PNC Telecom PLC v Revenue & Customs [2006] UKVAT V19754 (04 September 2006)

19754

STRIKE-OUT – whether appealable decision when Customs state that they will not repay input tax while investigations are made – no – appeal struck out

LONDON TRIBUNAL CENTRE

PNC TELECOM PLC	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 1 September 2006

Rupert Baldry, counsel, instructed by David Tunney Associates, for the Appellant

Richard Smith, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DIRECTION

1.	This is a decision on an application by Customs to strike out this appeal on the ground that there has been no appeal matter.  Both parties asked for a hearing in public.  The Appellant was represented by Mr Rupert Baldry and Customs by Mr Richard Smith.
2.	I find the following facts purely for the purpose of this decision:
(1)	In relation to the Appellant’s return for the period 03/06 by letter of 25 May 2006 Customs authorised repayment of input tax of £795,020.88 and in relation to the rest they stated by reference to eight specified transactions that the input tax “is to be withheld pending further verification of the transactions.”
(2)	Customs suspect that MTIC fraud is involved and have found evidence of fraud in four out of the eight chains of transactions.
(3)	The Appellant appealed against that decision on 19 June 2006 and Customs applied on 3 August 2006 to strike out the appeal on the ground that no appealable decision has been made.
(4)	At a meeting between the parties on 13 June 2006 Customs said they were unable to give an estimate of how long the enquiries would last.  The Appellant’s representative replied on 19 June 2006 saying that Customs had had more than enough time and they were appealing.  Customs replied on 20 June 2006 saying that they hd not made any decision and that appealing was premature but that judicial review was available to the Appellant.  The Appellant replied on 22 June saying that Customs had made a decision not to repay the balance of the input tax.
3.	Section 83 of the VAT Act 1994 provides:
“…an appeal shall lie to a tribunal with respect to any of the following matters…
(c) the amount of any input tax which may be credited to any person.”
4.	Mr Smith contends:
(1)	On the plain words of the letter of 25 May 2006 there has been no decision disallowing the input tax; Customs are still investigating the claim.  The Tribunal had accepted in Touchwood Services Ltd v HMRC VAT Decision 19532 in similar circumstances, and after the ECJ decision in Bond House, that appealing was premature:
“31.  I do not accept the proposition that a decision to defer a decision is an appealable decision. If the delay in making a decision is thought to be excessive the remedy is judicial review. Mr McNicholas [for the appellants] correctly accepted that Mr Sanger was entitled to make enquiries: that of itself involved deferring a decision. There was nothing to suggest that Mr Sanger had in fact made up his mind and was merely deferring communicating a decision.”
(2)	The Appellant’s remedy at this stage is judicial review, see R (UK Tradecorp Ltd) v Customs and Excise Commissioners [2005] STC 138.  
(3)	If the Appellant were right in its interpretation of s 83(c) Customs would never be able to investigate the validity of any input tax repayments.  If Customs decided not to repay any claims it would have to defend that action in the tribunal before it had made any enquiries, which is absurd.
(4)	The Appellant’s reliance on Kittel Case C-439, 440/04 is misplaced.  The right to deduct input tax must be exercised immediately but actual repayment is subject to the decision that:
“61     By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”
5.	Mr Baldry contends:
(1)	There has been a decision not to repay the input tax immediately.  It is that decision which is the subject of this appeal, following Kittel.
(2)	Judicial review is not a sufficient remedy.  The Appellant’s real complaint is not that Customs have taken an excessive time over their investigations.
(3)	The Appellant’s position is not absurd but follows from Kittel that Customs are required to justify their refusal to repay input tax by reference to objective evidence.
6.	Since the other authorities precede Kittel it important to establish what the ECJ decided: 
“47     In fact, the right to deduct provided for in Article 17 et seq. of the Sixth Directive is an integral part of the VAT scheme and in principle may not be limited. The right to deduct must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, in particular, Case C-62/93 BP Supergas [1995] ECR I‑1883, paragraph 18, and Joined Cases C‑110/98 to C‑147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 43).
…
55     Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (see, inter alia, Case 268/83 Rompelman [1985] ECR 655, paragraph 24; Case C‑110/94 INZO [1996] ECR I-857, paragraph 24; and Gabalfrisa, paragraph 46). It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends (see Fini H, paragraph 34).
56     In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods. 
57     That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.
…
60     It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void – by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller – causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.
