[2010] UKFTT 315 (TC)

TC00602

Appeal number:LON/2008/1277 

Procedure – application to admit late evidence five weeks before substantive hearing – whether evidence relevant – whether compelling reason not to admit

FIRST-TIER TRIBUNAL

TAX 

	SCEPTRE SERVICES LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JUDGE ROGER BERNER									

Sitting in public at 45 Bedford Square, London WC1 on 27 April 2010

Nigel Popplewell, Solicitor, Burges Salmon, for the Appellant

John Black QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an application made on 22 March 2010 on behalf of the Respondents for permission to rely on a witness statement of Mr Ian Henderson.  That witness statement was served on the Appellant in draft form on 22 March 2010, without the accompanying exhibits, as Mr Henderson was not at that time in possession of the source, or underlying, documents.  The final form of the statement was delivered to the Appellant, along with the underlying documents exhibited to it in the week prior to the hearing of the application.
2.	The substantive hearing of this appeal has been listed for 13 days from 24 May to 9 June 2010.  The hearing was originally listed for 11 days following a pre-trial review on 6 August 2009, and was extended by consent by a further two days on 17 November 2009.
3.	Nigel Popplewell, Solicitor of Burges Salmon appeared for the Appellant and the Respondents were represented by John Black QC.
Background
4.	The appeal is one of those arising out of investigations by HMRC into Missing Trader Intra Community fraud (“MTIC fraud”), which I need not describe in detail.  The disputed decisions of HMRC deny the right of the Appellant to deduct input tax in respect of VAT accounting periods 07/06 and 08/06.  In outline, the Respondents say that in respect of nine deals in period 07/06 and eight deals in period 08/06, they have traced the chains of transactions to defaulting traders, that the transactions were connected with fraudulent evasion of VAT and that the Appellant knew or should have known of that fact.
5.	At the pre-trial review on 6 August 2009 I acceded to the Respondents’ application for permission to adduce the evidence of Dr Findlay, an independent consultant advising PricewaterhouseCoopers LLP and other firms on electronics, semiconductors, IT and software markets and technologies.  His witness statement discusses the white and grey markets for electronic components and considers the Appellant’s transactions in that context.
Mr Henderson’s evidence
6.	Mr Henderson is an officer of HMRC, one of whose responsibilities is to view and analyse data from the First Curacao International Bank (“FCIB”) and to extract the relevant data in relation to HMRC’s civil investigations into MTIC fraud.  His witness statement essentially goes to the flows of money between various traders alleged by the Respondents to be part of the chains of transactions identified by them.  The methodology employed includes the preparation of spreadsheets from information derived from deal chain information provided by the Appellant’s case officer and the FCIB data, and flowcharts showing the invoice transaction chain identified by the case officer and the transfers of funds identified from Mr Henderson’s analysis of the FCIB accounts.
7.	The Appellant itself did not have an account with FCIB.  It is also the case that several of the buffer traders and a number of the alleged defaulting, or missing, traders did not have such accounts.
8.	Mr Black submitted that the essence of the case was the integrity of the deal chains.  The evidence of Dr Findlay was said to show that the chains were not capable of integrity, and that the deals were either uncommercial or could not have taken place.  This, he argued, was the central issue.  The FCIB evidence did not address the question of the Appellant’s knowledge, but went also to the integrity of the chains, viewed from a different perspective from that of Dr Findlay’s evidence.  Were the evidence to be accepted, Mr Black said that it would go to illustrate the artificiality of the transactions, and would be of assistance to the Tribunal.
Discussion
9.	Mr Black referred me to the often-cited extract from the judgment of Lightman J in Mobile Export 365 Limited anor v Revenue and Customs Commissioners [2007] STC 1794.  In giving guidance to the Tribunal in that case, Mr Justice Lightman said (at [20]):
“The presumption must be that all relevant evidence should be admitted unless there is a compelling reason to the contrary.”
10.	Accordingly, I should first decide if the evidence of Mr Henderson is relevant.  If I decide that it is, and should therefore in an ordinary case be admitted, I need then to go on to determine if there is a compelling reason why it should not.
Relevance
11.	I do not have any doubt that Mr Henderson’s evidence is relevant.  I accept the submission of Mr Black in this respect that, depending on the weight given to it by the Tribunal, such evidence has a relevance to the integrity of the deal chains, and to the question of third party payments.  
