19698
PRACTICE – proposed amendment to Statement of Case following the ECJ judgment in Bond House – whether amendment allowed – yes  

LONDON TRIBUNAL CENTRE

	SYNECTIV LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)

Sitting in public in London on 18 May 2006

Michael Patchett-Joyce, counsel, instructed by Pannone, for the Appellant

Rupert Anderson QC and Alan Bates, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This is an application by Customs to amend their Statement of Case from one based on the principles of the Bond House cases as decided by the Tribunal to the principles as decided by the European Court of Justice.  Mr Patchett-Joyce appeared for the Appellant and Mr Rupert Anderson QC and Mr Alan Bates for Customs.  The parties agreed that the application be heard in public.
2.	Customs made two decisions, the first on 8 April 2003 refusing repayment of input tax, of £492,303.40 for periods 07/01 to 09/01, and secondly, an assessment made on 9 May 2003 for period 09/01 for £66,850 on the ground that certain transactions did not amount to supplies in the course of a business, with the result that it incurred no input tax that it could properly claim.  The appeal was made on 30 December 2003.  I should mention that the reason for the time that has elapsed since then is that criminal proceedings were pending until 24 June 2005 when Crane J stayed the proceedings.
3.	I had the benefit of Customs’ draft revised Statement of Case (32 pages), Mr Patchett-Joyce’s outline submissions (30 pages), Customs’ skeleton argument for a directions hearing on 31 March 2006 (which was adjourned to allow the Appellant time to consider the draft revised Statement of Case) (8 pages), Customs’ further skeleton argument for this hearing (8 pages), and Mr Patchett-Joyce’s further submissions for this hearing (9 pages).
4.	Mr Patchett-Joyce contends that the appeal should be allowed on account of Customs’ failure to comply with directions of the Tribunal, and secondly that Customs have no reasonable chance of success for the case in the draft amended Statement of Case.
Failure to comply with Directions
5.	On the first of these, Mr Patchett-Joyce identified the following failures (I have excluded those where Customs failed to meet a time limit but applied for an extension of time before the previous time limit expired):
(1)	Customs having applied for an extension of time to serve its Statement of Case and List of Documents until 14 October 2005.  The Appellant having on 13 October 2005 applied for a Direction that the appeal should be allowed if Customs did not serve them by 21 October 2005, Customs failed to comply with the 14 October 2005 deadline for which they had asked.  However, on 19 October 2005 Customs applied for a stand-over until after the ECJ judgment in Bond House.
(2)	The Tribunal directed Customs to serve a draft revised Statement of Case and List of Documents by Friday 24 March 2006 and a skeleton argument by 29 March 2006.  These were not served until Tuesday 28 March 2006.
6.	Mr Anderson apologises for the second of these and points out that the 31 March 2006 hearing having been adjourned no prejudice has been caused to the Appellant, who has now had time to prepare the detailed outline submissions that were before me.
7.	These seem to me to be small failures by Customs and certainly not the type of failures that would justify allowing the appeal.  Accordingly I dismiss the Appellant’s application on this ground.
Amendment of Statement of Case
8.	Mr Patchett-Joyce contends in outline:
(1)	 The disputed decisions were wrong in law and are unsustainable.  Customs need to abandon the disputed decisions and make new ones.
(2)	The test for whether Customs should be allowed to amend their Statement of Case is that in Fraser v Oystertec [2004] EWHC 2225 (Ch):
“25.  The second principle is that the court ought not to give permission to amend if the claim has no real prospect of succeeding, and in particular if the claim is untruthful or fanciful or is unsupported by evidence and is put forward in the hope that something may turn up on disclosure or trial.
Here Customs have no real prospect of succeeding on their draft revised Statement of Case and it is legally embarrassing.
(3)	The amended Statement of Case should identify the transaction that is said to be vitiated by fraud; why that transaction is vitiated by fraud; and plead the facts and matters on which Customs intend to rely to establish that the Appellant knew or had the means to know that the transaction so identified was vitiated by fraud.  He accepts that the pleading about the missing trader satisfies the first two, but there is nothing that satisfies the third point.
(4)	Customs’ skeleton for the hearing on 31 March 2006 submits that the Appellant had actual knowledge that it was taking part in transactions chains which further the purposes of persons wishing to commit frauds on the public revenue.  However in their skeleton for this hearing they say that Customs are not required to prove fraud on the part of the Appellants.  If they are pleading fraud then it must be properly pleaded.
