20694

PRACTICE – MTIC appeal – Application to amend Statement of Case to allege fraud – Earlier direction for any allegation of fraud to be made within specified time – No allegation then made – Appeal listed for 5 days on that basis – Leave to amend 7 weeks before trial refused – Application for joint hearing refused

LONDON TRIBUNAL CENTRE

	    BLUE SPHERE GLOBAL LTD	           Appellant

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	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

	    DDR DISTRIBUTION LTD	           Appellant

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	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

       Tribunal: THEODORE WALLACE (Chairman)

Sitting in public in London on 8 April 2007 and 7 May 2008

Colin Challenger, instructed by Thomas Cooper, for the Appellants

Jonathan Holl, instructed by Howes Percival LLP, for the Respondents

© CROWN COPYRIGHT 2008

DECISION ON APPLICATIONS

1.	This decision contains the reasons for directions released on 12 May 2008 refusing an application by Customs for the appeals to be consolidated and for leave to amend the Statement of Case in Blue Sphere Global Ltd (“Blue Sphere”) to allege fraud against the Appellant.  That appeal is listed for a five day hearing from 30 June 2008.  Since the application involved issues of principle it was heard in public.  Customs have required written reasons under Rule 30(2).

2.	The appeal of Blue Sphere Global Ltd (“Blue Sphere”) is against a decision dated 25 April 2007 disallowing input tax of £1,100,750 claimed on two invoices dated 21 and 18 April 2006 for the purchase of mobile telephones sold by the Appellant to EU customers. That of DDR Distribution Ltd (“DDR”) is against a decision on 30 January 2008 disallowing £1,013,068 claimed on three invoices on 27, 28 and 29 June 2006 also for the purchase of mobile telephones sold to EU customers.

3	The applications were based on the fact that Michael Peters was the only director of both companies at the material times.  In both appeals Customs contend that the Appellants through their director knew or should have known that the purchases formed part of transaction chains connected with fraudulent evasion of VAT.

4.	The Statement of Case served on 21 June 2007 in the Blue Sphere appeal did not contain any particulars of actual knowledge of fraudulent evasion although it was pleaded that “the input tax was incurred by the Appellant in transactions connected with the fraudulent evasion of VAT and that the Appellant knew or should have known of this fact.”

5.	After a hearing on 10 September 2007, at which both parties were represented by counsel, Dr David Williams directed at paragraph 1(a) that by 24 September the Respondents indicate “whether it is contended that the Appellant was itself a fraudulent party to any of the transactions in question … and, if so, to give proper particulars of any specific allegation of fraud by the Appellant”.  The direction also provided for the exchange of statements by witnesses relied on by 28 September and of supplementary or further statements by 19 October.  Time estimates and avoid dates for the appeal from December 2007 were directed to be provided by 26 October; if  a time estimate could not be agreed the parties were directed to provide their own estimates.

6.	No indication under paragraph 1(a) of the Direction was provided by Customs nor were any particulars of any specific allegation given. Thomas Cooper wrote to Howes Percival on 10 October 2007 asserting that no allegation of fraud having been indicated the sole issue would be means of knowledge and due diligence.  

7.	Witness statements were exchanged on 12 October, an extension having been agreed. A statement of 35 pages by Mr Peters was served by the Appellant with statements by Harry Hughes and Martin Thompson; statements of 63 pages by Lisa Jane Orr and 47 pages by Simon Devine were served by Customs. On 23 October Thomas Cooper provided an estimate of five days for the appeal hearing.  Howes Percival wrote on 26 October providing dates to avoid but stating that they could not confirm agreement to the time estimate until inquiries into the statements served were completed; they asked for an extension of time to provide a time estimate to 21 December to allow for exchange of supplementary witness statements.  On 5 November Thomas Cooper wrote to the Tribunal confirming their availability for the dates given by Howes Percival and pressing for a hearing date to be fixed.

