Howard Watkinson and Joshua Carey were part of the team successfully representing HMRC in the E Buyer and Citibank case as the Court of Appeal hands down judgment in the long running saga concerning whether the principle in Kittel requires a pleading of, or finding of, dishonesty.
On 29 September 2017 a Court of Appeal of some strength (consisting of the Master of the Rolls, The Chancellor of the High Court and Lady Justice Hallett DBE) handed down judgment in HMRC v E Buyer Uk Ltd and Citibank NA, a judgment that comprehensively dismissed the long running argument advanced on behalf of taxpayers, that in cases where HMRC rely on the Kittel principle in the context of orchestrated VAT fraud, that amounts to an allegation of dishonesty and attracts the same pleading and disclosure requirements for such an allegation. This is the most important civil VAT fraud case since the Mobilx litigation reached the Court of Appeal in 2010.
Why does it matter? The taxpayers, E Buyer UK Ltd and Citibank NA, had each sought to argue that an allegation that they knew that their transactions were contrived as part of an overall scheme to defraud the Revenue was necessarily an allegation of dishonesty and required both the same level of particularity as such an allegation being made in other civil proceedings and the same level of disclosure. Behind the smoke and mirrors the aim of the taxpayers was obvious: to import into the Kittel test a further limb that HMRC would have to prove – namely that the taxpayer was dishonest. Civil tribunals baulk often enough at finding that professional men are dishonest therefore this would to place a further significant hurdle in HMRC’s way to denying input tax using the Kittel principle. The taxpayers also sought to import the requirements of pleading fraud into such cases so that the taxpayer could attack the pleadings, and finally, to import CPR style standard disclosure into the proceedings.
In short, the Court of Appeal was having none of it.
The Chancellor of the High Court, giving the leading judgment of the Court of Appeal, said in a key passage of the judgment at [85-87]:
“The key point, in my judgment, is that, whilst HMRC can, of course, allege that a taxpayer has acted dishonestly and fraudulently in relation to the transactions to which it was a party, they do not need to do so in order to deny that taxpayer the right to reclaim input tax under the Kittel test. The exercise upon which Judge Mosedale was engaged was, therefore, inappropriate. It was simply irrelevant for the FTT to ask whether the allegations in the Statement of Case, if all proved, would necessarily lead to the conclusion that the taxpayer had been dishonest or fraudulent. It was even more inappropriate for Judge Mosedale to direct HMRC to plead dishonesty when it had expressly informed her that it did not wish to make any such allegation. It might be, of course, that if some or all of the allegations made in the Statement of Case were proved, that might (in theory, though not, of course, in practice) have allowed a tribunal to go on to make a finding that the taxpayer had been dishonest. But if HMRC does not seek such a finding, and if such a finding is not needed to support the conclusion that the taxpayer cannot recover its input tax, there is neither any need nor any utility in asking the FTT to undertake that exercise.
- The UT’s concern was that, because the allegations made in the Statement of Case, might be sufficient to support a plea of dishonesty, further particulars of that plea were required. But as I have sought to show by reference to what Judge Mosedale actually found in the Citibank case, the core pleading in that case did not automatically mean that it was alleged that Citibank behaved dishonestly. As the UT said, such conduct might or might not, depending on a number of factors, be conduct that would be regarded as dishonest.
- In these circumstances, in my judgment, the UT was wrong to imply that the FTT was justified in undertaking the task of seeking to ascertain from the Statement of Case whether or not the conduct alleged automatically amounted to dishonesty or fraud. Such a process was unnecessary and inappropriate and particularly so when HMRC disavowed an allegation of that character.”
The Chancellor continued at 90:
“90. Finally, if a summary of the applicable law is required along the lines of paragraphs 86 and 87 of the UT’s decision, I would simply summarise the principles as follows:-
(i) The test promulgated by the CJEU in Kittel was whether the taxpayer knew or should have known that he was taking part in a transaction connected with fraudulent evasion of VAT.
(ii) Ultimately the question in every Kittel case is whether HMRC has established that the test has been met. The test is to be applied in accordance with the guidance given by the Court of Appeal in Mobilx and Fonecomp.
(iii) It is not relevant for the FTT to determine whether the conduct alleged by HMRC might amount to dishonesty or fraud by the taxpayer, unless dishonesty or fraud is expressly alleged by HMRC against the taxpayer. If it is, then that dishonesty or fraud must be pleaded, particularised and proved in the same way as it would have to be in civil proceedings in the High Court.
(iv) In all Kittel cases, HMRC must give properly informative particulars of the allegations of both actual and constructive knowledge by the taxpayer.”
And concluded at [97-98] by saying:
“97. It will by now be obvious that I agree with HMRC’s submission as to the fundamental issue that required to be resolved by this appeal. HMRC said that the question was whether the 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 to prove, an allegation of dishonesty. I agree that that was the question raised by this appeal. I also agree that the allegation, which is a classic Kittel first limb contention, does not require HMRC to plead, particularise and prove dishonesty or fraud.
- The main point in this case was not, as the taxpayers suggested a simple pleading question. The UT failed, I think, to identify the basic error that Judge Mosedale had made in the Citibank case, where she said, in effect, that making a first limb Kittel allegation required a plea of dishonesty. It does not; even if in some cases, the findings of knowledge made by the FTT could have led the FTT to uphold a plea of dishonesty had it been made. HMRC is entitled to stop short of alleging dishonesty and content itself with pleading, particularising and proving first limb Kittel knowledge. If, however, HMRC do expressly allege dishonesty, they will be required to comply with the normal rules of pleading and disclosure applicable to such cases. In future, it might be helpful in these cases for HMRC to say expressly in their Statements of Case whether or not they set out to prove the dishonesty of the appellant taxpayer.”
What we can take from this comprehensive decision? We suggest that it has the capacity to finally put to bed the age old question of the relevance of dishonesty in Kittel cases. It is now clear that HMRC does not need to do any more than it always said it did; that is to prove that the taxable person knew or should have known its transactions were connected with the fraudulent evasion of VAT, and that no allegation of dishonesty is required..
We suggest that such a strong judgment may now deal the final blow to the procedural wranglings currently en vogue, in which taxpayers suggest that since the case is one of dishonesty they cannot possibly understand the case that is being made against them in the pleadings.
Howard Watkinson was junior counsel to HMRC for the Upper Tribunal and Court of Appeal proceedings in both cases. Joshua Carey was, in his capacity as leading London VAT fraud solicitor for HMRC, the solicitor with conduct of HMRC’s case for the Upper Tribunal hearing in Citibank NA and for the First-tier Tribunal and Upper Tribunal in Ebuyer UK Ltd. Joshua has since qualified as a barrister and has an extensive indirect tax practice.
Howard and Joshua continue to accept instructions from both HMRC and taxpayers at the highest levels in cases relating to all aspects of VAT, Excise, HMRC powers and approvals and civil and criminal allegations of financial wrongdoing.
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