12.	Mr Popplewell complained that the FCIB evidence had nowhere been pleaded.  He argued that if it had the importance attached to it by the Respondents it ought to have been pleaded, as it was essential that an appellant should know the case against it.  No reference to the FCIB evidence had been included in the statement of case, even though that had been amended to reflect the evidence of Dr Findlay.
13.	I do not consider that a failure to refer to the FCIB evidence in the statement of case or in any other document that might be regarded for this purpose as a pleading goes to the question of relevance at all.  The purpose of the statement of case is to set out the case against the appellant, not the evidence by which that case might be sought to be proved.
14.	Each of the parties referred to probative value, which for these purposes I regard as being simply one element in the consideration of relevance.  Mr Popplewell referred me to a number of passages from Mr Henderson’s witness statement, and in particular to the fact that a number of the entities alleged to be part of the deal chains, including the Appellant itself, did not have an FCIB account, and accordingly even the cash flows could not be established in such cases on the basis of the FCIB evidence.  In relation to E-Management Solutions Europe Limited, a company which Mr Popplewell said had been identified by the Respondents as the defaulter in 12 out of the 17 deal chains, no information had been capable of being accessed despite that company apparently having an FCIB account.
15.	Mr Popplewell argued further that the FCIB evidence sheds no light on the movements of goods.  It deals only with the cash flows.  In relation to the alleged third party payments the evidence cannot show whether or not the money flows were in exchange for other goods.  Evidence of the chains could be obtained from invoices, assessments and VAT registration forms that could be provided by the relevant officers without Mr Henderson’s involvement.  
16.	It seems to me that Mr Popplewell’s objections in this regard do not go to relevance, but to weight.  That will be a matter to be considered by the Tribunal, and is not a reason for excluding the FCIB evidence at this stage.  On this basis I conclude that the FCIB evidence is relevant.  I must therefore now consider if there is nevertheless a compelling reason why it should not be admitted.
Prejudice
17.	In Revenue and Customs Commissioners v Brayfal Limited CH/2008/APP0082 (unreported), Lewison J referred to Commissioners of Customs and Excise v Neways International (UK) Limited [2003] STC 795 and to the requirement set out by Lloyd J in that case that in considering whether to extend time or otherwise deal with a default, the Tribunal should conduct a balancing exercise, weighing the consequences of the default for the innocent party against the possible consequences of any sanction for the party in default.  That balancing exercise was held to be equally appropriate in Brayfal in a case where there was an application to admit additional documents.
18.	In this case I have to weigh the prejudice to the Appellant in admitting the witness statement of Mr Henderson against the prejudice to the Respondents in not admitting it.  In one sense, of course, any evidence can be said to be prejudicial to the other party.  But the reference to prejudice here is not in my view to the effect that such evidence might have on the other party’s substantive case, but to the prejudice to the conduct of that case.  This can be conveniently described as unfair prejudice, but it is clear from Brayfal that once prejudice is identified, it weighs in the balance and how much weight it should be given must then be determined by the Tribunal.  The question of fairness is one element in that balancing exercise.
19.	Mr Popplewell referred me to the recent Tribunal decision (Judge Mosedale and Mrs Salisbury) of Commissioners of Revenue and Customs v Earthshine Limited [2010 UKFTT 67 (TC), where the Tribunal allowed certain e-mail evidence to be admitted although it had been produced only during the hearing.  The facts of that case were markedly different from those with which I am concerned in this application  There the appellant’s director, shareholder and key witness was the author of nearly all of the e-mails in question and the recipient of the rest.  This was not therefore evidence that was new to him or, by extension, to the appellant.  Here, by contrast, the Appellant cannot have been aware of any of the evidence of Mr Henderson sought to be adduced.  Mr Popplewell referred me to the reasons set out by the Tribunal in Earthshine why admitting late evidence might be unfairly prejudicial to a party (at [27]):
“There are three reasons why admitting evidence so late is (potentially) unfairly prejudicial to the Appellant.  Firstly, it may ambush and surprise the Appellant putting them at a disadvantage.  Secondly, the Appellant may not have time to obtain evidence in rebuttal... [The third reason is not material to this application.]