8.	On 22 November 2007 Thomas Cooper applied for the appeal to be allowed under Rule 19(4) because of the failure of Customs either to agree or to provide a time estimate or, alternatively, for the appeal to be listed on the basis of the Appellant’s dates to avoid.  The notice of application cited  the lapse of time between the submission of the return on 22 May 2006 and the decision on 25 April 2007 which had followed an application by the Appellant for judicial review.  On 27 November Howes Percival made an application for specific disclosure of all documentation passing between the Appellant and Vantis Tax Advisers and for an extension of time for supplementary statements until 21 days after such disclosure. In a covering letter they wrote,

“It is not currently alleged (and it is accepted that the leave of the Tribunal would now be required to specifically plead such an allegation) that Mr Peters (the Appellant’s Director) or Blue Sphere … had actual knowledge of the fraud in this case.”

9.	The matter came before the President, Sir Stephen Oliver, on 20 December when Customs were represented by counsel.  Directions having been agreed, Thomas Cooper had informed the Tribunal that they were not attending. Sir Stephen gave a direction in the terms agreed, both applications being withdrawn.  The directions required Blue Sphere to provide any documentation passing between Vantis Tax Advisers and Investortech Ltd on which it relied by 9 January 2008, that any supplemental witness statements be exchanged by 25 January and, under paragraph 5, that by 25 January the parties file “dates to avoid for a five day listing of this appeal for the period February 2008 to 8 July 2008.”  A further directions hearing to deal with case management was to be listed as soon as practicable after 8 February 2008.

10.	Further witness statements by Mr Peters and Mrs Orr were exchanged.  Agreed dates to avoid up to 8 July were provided.  On 12 February Thomas Cooper wrote to the Tribunal pressing for the hearing date to be fixed.

11.	On 14 February Howes Percival wrote to the Tribunal that an input tax denial had just been issued to DDR and that in the event of an appeal by DDR the appeals should be consolidated, stating that if DDR did not appeal Customs would wish to amend the pleading against Blue Sphere adducing further evidence as to DDR’s trading in so far as it related to that of Blue Sphere; they asked for a directions before the appeal was listed.  Thomas Cooper wrote on 19 February that DDR was appealing but that Blue Sphere did not agree to consolidation and again asked for an early hearing date.  Howes Percival wrote on 22 February stating that they had not yet received the appeal notice but that when they did they would formally apply for consolidation and would seek an extension of time for the Statement of Case in DDR; they wrote further that the consolidated appeal could not take place “within the listed window previously advised.”  DDR’s appeal had in fact been notified to Customs’ Solicitor’s Office at Somerset House on 13 February.  On 25 February Thomas Cooper again pressed for the appeal to be listed.

12.	On 10 March in accordance with the President’s direction the appeal hearing was notified for 5 days from 30 June 2008.

13.	On 11 March Howes Percival applied to the Tribunal for the two appeals to be consolidated and asked for direction for a consolidated Statement of Case or, alternatively, for leave to amend the Statement of Case in the Blue Sphere appeal and to serve further evidence.  That application made no reference to any specific allegation of fraud against Blue Sphere or to the direction of September 2007 (see paragraph 5 above).    

14.	On 3 April Howes Percival served a Statement of Case in the DDR appeal which, apart from stating that the Appellant “knew or should have known”, contained no specific allegation or particulars of fraud.  Also on 3 April Howes Percival served a draft consolidated Statement of Case which again did not contain any specific allegation or particulars of fraud.  At the directions hearing on 8 April a further draft consolidated Statement of Case was served alleging at paragraph 31 actual knowledge of fraud particularising the allegations at 31.7:

“that Mr Peters of [Blue Sphere] and DDR was knowingly involved in dishonest transactions which he knew were connected to fraud.”

A draft amended Statement of Case in the Blue Sphere appeal was served on 10 April 2008, containing similar allegations of fraud to those in the draft consolidated case.

15.	Before considering whether to accede to the application for the appeals to be heard together (consolidation not being correct when the parties are different), it was necessary to consider whether Customs should be given leave to allege actual knowledge of fraud against Blue Sphere having consciously not done so in accordance with the direction of Dr David Williams released on 21 September 2007. At the time when the direction were given no application to amend the DDR Statement of Case dated 3 April to contain a specific allegation of fraud with particulars had in fact yet been made.

16.	Appeals by different taxpayers cannot be consolidated, although they can where appropriate be heard together. Separate Statements of Case are necessary in any event.  It is clear that a joint hearing is inappropriate when fraud is in issue in one appeal but not in the other. 

