CCA Distribution Ltd v The Commissioners for HMRC

CCA Distribution Limited (CCA) appeals against the decision of the Upper Tribunal (Tax and Chancery Chamber) (Morgan J and Judge Timothy Herrington) (the UT) to allow an appeal by The Commissioners for HM Revenue and Customs (HMRC) against a decision of the First-tier Tribunal (Tax Chamber) (the FTT) released on 22 April 2013. By that decision, the FTT allowed an appeal by CCA against HMRC’s decision to deny CCA a right to deduct input tax in excess of £9.8 million on its purchases of mobile telephones made in the VAT periods 04/06, 05/06 and 06/06 (May to July 2006).

HMRC had denied the deduction of input tax on the grounds that the purchases made by CCA were connected with the fraudulent evasion of VAT and that, through its controlling director Ashley Trees, it knew or should have known that the purchases were so connected.

As is notorious, mobile phones have frequently been used in transactions designed to defraud the public finances of value added tax, through sales and purchases between companies in the UK and one or more other EU member states, commonly called Missing Trader Intra-Community (or MTIC) fraud. The 39 purchases by CCA in question in this case were connected with transactions constituting MTIC fraud. In each case, the seller was a “contra-trader”, actively engaged in the fraudulent evasion of VAT. The UT gives a concise description of “contra-trading” and the part played by CCA in its Decision at [4]-[5].

It has at all times been common ground that the purchases made by CCA were in fact connected with the fraudulent evasion of VAT but CCA denied that it either knew or should have known of the connection. That was the issue before the FTT.

The members of the FTT were split on the issue before them. Judge Cornwell-Kelly (the Judge) concluded that HMRC, on whom the burden of proof lay, had not established that CCA either knew or should have known of the connection, while the other member, Mr John Agboola ACCA, concluded that it had known of the connection. The Judge exercised his casting vote in favour of allowing CCA’s appeal, pursuant to article 8 of the First-tier Tribunal and Upper Tribunal (Composition of Tribunal) Order 2008.

HMRC were given permission to appeal against the FTT’s Decision on four grounds, having sought permission on eight grounds. The UT dismissed one ground of appeal and that is not challenged by HMRC. The UT allowed the appeal on two grounds and, in the light of their decision on those grounds, did not consider or reach a conclusion on the remaining ground. CCA was refused permission to appeal to this court by the UT and on the papers by Patten LJ, but it was given permission by Kitchin LJ following an oral hearing.

CCA therefore seeks to reverse the Decision of the UT on the two grounds of appeal upheld by the UT in favour of HMRC. HMRC resist the appeal and, by a respondent’s notice, seek to uphold the UT’s Decision on the further ground that was not considered by the UT.

HMRC’s grounds of appeal were unnecessarily long and complicated, a matter on which the UT was rightly critical in its Decision at [34]-[46]. The three relevant grounds of appeal that were before the UT may be summarised as follows. First, the Judge (and hence the FTT) erred in law in taking into account an irrelevant consideration, that the criminal investigation into the relevant VAT frauds had not involved CCA and Mr Trees (Ground 3). Secondly, the Judge erred in law in failing properly and consistently to apply the correct test to the issues and to apply the correct approach to the evidence (Ground 5). Thirdly, the Judge erred in his approach to the banking evidence (Ground 8).

Each of these grounds challenged the way in which the FTT had reached its conclusions and the way in which it had dealt with, or not dealt with, the evidence and issues before it.

Mr Pickup QC, appearing for CCA, reminded us of the limitations on an appeal court as regards the decision of the fact-finding tribunal, as expressed in many authorities dealing both with appeals generally and, more specifically, with appeals from tribunals governed by the Tribunals, Courts and Enforcement Act 2007 which lie only on a point of law (section 11(1)).

I propose to deal first with the two grounds of appeal on which HMRC succeeded before the UT, in the order in which it took them. References below to “Ground 3” and so on are to the numbered grounds before the UT.