20.	This is not a case where there has been a breach by the Respondents of a direction regarding witness evidence.  The directions given on 30 January 2009, effectively by consent, provided that there should be no further evidence without leave, and the Respondents are applying for permission.  However, I have to have regard to the context in which this application is made.  The January 2009 directions were particularly concerned with witness evidence in reply.  The first direction in relation to witness evidence, also by consent, had been made on 14 August 2008, and much of the Respondents’ witness evidence had been served on 25 November 2008.  Further evidence was served in 2009, including the evidence of Dr Findlay.  In my decision following the pre-trail review on 6 August 2009 admitting the evidence of Dr Findlay, I also directed that the Appellant could serve evidence in reply to the evidence of Dr Findlay.  That evidence was served on the Respondents on 11 December 2009.  The pre-trial review set out directions for preparation for the hearing on the basis of the evidence filed and known to be intended to be filed, and directed that the appeal be listed for hearing in a window commencing 1 January 2010 with a time estimate at that point of 10 days.
21.	By agreement, certain other evidence, in the form of 15 further witness statements on behalf of the Respondents and a supplemental disclosure by the Appellant, has been admitted by direction given by me at the same hearing as for this application.
22.	Whilst it is always possible for further evidence to be admitted with the permission of the Tribunal, regard must be had to the directions that have been made in respect of the evidence in general.  The purpose of those directions is to enable the evidence to be assembled so that each party can have a fair opportunity to prepare its case.  They are designed so that a party is not disadvantaged by surprise or ambush.  As Lewison J said in Brayfal (at [38]):
“… modern case management attaches importance to a cards-on-the-table approach.  It discourages surprises and ambushes.”
23.	Mr Black argued that the application to admit the FCIB evidence could not be regarded as either a surprise or an ambush.  I do not agree.  In my view this was a surprise in the context of the case management process that had been conducted, both by the Tribunal and, to a large extent, by agreement between the parties.  The Appellant was in my view, at the stage of the pre-trial review, entitled to expect that the evidence that had by then been served by the Respondents amounted to the totality of the evidence that the Respondents considered they would require to prove their case.  This was always subject to possible further evidence being admitted in reply or rebuttal to evidence served by the other party, or, as was the case in Earthshine, evidence on an issue that has arisen at a late stage, including in the course of a hearing, but the position is different in the case of the core evidence relied upon to prove a party’s case.  The omission on the part of the Respondents to serve, or give any indication that they might serve, FCIB evidence was contrary to the cards-on-the-table approach.  Such an indication would have enabled the Tribunal, in the course of case management, to set a timetable for the service of such evidence so as to facilitate efficient progress of the appeal to a hearing, and would have put the Appellant on notice regarding the evidence.  Regarded in this light, in my view the application to admit the FCIB evidence late, without any advance warning, was a surprise to the Appellant.
24.	Mr Popplewell argued that the timing of the application and the service of the final statement of Mr Henderson gave the Appellant insufficient time for rebuttal.  The Appellant would be prejudiced in its ability to respond.  He argued that it might be necessary to make an application for disclosure in respect of the full information available on the server from which Mr Henderson had obtained his data.  There was no opportunity to do this if the FCIB evidence was admitted at a late stage.
25.	Mr Black submitted that the question of rebuttal was unlikely to arise in the case of the Appellant.  The Appellant itself did not have an FCIB account.  The evidence related only to third parties.  The Appellant’s was unlikely to provide a witness who was an expert in the operation of FCIB accounts.  He emphasised that the evidence was directed only to the integrity of the chains, and not to the knowledge of the Appellant.  He said, in answer to Mr Popplewell, that the purpose of this evidence was not to seek to make the Appellant guilty by association.  The evidence was not a fundamental re-assessment of the issues in the case, but on the other hand the FCIB evidence was not merely ancillary.  Nor was it something that had been omitted from earlier evidence that had been served.
