HM Revenue and Customs v Citibank NA & Anor, Court of Appeal - Civil Division, September 29, 2017,  EWCA Civ 1416
|Resolution Date:||September 29, 2017|
|Issuing Organization:||Civil Division|
|Actores:||HM Revenue and Customs v Citibank NA & Anor|
Case No: A3/2016/2015 &
Neutral Citation Number:  EWCA Civ 1416
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE NUGEE AND JUDGE TIMOTHY HERRINGTON
 UKUT 0123 (TCC) (10TH MARCH 2016)
ON APPEAL FROM THE FIRST-TIER TRIBUNAL (TAX CHAMBER)
JUDGE BARBARA MOSEDALE  UKFTT 1063 (TC) (28TH NOVEMBER 2014)(Citibank)
AND JUDGE JOHN WALTERS QC  UKFTT 921 (TC) (24TH SEPTEMBER 2014)(E Buyer)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 29 September 2017
SIR TERENCE ETHERTON, MASTER OF THE ROLLS
SIR GEOFFREY VOS, CHANCELLOR OF THE HIGH COURT
LADY JUSTICE HALLETT D.B.E
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Mr Jonathan Kinnear QC, Mr James Puzey and Mr Howard Watkinson (instructed by the Solicitor to HMRC) for the Appellants
Mr Michael Conlon QC and Mr David Scorey QC (instructed by Hogan Lovells International) for Citibank NA
Mr John Wardell QC and Mr David Scorey QC (instructed by Banks Kelly) for E Buyer
Hearing date: 18th July 2017
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JudgmentSir Geoffrey Vos, Chancellor of the High Court:
This appeal raises a short point that may have important consequences for the way in which the Commissioners for Her Majesty's Revenue and Customs (``HMRC'') can challenge a taxpayer's right to deduct input VAT on the basis that the taxpayer knew, or should have known, that its transactions were connected with the fraudulent evasion of VAT as part of a Missing Trader Intra-Community fraud (an ``MTIC fraud'').
The parties do not, however, entirely agree on the short point that the court has to consider. HMRC contend that the question is whether the Upper Tribunal (``UT'') was wrong to conclude that an allegation that a taxpayer knew that its transactions were part of an orchestrated scheme to defraud HMRC required HMRC to plead and particularise, and therefore prove, an allegation of dishonesty. The taxpayers submit in response that the UT understood full well that, as a matter of law, an allegation that a taxpayer knew that its transactions were part of an orchestrated scheme to defraud HMRC might not involve an allegation of dishonesty or fraud (which was common ground). As a result, the taxpayers contend that the question for this court is only whether in the circumstances of the pleadings in these cases, the UT was right to say that what HMRC had actually pleaded as to knowledge amounted to dishonesty and had to be particularised as such. The taxpayers say that they are entitled, as a matter of good procedural case management, to have the serious allegations that HMRC has made fully and properly particularised.
To untangle this basic dispute, it will be necessary to look in rather more detail than might otherwise have been necessary at the decisions of the two First-tier Tribunals (the ``FTT'') in these cases, and at the decision of the UT.
The UT upheld the decision of the FTT (Tribunal Judge Barbara Mosedale) in the case against Citibank NA (``Citibank''), but reversed the decision of the FTT (Tribunal Judge John Walters QC) in the case against E Buyer UK Limited (``E Buyer''). HMRC are appealing the UT's decision in both cases. In E Buyer's case, HMRC also appeals the UT's decision to overrule Judge Walters' decision to refuse E Buyer's application for standard disclosure by list of the kind envisaged by the Civil Procedure Rules (``CPR'') in High Court litigation in respect of the knowledge allegation.
In both cases, however, HMRC's main ground of appeal is as follows:-
``The [UT] erred in law in concluding that the allegation that [Citibank and E Buyer] knew both that there was an overall scheme, involving an orchestrated and contrived series of transactions, to defraud [HMRC], and that its transactions were part of this scheme, required a plea of dishonesty to be made as part of [HMRC's] Kittel case, because the Kittel test contains no element of dishonesty''.
The Kittel test arises from the decision of the Court of Justice of the European Union (``CJEU'') in the case of Axel Kittel v. Belgium; Belgium v. Recolta (C-439/04 and C-440/04),  STC 1537 (the ``Kittel'' case). It is not in dispute. It provides that a trader will not be able to reclaim input VAT if it knew or should have known that the transaction in which it was involved was connected with a scheme for the fraudulent evasion of VAT. Demonstrating actual knowledge has been referred to as the first limb of the Kittel test, whilst demonstrating that the taxpayer should have known has been referred to as the second limb of the Kittel test. HMRC wish to rely on both limbs in each of these cases and are not prepared to give up their reliance on the first limb of the Kittel test.