This was a very specific challenge to the finding of the Judge (and hence of the Tribunal) that CCA, through Mr Trees, did not have actual knowledge that CCA’s purchases were connected to the fraudulent evasion of VAT.

The entire Decision of the FTT runs to 423 paragraphs and 115 pages. The recital of facts and some findings are contained in paragraphs 32 to 240. The submissions of the parties are summarised in paragraphs 241 to 355. Paragraphs 357 to 421 is headed Conclusions and sets out joint findings in paragraphs 357 to 385, the Judge’s findings and conclusions in paragraphs 388 to 411, and the member’s findings and conclusions in paragraphs 412 to 421.

In paragraph 387, the FTT stated that they had “not found this an easy case to determine and it would be fair to describe it as a borderline case, some evidence pointing in one direction and other evidence in another”.

At paragraph 393, the Judge stated “I therefore conclude that it has not been established on the balance of probabilities that CCA through Mr Ashley Trees was a knowing participant in a fraud on the Revenue”. So expressed (“therefore”), this is a conclusion drawn from the evidence and factors identified by the Judge in the preceding paragraphs under the heading “Mr Trees’ knowledge”.

The relevant evidence and factors were as follows. First, at paragraph 388, the Judge said: “The impression of Mr Trees in the witness box was that he was a tense but truthful witness”. Rather than improvise evidence that would have favoured him, he would say if he did not know the answer to a question or admit that he had not taken a particular step. The Judge was accordingly more inclined to accept explanations volunteered by Mr Trees. No criticism of this approach to the quality of Mr Tree’s evidence is made, or could be made, by HMRC.

Secondly, at paragraph 389, the Judge accepted Mr Trees’ evidence as regards the commercial rationality of the trading patterns. The Judge said:

Continuing with this topic, the Judge recorded and accepted at paragraph 390 Mr Tree’s evidence that “he never thought of querying the situation because, whatever its explanation, it offered an opportunity for him: he evidently contented himself with the knowledge that there are all sorts of reasons why markets don’t function as an uninitiated observer might expect them to”.

Thirdly, at paragraph 391, the Judge said that it was “inherently improbable” that in circumstances where there was close, constant and well-established monitoring by HMRC and checks made on CCA’s trade connections, at its request, by KPMG and Deloittes, especially in connection with the very transactions under appeal, Mr Trees was at the same time consciously collaborating in an organised fraud, particularly given the absence of any evidence of bad character or duplicity on his part.

Fourthly, and finally, is paragraph 392, which is the paragraph challenged by HMRC under Ground 3:

When giving permission to HMRC to appeal as regards this paragraph, the Judge said:

The UT held that the criminal investigation and subsequent trials and convictions, on which the Judge relied, were irrelevant to the issue of Mr Trees’ knowledge and that it was an error of law to have taken them into account.

The UT dealt with this in its Decision at [80] to [84]:

CCA challenge this analysis and conclusion on a number of grounds.

First, it submits that the interpretation put on the first sentence of paragraph 392, in the UT’s Decision at [81] (“What the Judge seemed to be saying…”) exceeded its appellate function and, in any event, did not flow necessarily or naturally from the words used by the Judge. I disagree on both counts. First, it is entirely proper for an appellate tribunal to seek to give meaning to the judgment under appeal when the judge has not made clear the point he is making. Secondly, the interpretation suggested by the UT appears to me not only the obvious one, but also an interpretation supported by what the Judge went on to say in the rest of paragraph 392. Counsel for CCA did not suggest any alternative interpretation. But in any event, as the UT said, whatever the reason for the criminal investigation not involving CCA or Mr Trees, the criminal investigation had no probative value as regards Mr Trees’ knowledge, and CCA does not submit the contrary.