Submissions

17.	Mr Hall, for Customs, said that Maharani Restaurant v Customs and Excise Commissioners  [1999] STC 295 confirmed that the Tribunal has power under Rule 19(3) to direct that appeals by different appellants be heard together in spite of their objections.  The test is whether it is “necessary or expedient to ensure the speedy and just determination of the appeal” in each case.

18.	He said that the sole director of each Appellant was Mr Peters, both appeals related to mobile phones and all transactions by both Appellants had been traced back to a common supplier, Infinity Holdings Ltd.  The case for Customs was that the controlling mind was the Peries family and that Mr Peters was a knowing party to the transactions which were fraudulent.  He accepted that the question whether Customs should be allowed to amend the Statement of Case in Blue Sphere fell to be considered before that of a joint hearing.

19.	Mr Hall relied on the principles set out by Peter Gibson LJ in Cobbold v London Borough of Greenwich (1999), which were applied in Giles v Rhind (2008) both in the Court of Appeal, that amendments in general ought to be allowed so that the real dispute can be adjudicated upon provided that any prejudice could be compensated for in costs and the efficient administration of justice is not significantly harmed.

20.	He said that the real issue is whether there was an organised system of which Mr Peters was part and whether he had actual knowledge.  In any event Customs would be entitled to cross-examine Mr Peters as to his credit relying on his concealment of links with the Peries family.  It would be artificial if Customs could cross-examine on that basis but could not allege fraud.  The majority of the evidence on which the allegations of fraud were based were contained in the statements served in October.  Blue Sphere could not say that it had been taken by surprise.  He accepted with hindsight that Customs should have applied to amend at that stage.  However, this was not a case where Customs had sought to alter its case on the day of the hearing.  Information relating to DDR had only been available to those handling the Blue Sphere appeal after 30 January 2008, although other officers knew before.  He said that the decision in DDR by Mrs Magnay was taken within 10 months of the receipt of the DDR documents which was within a reasonable time.

21.	Mr Hall said that any prejudice arising from the amendments could be compensated for by costs.  He said that although there might be a procedural problem as to whether the Appellant had complied with the requirements for conditional fee agreements in relation to filing Form N.251, he was instructed that in the present case Customs would not contend that costs under such agreements were not unenforceable in principle in Tribunal proceedings.

22.	He submitted that an adjournment of the five day hearing listed to start on 30 June would not led to significant harm to the efficient administration of justice.

23.	Mr Hall said that if the Tribunal allowed the amendment but did not direct that the appeals be heard jointly the hearing could remain listed for 30 June provided the Appellant did its best.  He said that there was a risk that in any event five days might not be adequate.

24.	Mr Challenger, for the Appellants, said that it was a basic principle that an allegation of fraud must be specifically pleaded and should be supported by cogent evidence.  He said that even six to seven weeks before the hearing date the proposed amendment did not contain properly particularised allegations.  The question of whether fraud was alleged had been specifically considered by Dr Williams at the directions hearing in September 2007 and a deadline had been given for such allegation.  The statement by Mr Peters had been made on the basis that fraud was not alleged.  It was not right that an amendment should be allowed because of a change of view by Customs following a change of counsel.  It would be different if there was cogent fresh evidence of which Customs could not have been aware.

25.	He said that Blue Sphere was unable to trade because of the refusal to repay input tax.  The refusal decision was only given two days before the hearing in the High Court of an application for judicial review.  The date of 30 June 2008 for the appeal hearing was critical to Blue Sphere.  Blue Sphere could not be represented without a conditional fee agreement.  Its legal representative had to consider a series of factors including the prospects of success and an early resolution of the appeal.  There was a risk that they would not continue to act if the appeal hearing date was vacated.  It was unlikely that Thomas Cooper would continue to act for DDR; the Tribunal could not assume that Thomas Cooper would continue to act for both Appellants in a joint hearing.  He said that costs would not compensate the Blue Sphere for the delay.

26.	He said that in the appeal Customs would have to show that the input tax arose from transactions in a fraudulent chain involving a loss of tax and that Mr Peters should have known this.  If Customs failed to show that he should have known this , it would be remarkable if they succeeded in establishing actual knowledge.