61     By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.” 
The Court is therefore saying that a provision of domestic law that makes a contract void as contrary to public policy cannot take away the immediate right to deduct input tax.  However if the taxable person knew or should have known that he was participating in a transaction connected with fraudulent evasion of VAT then the right to deduct input tax can be refused.  This is because the taxable person would be aiding the fraud and becoming an accomplice (see [57]), whether or not he profited from the fraud (see [56]).  The fraudster was the other party to the contract in Kittel.  However, it seems to me that the principle is not limited to the facts of that case.  If the person knew, or should have known, he was taking part in transactions connected with fraudulent evasion of VAT he would still be aiding the perpetrators of the fraud whether they were parties to the same contract, or other contracts in the same chain of transactions.
7.	It is clear that the Court envisages that the objective evidence will come from Customs and this must be evidence that the taxable person knew or should have known (or, in Optigen,Cases C-354, 355/03, 484/03 “had the means of knowledge”) that he was participating in a transaction connected with fraudulent evasion of VAT.  Logically this first requires it to be determined what exactly was the evasion and who in he chain of transactions knew about it.  All this requires investigation by Customs.
8.	We therefore have the situation that in the course of an appeal one cannot tell whether the Appellant is entitled to input tax deduction until Customs have finished their investigations.  This narrows the difference between the parties.  Mr Baldry wants to be able to appeal at the beginning and then Customs’ investigations can be monitored by the Tribunal as part of its case management.  Mr Smith wants to put off the start of the appeal until it is known whether Customs are in fact disallowing the input tax deduction, and in the meantime judicial review (or perhaps more practically the Adjudicator) is available to monitor the length of Customs’ investigations.  It seems to me that Mr Smith’s contention is the preferable interpretation of s 83(c).  One cannot have a dispute about the “matter” of the amount of input tax until the outcome of Customs’ investigations is known; Customs may after their investigation conclude that the Appellant did not know and should not have known about any fraud (or it may be that there was no fraud).  I do not consider that this is in conflict with Kittel, which looks at the outcome of the appeal itself for which it makes no difference whether an appeal starts now and is held up by Customs’ investigations, or starts later after the investigations are complete.  
9.	It is less than satsisfactory that Customs can take their time over the investigations without any control by this tribunal when the Appellant wants to appeal, although I should say there is no evidence of any delay in this case.  There is potential judicial control through judicial review (and the Adjudicator), of which Lightman J approved in R (on the application of UK Tradecorp) v Customs and Excise Commissioners [2005] STC 138 at [25] following the heading Judicial control:
“[25] Secondly the Community principle of proportionality requires the availability at all times of effective judicial control over the actions of the commissioners at the instance of the taxable person. The availability of judicial control has two elements. The first element is that the national legal system must afford to a taxable person at all times access to a court which can scrutinise, supervise and monitor the due performance by the commissioners of their duties, and that embraces scrutiny both of the decisions made and the decision-making process. This requirement in the case of the claimant is plainly met, for at any time the claimant could (as it has done) invoke the jurisdiction of the Administrative Court. The Administrative Court’s role includes ensuring that the commissioners in accordance with their duty expeditiously determine the applications for refunds and reach fair and proportionate decisions whether (eg) to proceed with an investigation or whether to make part or interim payment. Further after the commissioners’ decision the taxable person can appeal to the tribunal on the merits and make claims before the tribunal for interest and supplementary payments as previously outlined. There is much to be said for the proposition that the supervisory jurisdiction of the Administrative Court in regard to the commissioners could more conveniently, expeditiously and economically be exercised by the tribunal as an adjunct to its appellate function, but I cannot think that the present procedure in any way falls short of the standard required by the principle of proportionality.”
I am sure that the Appellant would echo the last sentence, which is indeed contained in the draft Tribunals, Courts and Enforcement Bill (Cm 6885), but that is not the law today.
10.	Accordingly I strike out the appeal on the basis that there has been no decision against which the Appellant can appeal.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 4 September 2006

LON/06/0685