26.	In my view the Appellant is prejudiced by the short time before the hearing at which this evidence has been produced.  To be treated fairly an appellant must have a reasonable opportunity to construct a rebuttal to evidence sought to be adduced late, whatever the nature of that evidence.  Although all relevant evidence will assist the Tribunal it will only do so if the party against whom it is directed has a fair opportunity to rebut or throw into question that evidence or any part or aspect of it.  Proper consideration of the issues can be achieved only if both parties are given a fair opportunity to prepare their cases in advance of the hearing.  Although the FCIB evidence does not introduce any new issue, it is of a substantial nature, and a fair opportunity to rebut it would have to be given to the Appellant, who up to the time of the application would have been preparing its case on the evidence already served.
27.	In the context of the case management process and the assembly of the evidence in accordance with that process, for these reasons I consider that there is prejudice to the Appellant in the late presentation of the FCIB evidence.
The balancing exercise
28.	In weighing the prejudice to the Appellant against the prejudice to the Respondents were I to refuse this application, I must consider the reasons for the late application.  Mr Black told me that Mr Henderson was one of a number of officers who had access to FCIB evidence, but there was a system of priorities, or queue.  The information had been obtained from Mr Henderson in March 2010 and had been put into a draft witness statement served on the Appellant at that time.
29.	I do not consider that the internal workings of the system for access to the server on which the FCIB evidence is held can be a relevant consideration in determining the degree of prejudice to an Appellant.  It is clear, and Mr Popplewell referred me to a case in which he had been involved where FCIB evidence had been served in June 2009, that the Respondents have had access generally to the FCIB materials such that it would have been possible to carry out an interrogation of the system and produce the materials for which permission is now sought at a much earlier stage, and before the pre-trial review.  It cannot be assumed by the Respondents that a tribunal will validate the priority (or lack of it) afforded to the obtaining of the FCIB evidence in a particular case by allowing such evidence in late.
30.	I have described above what I consider to be the prejudice to the Appellant were I to allow this application.  The prejudice to the Respondents is that they will be deprived of this evidence if I refuse the application.  In this case, as Mr Black submitted, the FCIB evidence is not concerned with demonstrating that the Appellant knew or ought to have known of the fraudulent evasion of VAT, but is solely directed to the integrity of the deal chains, and their connection to that fraud.  That, as I have stated above is relevant evidence.  Without it the Respondents will rely upon the evidence of the various officers responsible for the companies in the deal chain and on documentary evidence such as invoices and VAT returns.
31.	It cannot have been the case that, absent the FCIB evidence, the Respondents would have had no case against the Appellant as regards the deal chains and the integrity of those chains.  The statement of case sets out that HMRC have traced the chain of transactions to defaulting traders, and the deal sheets in respect of the Appellant’s deal chains are set out at Annex C to the statement of case.  These are the deal sheets that the Appellant’s case officer provided to Mr Henderson and which are exhibited to his statement.  The evidence that was at that stage in the Respondent’s hands must have been sufficient for them to make their case against the Appellant.  If the case could only have been made with the FCIB evidence, then no doubt that evidence would have been obtained sooner.
32.	In all these circumstances, having regard to the lateness of the production of this evidence, which, although it could have been obtained at an earlier stage in the proceedings, was only served in final form on 21 April 2010, less than five weeks before a hearing listed for 13 days, and the prejudice to the Appellant caused by the unexpected production of new evidence for the purpose not of rebuttal, but to prove the Respondent’s case on a primary issue, and the lack of a fair amount of time for the Appellant properly to prepare a rebuttal, do in my view together amount to a compelling reason not to admit the evidence of Mr Henderson at this stage.  This will prejudice the Respondents, but I am satisfied that such prejudice does not outweigh the prejudice to the Appellant were I to have allowed this application.  The balancing exercise in this case comes down on the side of the Appellant.
33.	The Respondents’ application for permission to rely on the witness statement of Mr Henderson is refused.  As discussed with the parties, I reserve the question of costs.     

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 6 May 2010