Conclusions

27.	This case involves an alleged MTIC fraud.  MTIC stand for missing trader intra community.  The Appellant claimed input tax on mobile telephones supplied to two German companies.  The goods were bought from Infinity Holdings Ltd.  Customs allege that the goods were part of chains which contained defaulting traders.

28.	In Axel Kittel v Belgium and Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and 440/04) [2000] All ER (D) 69 the Court of Justice said this at paragraphs 56 and 57:

“56 … a taxable person who knew of 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.”

The Court of Justice, therefore, for the purposes of VAT equated the position of the person who knowingly participates in a fraudulent chain with that of the person who should have known that he was taking part in a transaction connected with a fraudulent chain.

29.	There is however an important difference between the person who knowingly participates in fraud and the person who takes part in a fraudulent chain without knowing that he is doing so notwithstanding that he should have known.  A person who knowingly participates in a transaction connected with fraudulent evasion is himself committing fraud.  A person who does not have actual knowledge may be culpably negligent but is not fraudulent.  The distinction is often clouded by the fact that actual knowledge is frequently inferred from the circumstances leading to the conclusion that such person should have known, put another way, a conclusion that a person should have known often leads on to a conclusion that he must have known.

30.	It is a long established principle of English law that any allegation of fraud must be clearly pleaded with particulars.  This applies to civil as well as to criminal proceedings.  It applies to tax appeals just as much as to any other litigation.  An Appellant against whom fraud is alleged is entitled to know clearly what case he has to meet.

31.	In the present case, faced with an allegation in the Statement of Case that it knew that the transactions were connected with fraudulent evasion of VAT, the Appellant asked at the hearing in September 2007 for particulars of any such allegation and the Tribunal directed that proper particulars of any specific allegation of fraud be given by 24 September.  At the same time the Tribunal gave directions designed to achieve an early hearing.  Any allegation of fraud almost inevitably involves more evidence and a longer hearing.

32.	Customs made no allegation within the time specified that the Appellant was itself a fraudulent party and no particulars were given.  Witness statements were exchanged on this basis and on 27 November Howes Percival accepted expressly that no allegation had been made that Mr Peters had actual knowledge of fraud and that leave would be required to do so.  It is important to note that the majority of evidence on which Customs later sought to allege fraud was contained in the October statements.

33.	The further agreed directions given in December were clearly on the footing that the only issue was means of knowledge and due diligence.  The agreed directions envisaged an early hearing and required avoid dates from February to early July.  Further statements were exchanged on this basis and avoid dates were provided.

34.	On 14 February 2008 there came the first indication that the timetable was in question in that Howes Percival asked for a further directions hearing before the appeal was listed; that letter made no mention of a possible allegation of fraud against the Appellant.  Even when a draft consolidated Statement of Case for the two appeals was served on 3 April there was no specific allegation of fraud against the Appellant.  Actual knowledge of fraud was only alleged for the first time in the document served at the directions hearing on 8 April.

35.	The appeal had meanwhile been listed to be heard for five days commencing 30 June 2008, the last clear week under the December directions.

36.	Around 250 MTIC appeals have been lodged with the London Tribunal; that figure is derived from Customs.  None of such cases is short.  An appeal listed for closing submissions on 17 May 2008 had already taken up 23 days.  Detailed case management is essential in these cases in particular to ensure that there is an informed time estimate before listing.  If a case overruns and has to be adjourned part heard, there is often a major problem in relisting.  All lay members of the Tribunal are part-time as are the majority of chairmen.  Adjournments almost invariably add to the overall length of hearings.  Furthermore the evidence is no longer fresh in the minds of the Tribunal.

37.	In support of the application to amend Mr Hall relied on the following passage from Peter Gibson LJ from the decision in Cobbold [1997] EWCA Civ 2074, a case which is unreported but is noted at Part 17.3.7 of the White Book,

“It is, of course, important that trial dates, when they are fixed, should be adhered to, but I fear that [the judge] may have let that factor dictate his approach to the question of amendment.  The overriding objective is that the court should deal with cases justly.  That includes, so far as practicable, ensuring that each case is dealt with not only expeditiously but also fairly.  Amendments in general ought to be allowed so that the real dispute between the parties can be adjudicated upon provided that any prejudice to the other party or parties caused by the amendment can be compensated for in costs, and the public interest in the efficient administration of justice is not significantly harmed.”