(5)	In a number of respects the draft revised Statement of Case does not show the facts and matters relied on to show knowledge or means of knowledge; it makes reference to transactions other than the specified transactions which are not capable of being similar fact evidence; it states that the fraud was dependent on each party acting as the “ringmaster” of the scheme intended without identifying the ringmaster, his intention, how his intention was communicated and how each party acted in accordance with such intention; or contains nothing more substantial than surmise and conjecture.
(6)	So far as documents obtained from the freight forwarder Hawk Logistics Limited are concerned, Crane J in R v Uddin (Southwark Crown Court, 24 June 2005) in staying the prosecution recorded that Counsel for the Crown stated:
“…we are not relying on the documentation to show the truth of anything merely to show that there was such documentation and that, on the face of it, it created a chain of documentation.”
Customs’ case here relies extensively on Hawk documents.  In the same proceedings doubts were also raised about Mobile World GmbH, which appears in a number of the transactions in issue here, on the basis of telephone surveillance by the German authorities which was said by the Judge to show that Hawk employees and Mobile World were collaborating in carousel fraud.
(7)	The draft relies on transcripts of lawful covert surveillance at the Crowne Plaza Hotel in Manchester on 2 to 4 November 2001 which are described as MTIC fraud planning discussions, which cannot be evidence of knowledge relating to transactions between July and August 2001.
9.	Mr Anderson and Mr Bates contend in outline:
(1)	The Appellant is effectively seeking a strike-out, but it is clear from Barrett v Enfield LBC [2001] 2 AC 550 at 557 per Lord Browne-Wilkinson, that it is not appropriate to strike out where there is developing jurisprudence which requires novel points of law to be decided on actual findings of fact.
(2)	It is accepted that the disputed decisions were made on the wrong legal basis but subject to producing evidence of “knowledge or the means of knowledge” the decisions would still be correct.
Reasons for the decision
10.	In Bond House, Cases C354/03, C-355/03 and C-484/03, the ECJ stated:
“51     It follows that transactions such as those at issue in the main proceedings, which are not themselves vitiated by VAT fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of Articles 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge.
52     Nor can the right to deduct input VAT of a taxable person who carries out such transactions be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by VAT fraud, without that taxable person knowing or having any means of knowing.”
It follows that Customs must now show that the relevant transactions formed part of a chain of transactions one or more of which (whether earlier or later) was “vitiated by fraud” and the Appellant had “knowledge or the means of knowledge” of that fact.
11.	Since the EJC’s judgment, the Advocate General in Axel Kittel v Belgium, Cases C-439/04 and C440/04, dealt with questions relating to carousel frauds One question dealt with persons who acted in good faith; another with the effect of the unlawful basis of the contract being known to both parties to the contract.  He divided the latter into two categories (a) the person being involved in the fraud and deriving undue benefit from it, and (b) the person who was aware of the fraud but distanced himself and derives no benefit from it.  He treats the person in (b) in the same way as the person acting in good faith.  Of the person in (a), he states (unofficial English translation provided by Customs):
“50.  Networks in which one of the parties involved does not pay back to the tax authorities the VAT which he passes on, and the other party deducts it, involve an abuse of a right, because a statutory provision (article 17 of the Sixth Directive) is used to obtain an advantage which is contrary to its purpose, and a transaction has been carried out outside normal trading conditions, in order to gain an undue financial advantage.”
The Advocate General therefore analyses the relevance of knowledge or the means of knowledge as being that a person with such knowledge is abusing the right to repayment of the input tax.  This analysis may or may not be upheld by the ECJ.
12.	Since the ECJ has decided that the law is different from that decided by the Tribunal in the Bond House cases it is not surprising that Customs seek to amend their Statement of Case.  To some extent the issue is similar, that the nature of the transactions entered into by the Appellant are such that it is not entitled to repayment of input tax, but now Customs have to show not merely the existence of the transactions but that the Appellant had knowledge, or the means of knowledge, that the relevant transactions formed part of a chain of transactions one or more of which (whether before or after) was “vitiated by fraud.”  It is worth pointing out that the reason that Customs had already served a Statement of Case on 12 December 2005 when everyone knew that judgment of the ECJ in Bond House was imminent is that the Tribunal wanted Customs to disclose to the Appellant the facts on which they relied, which would enable the Appellant to dispute the factual basis of the case.
