMRC accepted they “have to prove dishonesty – will have to make CPR compliant disclosure – have to see if anything else to be served – will be served in evidence as exhibits”. [18] I therefore agree with HMRC that there was no agreement at the Hearing that HMRC would disclose “any documentation relating to the fraudsters which mentioned [Mr Trees’] name or that of CCA”
“60 VAT evasion: conduct involving dishonesty (1) In any case where – (a) for the purpose of evading VAT, a person does any act or omits to take any action, and (b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability), he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct. ... (7) On an appeal against an assessment to a penalty under this section, the burden of proof as to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners. 61 VAT evasion: liability of directors etc (1) Where it appears to the Commissioners (a) that a body corporate is liable to a penalty under section 60, and (b) that the conduct giving rise to that penalty is, in whole or in part, attributable to the dishonesty of a person who is, or at the material time was, a director or managing officer of the body corporate (a “named officer”), the Commissioners may serve a notice under this section on the body corporate and on the named officer. (2) A notice under this section shall state – (a) the amount of the penalty referred to in subsection (1)(a) above (“the basic penalty”), and (b) that the Commissioners propose, in accordance with this section, to recover from the named officer such portion (which may be the whole) of the basic penalty as is specified in the notice. (3) Where a notice is served under this section, the portion of the basic penalty specified in the notice shall be recoverable from the named officer as if he were personally liable under section 60 to a penalty which corresponds to that portion; and the amount of that penalty may be assessed and notified to him accordingly under section 76. (4) Where a notice is served under this section – (a) the amount which, under section 76, may be assessed as the amount due by way of penalty from the body corporate shall be only so much (if any) of the basic penalty as is not assessed on and notified to a named officer by virtue of subsection (3) above; and (b) the body corporate shall be treated as discharged from liability for so much of the basic penalty as is so assessed and notified. (5) No appeal shall lie against a notice under this section as such but – (a) where a body corporate is assessed as mentioned in subsection (4)(a) above, the body corporate may appeal against the Commissioners' decision as to its liability to a penalty and against the amount of the basic penalty as if it were specified in the assessment; and (b) where an assessment is made on a named officer by virtue of subsection (3) above, the named officer may appeal against the Commissioners' decision that the conduct of the body corporate referred to in subsection (1)(b) above is, in whole or part, attributable to his dishonesty and against their decision as to the portion of the penalty which the Commissioners propose to recover from him. (6) In this section a “managing officer”, in relation to a body corporate, means any manager, secretary or other similar officer of the body corporate or any person purporting to act in any such capacity or as a director; and where the affairs of a body corporate are managed by its members, this section shall apply in relation to the conduct of a member in connection with his functions of management as if he were a director of the body corporate.”
“77 Assessments: time limits and supplementary assessments. ... (2) Subject to subsection (5) below. an assessment under section 76 of an amount due by way of any penalty, interest or surcharge referred to in subsection (3) of that section may be made at any time before the expiry of the period of 2 years beginning – (a) in the case of a penalty under section 65 or 66, with the time when facts sufficient in the opinion of the Commissioners to indicate, as the case may be (i) that the statement in question contained a material inaccuracy; or (ii) that there had been a default within the meaning of section 66(1), came to the Commissioners’ knowledge; and (b) in any other case, with the time when the amount of VAT due for the prescribed accounting period concerned has been finally determined.”
““In trying this question I believe I state the rule of the Court correctly when I say that, where a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time... Now, undoubtedly the whole of the case made by this bill might have been adjudicated upon in the suit in Newfoundland, for it was of the very substance of the case there, and prima facie, therefore, the whole is settled. The question then is whether the special circumstances appearing upon the face of this bill are sufficient to take the case out of the operation of the general rule.”
“[17] Res judicata is a portmanteau term which is used to describe a number of different legal principles with different juridical origins. As with other such expressions, the label tends to distract attention from the contents of the bottle. The first principle is that once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings. This is “cause of action estoppel”
“But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not. Thus while I would accept that lack of funds would not ordinarily excuse a failure to raise in earlier proceedings an issue which could and should have been raised then, I would not regard it as necessarily irrelevant, particularly if it appears that the lack of funds has been caused by the party against whom it is sought to claim. While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party's conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.”
“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 3 Hare 100 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 WLR 510 where he said, at p 515: “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.’”...”
“... The rule is not based on the doctrine of res judicata in a narrow sense, nor even on any strict doctrine of issue or cause of action estoppel. It is a rule of public policy based on the desirability, in the general interest as well as that of the parties themselves, that litigation should not drag on for ever and that a defendant should not be oppressed by successive suits when one would do. That is the abuse at which the rule is directed.”
“[74] These several considerations provide convincing grounds for holding that the second leg of the test propounded in Ghosh does not correctly represent the law and that directions based upon it ought no longer to be given. The test of dishonesty is as set out by Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Tan and by Lord Hoffmann in Barlow Clowes: see para 62 above. When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.”
“[59] Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity'.”
“[42] By the concluding words of § 59 the Court must be taken to mean that even where the transaction in question would otherwise meet the objective criteria which the Court identified, it will not do so in a case where a person is to be regarded, by reason of his state of knowledge, as a participant. [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.”