The Civil Procedures Rules do not apply to the Tribunal, however the approach of the courts is clearly relevant.

38.	A series of features are present in this case which were not present in Cobbold.  The first is that the amendment for which leave was sought alleged fraud.  I accept the submission of Mr Challenger that this was a serious allegation for Mr Peters as well as for the company and that the Appellant would have possibly needed up to six more witnesses.  The next feature is that the amendment was sought over six months after the date set by Dr Williams last September.  Although some material was obtained by Customs later, Mr Hall accepted that most of the material on which the allegations of fraud were based was in the October statements.  The involvement of Mr Peters with DDR featured prominently in Mrs Orr’s October statement in particular at paragraphs 59 to 70.  By that time the investigation into DDR’s return to June 2006 had been continuing for 16 months.  The delay in reaching a decision as to DDR’s input tax claim appears to me to have been excessive.  It is scarcely credible that the officers handling the Blue Sphere appeal were unaware of the progress of the DDR inquiries; if they were not they should have been. In Cobbold there had been no failure to comply with an earlier direction.

39.	In the present case I do not consider that any prejudice to the Appellant can be compensated for in costs.  An interim costs order might cover part of the additional costs but could not compensate the Appellant for the delay in recovering the input tax if the appeal succeeds.  If an amendment had been allowed, the 30 June hearing would clearly have had to be vacated.  Any interest award cannot compensate the Appellant for the fact that it cannot trade meanwhile because of shortage of funds.

40.	Mr Hall submitted that an adjournment of the five day hearing would not lead to significant harm to the efficient administration of justice.  It may be that the loss of a five day hearing date viewed on its own would not involve significant harm.  However that wholly ignores the wider picture.  It is highly unlikely that another five day case could have been listed for 30 June at less than 7 weeks notice or for that matter any shorter appeal.  If the appeal had to be relisted it would have taken up hearing dates otherwise available for other appeals.  Quite apart from the knock-on effect on other appeals, an approach that the adjournment of an appeal such as this would not be significant would make efficient case management excessively difficult.  As it is there is a danger that it will take years to clear the backlog of existing MTIC cases.  It is essential that Customs devote adequate resources to the preparation of these appeals in proper time.

41.	Finally, on this aspect, I do not accept the proposition that an amendment to allege fraud is necessary so that the real dispute between the parties can be adjudicated upon.  While it is in theory possible that a tribunal might conclude that although it is not established that an appellant should have known of a fraudulent chain, nevertheless he did know in fact, such a result would be remarkable.

42.	For the avoidance of doubt I directed that all allegations in the Statement of Case that the Appellant “knew” that the purchases on which input tax is in dispute formed part of transaction chains in which one or more of the transactions was connected with the fraudulent evasion of VAT should be disregarded so that the sole issue is whether the Appellant “should have known” of that fact.  This of course only arises if Customs establish a fraudulent tax loss and that the transactions connected to that loss are connected to the taxpayer’s transactions, see Revenue and Customs Commissioners v Brayfal Ltd, 3 March 2008 (CH/2008/APP/082) at [1].

43.	Having refused leave to amend, it would clearly have been impossible for the two appeals to be heard together with fraud alleged in one appeal but not the other.  In any event it is clear that a joint hearing would have taken substantially longer than five days.

44.	Again, for the avoidance of doubt, I directed that no further documents shall be produced or witness statements served without specific leave.  This was implicit in the earlier directions but was not expressly directed.  The purpose of such direction is to prevent the other party being taken by surprise and to reduce the risk that the hearing will overrun.

45.	I varied the September directions to require an agreed bundle of documents by 2 June, for a core bundle not exceeding 200 pages and for skeleton arguments to be exchanged 14 days before the hearing with supplementary skeletons by 25 June 2008.

46.	Subsequent to the hearing I received a formal application from the Appellant for costs.  At the hearing Mr Hall accepted that if the amendment was allowed a direction in favour of the Appellant for costs of and occasioned by the amendment would be normal.  Logically the Appellant having succeeded in opposing the amendment and the application of 11 March 2008 is entitled to the costs of and arising from the applications and I so direct.

THEODORE WALLACE
CHAIRMAN

RELEASED: 29 May 2008

LON 2007/934
LON 2008/349