HMRC say, in essence, that they are not necessarily alleging fraud or dishonesty merely by contending that the trader knew that its transaction was connected with a scheme for the fraudulent evasion of VAT. The taxpayers submit that, whilst it would be possible to allege that the first limb of the Kittel test was satisfied without alleging fraud, in these cases HMRC are doing so because, despite the fact that HMRC have disavowed reliance on the taxpayers being either dishonest or fraudulent, HMRC's pleadings can only sensibly be construed as making such allegations.
I will start with a brief resume of the essential factual background in each case.
E Buyer is a large online retailer of electronics, with an annual turnover of approximately £200 million. The appeal concerns 289 wholesale export transactions between June 2010 and September 2011 in connection with 37 defaulting traders and three so-called ``contra-traders''. HMRC refused E Buyer's claim to deduct input tax by various decisions notified in letters dated between 31st January 2013 and 29th April 2014 in an assessed sum of £6,740,113.23. E Buyer lodged Notices of Appeal in respect of each decision with the FTT. HMRC filed their Statement of Case on 12th February 2014 alleging that E Buyer knew or should have known that the transactions were connected with VAT fraud. On 21st March 2014, HMRC applied for a direction that Rule 27(2) of the Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 (the ``2009 Rules'') be dispensed with, and sought a direction that the exhibits to the witness statements should stand as the documents on which the parties intended to rely. Rule 27(2) provides that ``[s]ubject to any direction to the contrary, within 42 days after the date [HMRC] sent the statement of case ... each party must send or deliver to [the FTT] a list of documents ... which the party providing the list intends to rely upon ...''. E Buyer objected to this application on 2nd June 2014 and made its own application for HMRC's Statement of Case to be struck out, alternatively for a direction that HMRC should provide E Buyer further and better particulars in response to its 31-page request, and also for a direction that both parties should provide disclosure by list of all documents relevant to the appeal (which was, in effect, standard disclosure of the kind envisaged by the CPR).
After a hearing on 15th and 16th September 2014, Judge Walters QC directed on 23rd September 2014 that HMRC's application should be allowed and that E Buyer's applications should be dismissed.
The relevant Citibank transactions were the purchase and sale of EU Emissions Allowances (``EUAs'') or carbon credits in September 2009. EUAs were at the time a new type of financial derivative treated for VAT purposes as a supply of services. On 27th August 2013, HMRC assessed Citibank for VAT that it had reclaimed in the total sum of £10,081,126. A review of the relevant decisions dated 17th December 2013 upheld the assessment, however a subsequent substantive review dated 27th February 2014 reduced the assessment to the current sum claimed of £9,893,821. Citibank filed its Notice of Appeal in the FTT on 16th January 2014 on the basis that the assessment failed to identify the alleged fraud or to make good the assertion that Citibank knew or ought to have known of the fraud and therefore failed to displace Citibank's prima facie right to recover the input tax. HMRC's Statement of Case dated 22nd April 2014 alleged that the bank knew or ought to have known that the transactions were connected with VAT fraud. On 23rd May 2014 Citibank issued an application for directions seeking answers to its request for further and better particulars of the Statement of Case. The matter was heard by Judge Mosedale on 3rd November 2014, who decided on 24th November 2014 that HMRC's Statement of Case alleged dishonesty against Citibank, and that this should have been expressly pleaded. She therefore directed that HMRC should amend their Statement of Claim, which HMRC did on a protective basis on 23rd December 2014.
The appeals were heard together in the UT on 7th and 8th December 2015 before Mr Justice Nugee and Judge Timothy Herrington. The UT gave its decision on 10th March 2016. I shall return to the details of that decision in due course.
The allegations in the Statements of Case
The Statements of Case in both cases are long and complex. But the critical aspects of the decisions considered by both the FTTs and the UT are confined to a small number of paragraphs.
The following allegations were made by HMRC against E Buyer in its consolidated Statement of Case:-
``38. [HMRC] contend that [E Buyer's] transactions formed part of an overall scheme to defraud the Revenue, that the scheme involved an orchestrated and contrived series of transactions, and that there were features of those transactions which demonstrate that [E Buyer] knew or ought to have known that this was the case. It is not necessary to prove the identities of those responsible for orchestrating the...
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