13.	The Appellant contends that Customs’ case has no real prospect of succeeding.  Their case is that they have a lot of facts that they want to put before the Tribunal for the Tribunal to infer that the Bond House test is satisfied.  That is something which it is impossible for me to judge at this stage that they have no real chance of success.  Only after hearing the evidence could one judge that.  It is certainly not close to the examples instanced in Fraser v Oystertec that “the claim is untruthful or fanciful or is unsupported by evidence and is put forward in the hope that something may turn up on disclosure or trial.”  There is no doubt about what facts Customs rely on; the only question is what one should infer from them.
14.	I consider that Customs have sufficiently pleaded the facts and matters on which Customs intend to rely to establish that the Appellant knew or had the means to know that the transaction so identified was vitiated by fraud.  My understanding is that they will contend that the totality of the facts pleaded will justify such an inference.
15.	So far as pleading fraud is concerned, Customs have to show “knowledge or the means of knowledge” on the part of the Appellant that another transaction in the chain is fraudulent, not that the Appellant is itself fraudulent.  In the light of Kittel it may be that even if the Appellant knew of the fraud but distanced itself and derived no benefit from it, that knowledge would be insufficient for Customs to make out their case.  What Kittel does show is that knowledge of fraud is different from being fraudulent.  Accordingly I consider that the rules for pleading fraud are not applicable.
16.	So far as the Hawk and Mobile World documents are concerned, if there are doubts about them that is a matter of the weight to be given to them.  The fact that they were not admissible in criminal proceedings, as I understand it, because the prosecution did not intend to call witnesses from Hawk, cannot prevent them from being produced in the Tribunal, whose rules provide that it “shall not refuse evidence tendered to it on the grounds only that such evidence would be inadmissible in a court of law” (rule 28(1) VAT Tribunals Rules 1986).
17.	The Crowne Plaza Hotel transcripts are clearly later than the transactions in issue but I cannot say that they are entirely irrelevant.  If they show knowledge of the true nature of chains of transactions it could be relevant to whether the Appellant had such knowledge earlier.
18.	Mr Patchett-Joyce made numerous other objections to the draft revised Statement of Case.  Essentially these criticised the lack of detail or lack of connection between the matters pleaded and the knowledge or means of knowledge that Customs were seeking to show.  It seems to me that it is the nature of the legal case that Customs have to met that knowledge or means of knowledge must be left to be inferred from all the evidence.  On that basis, a claim that the Appellant had transactions with another missing trader can be relevant to its knowledge in relation to the transactions in issue even though it relates to different transactions.  Similarly, Customs can plead that parties were obviously acting in accordance with a ringmaster’s plan rather than carrying out normal transactions, without being able to identify the ringmaster.  What the Appellant knows from the draft is what facts are being said to contribute to the Appellant’s state of knowledge.  If it considers there are errors in these facts that is a matter than can be dealt with at the appeal.  Even if he is right in saying that in many respects Customs’ case is based on nothing more substantial than surmise and conjecture, this does not mean that the draft cannot stand.  It is a point that he can validly make at the appeal.  
19.	 Mr Anderson said that one of the alternative legal bases for Bond House set out in paragraph 17(i) of the draft revised Statement of Case is no longer relied on by Customs (11 May 2006 skeleton paragraph 17).  
20.	In the circumstances I give Customs leave to amend their Statement of Case in the form of the draft subject to amendment to deal with the point in paragraph 19 above.  I direct Customs to file their Statement of Case as so amended within 14 days of the date of release of this Decision.  The way forward would then be to have a further directions hearing but I invite the parties to try to agree directions first failing which either party can apply to the Tribunal for a directions hearing.
21.	Both parties reserved their position on costs.  Either party may by notice to the Tribunal within 28 days of the date of release of this Decision apply for an order for costs in principle relating to this hearing and the adjourned 31 March 2006 hearing.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 23 May 2006

LON/2004/0007