E BUYER UK LTD v REVENUE & CUSTOMS COMMISSIONERS : REVENUE & CUSTOMS COMMISSIONERS v CITIBANK NA (2016)

In proceedings concerning missing trader intra-community fraud where HMRC alleged in its statement of case that the taxpayer “knew or should have known” that its transactions formed part of an overall scheme to defraud the Revenue, that amounted to an allegation of dishonest conduct. HMRC was therefore required to provide proper particulars of what the taxpayer was alleged to have known and the facts on which the case against it was based.
The Upper Tribunal had to consider conjoined appeals in which taxpayers (E and C), who were the subject of missing trader intra-community fraud proceedings, claimed that HMRC had failed to plead its statements of case with sufficient particularity. E also sought disclosure of documents by HMRC.

 

E was a large online retailer of electrical goods and C was a global financial institution involved in EU emissions allowances trading. In proceedings before the First-tier Tribunal, HMRC alleged that the taxpayers had been involved in transactions which formed part of an overall scheme to defraud the Revenue; that the schemes involved an orchestrated and contrived series of transactions; and that there were features of those transactions which demonstrated that the taxpayers “knew or should have known” that that was the case. The taxpayers argued that HMRC’s statements of case failed to satisfy the requirements of civil fraud pleadings because they were insufficiently particularised and contained no proper plea of fraud, notwithstanding that dishonesty was being alleged. According to HMRC, the pleadings did not have to be particularised in the manner contended for by the taxpayers because they did not amount to an allegation of dishonest behaviour. The tribunal found in favour of HMRC in E’s case, but in C’s case it held that HMRC had failed to clarify whether it was alleging a dishonest state of mind. It directed HMRC to either expressly allege dishonesty or disclaim it.

 

The issue was whether, in a case where HMRC chose to allege actual knowledge of a fraud under the first limb of the test in Kittel v Belgium (C-439/04) [2008] S.T.C. 1537, such an allegation was tantamount to an allegation of dishonesty.

 

HELD: (1) In Kittel, the Court of Justice of the European Union had laid down a test of whether a taxpayer “knew or should have known” that transactions in which it had engaged were connected to fraud. That test was one of knowledge and was not to be regarded as synonymous with dishonesty, Kittel applied. The test was to be applied in accordance with the guidance given by the Court of Appeal in Mobilx Ltd (In Administration) v Revenue and Customs Commissioners [2010] EWCA Civ 517, [2010] S.T.C. 1436 and Fonecomp Ltd v Revenue and Customs Commissioners [2015] EWCA Civ 39, [2015] S.T.C. 2254. However, where HMRC relied on the first limb of Kittel and alleged that the taxpayer actually knew that it was taking part in a transaction connected with fraudulent evasion of VAT, that would very often amount to an accusation of conduct that would be regarded as dishonest by an English court, Megtian Ltd (In Administration) v Revenue and Customs Commissioners [2010] EWHC 18 (Ch), [2010] S.T.C. 840 applied (see paras 61, 85-86 of judgment).

 

(2) In the context of ordinary civil litigation, there was clear authority that a rolled-up plea of “knew or should have known” did not necessarily make alternative allegations, one of knowledge and, alternatively, one that the relevant facts should have been known, Armitage v Nurse [1998] Ch. 241 followed. However, in the instant case, HMRC was seeking to rely on both limbs of Kittel by making such alternative allegations. The natural meaning of the allegation was that C knew both that there was an overall scheme involving an orchestrated and contrived series of transactions to defraud the Revenue, and that its transactions were part of that scheme. The tribunal was fully justified in concluding that that amounted to an allegation of dishonest conduct. HMRC’s position was unclear: it was willing to allege that C knew that its transactions formed part of a fraudulent scheme, but was unwilling to accept that it was alleging dishonesty. It had used the same rolled-up plea E’s case, and therefore a similar allegation of dishonest conduct was being made against E. It followed that E was entitled to proper particulars of what it was alleged to have known and the facts on which the case against it was based. E’s case was therefore remitted to the tribunal to decide which of its requests for further information were justified and proportionate, Mobilx and Fonecomp followed (paras 91-97, 100-105).

 

(3) Although the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 r.27 demonstrated that disclosure in the tribunal did not simply mirror that in ordinary civil litigation, the limitations of that rule should not preclude a request for wider disclosure where it was proportionate to the importance of the case, the complexity of the issues, the anticipated costs and the resources of the parties. The instant case was highly complex and of great importance to the taxpayer. Therefore, it was appropriate for HMRC to disclose not only the material that it wished to rely on, but also any other material uncovered in the course of its investigations which might undermine its case (paras 108-109).

 

Appeals allowed in part

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