“[85] The key point, in my judgment, is that, whilst HMRC can, of course, allege that a taxpayer has acted dishonestly and fraudulently in relation to the transactions to which it was a party, they do not need to do so in order to deny that taxpayer the right to reclaim input tax under the test. The exercise upon which Judge Mosedale was engaged was, therefore, inappropriate. It was simply irrelevant for the F-tT to ask whether the allegations in the statement of case, if all proved, would necessarily lead to the conclusion that the taxpayer had been dishonest or fraudulent. It was even more inappropriate for Judge Mosedale to direct HMRC to plead dishonesty when it had expressly informed her that it did not wish to make any such allegation. It might be, of course, that if some or all of the allegations made in the statement of case were proved, that might (in theory, though not, of course, in practice) have allowed a tribunal to go on to make a finding that the taxpayer had been dishonest. But if HMRC does not seek such a finding, and if such a finding is not needed to support the conclusion that the taxpayer cannot recover its input tax, there is neither any need nor any utility in asking the F-tT to undertake that exercise.”
“[49] Mr McGurk submitted that the imposition of penalties on Mr Kishore amounted to an abuse of process by HMRC. He argued that the penalties depended on the same facts as the refusal of Mr Kishore’s input tax claims and that HMRC ought to have raised the penalty assessments at the same time as they denied the right to deduct input tax. Invoking the rule in Henderson v Henderson, Mr McGurk maintained that HMRC should have sought to impose the penalties earlier if they wished to impose them at all. [50] I have not been persuaded. Johnson v Gore Wood & Co confirms that the “bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all”
“During our checks into the tax affairs of CCA Distribution Limited (in Administration), we found that the company had not declared the right amount of tax. We consider that the actions that led to this happening were dishonest. Because of this we are going to charge the company a civil evasion penalty. We are charging this penalty underSection 60(1) of the VAT Act 1994 . We also consider that you were wholly responsible for the dishonest actions. This is because you, as the director and controlling mind of the Appellant, entered into transactions and sought to deduct£9,874,254 in input tax in relation to deals in April, May and June 2006 for the purpose of evading VAT. We will therefore recover some of the penalty from you. We are doing this underSection 61 of the VAT Act 1994 .”
“[474] But we do not decide it on that basis. Putting all of that out of our mind, we look at the facts. We have found that CCA did know that its deals were dictated to it (§§304-309) and that its banking was dictated to it (see §299-303 and §§310-324): knowing any one of these matters meant Mr Trees could not have been in any doubt that CCA was participating in transactions orchestrated for the purpose of VAT fraud. He knew CCA was not trading as a free agent in any grey market. [475] But even if we were to put those findings of fact aside, we would still conclude that Mr Trees knew that CCA’s transactions were connected to fraud. CCA was offered deals far too good to be true: it was offered the opportunity to make phenomenal profits over a short space of time for doing virtually nothing; the deals required no special skill nor utilisation of any carefully cultivated contacts, they involved few costs and no commercial risk. CCA knew that its customers had little interest in the product traded, it knew about the patterns in the trading that had no rational explanation, it knew that its trading environment was uncommercially benign (see §§269-298). The only explanation for all of this was clearly that the transactions were orchestrated for the purpose of fraud; that conclusion is all the more obvious when Mr Trees was well aware that there was VAT fraud taking place in mobile phone trading. From this we would conclude that it was very clear that Mr Trees knew that CCA’s transactions were connected to fraud. [476] But it is even more certain that he did: he acted as a person who did know of the connection; CCA’s deal documentation was inadequate reflecting that Mr Trees knew that it did not really matter; similarly CCA did not inspect the goods; CCA’s due diligence was inadequate and undertaken to satisfy HMRC; negative indicators were ignored; CCA held inadequate insurance against some risks and none against others despite the high value of the goods; CCA was not willing to cooperate with HMRC over IMEI numbers where such cooperation might have helped reveal circulation of the phones and thus the fraud. Mr Trees had a relationship of trust with Future which was clearly involved in the fraud and this relationship continued long after the suspicions of an innocent trader would have been raised. [477] None of factors put forward by appellant as indicating Mr Trees did not know actually countered or explained away any of these findings. CCA’s cooperation with HMRC was limited and self-interested; Mr Trees did not rely on Mr D’Rozario’s opinions; HMRC was definitely not better placed to spot the fraud than Mr Trees; while Mr Trees did choose to put his own money at risk, this was at least as consistent with confidence that HMRC would not discover any fraud, as with any innocence; CCA’s prior trading could only have given CCA confidence that HMRC would continue to repay it its input tax claims; its employees were not aware of anything untoward but there was no reason why they would know as it was Mr Trees who exclusively conducted the deals and in any event their evidence was so general it does not exonerate Mr Trees. [478] We are in no doubt that Mr Trees knew that all of CCA’s transactions in the period in question were connected to fraud. As we have found that they were so connected, CCA’s claim for input tax on the transactions was correctly denied by HMRC on the basis of Kittel. The appeal is DISMISSED.”