Second, CCA submits that it is apparent from the Judge’s choice of the words “Nor can it be irrelevant” that he was not placing significant reliance on the criminal investigation. As recorded by the UT at [83], CCA accepted before the UT that the Judge regarded it as relevant but argued that it had not been shown to be “highly material”. I agree with the UT that, while it is impossible to know the precise weight placed by the Judge on this matter, it is plain that he gave it some weight. Why else would he include it as a separate paragraph in a short passage of just four paragraphs setting out his reasons for his finding on the central issue of Mr Trees’ actual knowledge? Moreover, it is not sufficient for a judge to have regard solely to the manner in which a witness gives evidence, which the Judge addressed in one of the paragraphs (388). A judge must also look at the other evidence and circumstances, and only three paragraphs were concerned with those, including paragraph 392. That the Judge did in fact place weight on this factor is also demonstrated by what he said when giving permission to appeal on this point.

Third, CCA emphasises that the FTT had the advantage of seeing and hearing Mr Trees give evidence over four days and the Judge’s conclusion reflects a careful assessment of his credibility. It submits that, on any fair reading of the Decision, it is inconceivable that the Judge would have reached a different decision, if he had ignored as irrelevant the criminal investigation. With respect, this cannot possibly be so. Once it is accepted that it played some part in the Judge’s conclusion, it cannot be known what his conclusion would otherwise have been, all the more so in a case that he himself described as borderline.

I would therefore reject CCA’s appeal as regards Ground 3.

Ground 5 was a somewhat compendious ground of HMRC’s appeal to the UT. For the purpose of CCA’s challenge to the UT’s Decision on Ground 5, the parties have before us divided it into two components: (i) the approach to circumstantial evidence and (ii) a challenge to the sufficiency of the reasons given by the Judge in rejecting HMRC’s alternative case that CCA should have known of the connection of its transactions with a fraudulent scheme and the UT’s decision to allow HMRC to pursue the appeal on this basis.

I will first take the approach to circumstantial evidence. The relevant part of Ground 5 was that the FTT took “the wrong approach by applying the burden and standard of proof to individual pieces of evidence. What it should have done was to consider all of the evidence in the case and then asked itself whether the case had been proved to the correct standard. It failed to stand back and look at the circumstances as it was required to do by law.” CCA submitted to the UT that this was not a fair criticism of the Judge’s reasoning, as paragraph 411 demonstrated.

There can be no doubt that the FTT was required to consider the evidence as a whole before reaching its conclusion: see Davis & Dan Ltdv HMRC [2016] EWCA Civ 142; [2016] STC 1236 per Arden LJ at [57] - [60]. The issue is whether the Judge did so.

I have earlier briefly summarised the structure of the FTT’s Decision. Paragraphs 357 to 382 contain unanimous views of the FTT. Only one aspect need be mentioned and that is their treatment of the grey market in which CCA was admittedly trading. At paragraph 380 they stated:

At paragraph 382 they said that they had inadequate information about the operation of the market and concluded that:

The Judge’s conclusions and reasons are contained in paragraphs 388 to 411. I have already referred in some detail to paragraphs 388 to 393 which appear under the heading “Mr Trees’ knowledge”. As I have said, four grounds are given by the Judge in paragraphs 388 to 392 for the conclusion expressed at paragraph 393 that “it has not been established on the balance of probabilities that CCA through Mr Trees was a knowing participant in a fraud on the Revenue”.

In paragraphs 394 and 395, the Judge addresses HMRC’s case that Mr Trees should have known that CCA’s purchases were connected with the fraudulent evasion of VAT. I shall return to these paragraphs when dealing with the second component of Ground 5.

In the following paragraphs, the Judge considers different areas of evidence under appropriate headings: banking evidence (paragraphs 396 to 399), due diligence (paragraphs 400 to 404), insurance (paragraphs 405 and 406), reliance on HMRC (paragraphs 407 to 409) and Samsung Serenes (paragraph 410). The Judge concludes:

The challenge made by HMRC was that in paragraphs 396 to 410 the Judge had looked at individual pieces of evidence and asked of each whether it proved on the balance of probabilities that Mr Trees had known or should have known of the connection with fraud, without stepping back and asking the same question of the totality of the evidence. Moreover, the Judge considered these various items of evidence, having already concluded that Mr Trees did not have actual knowledge based only on the matters set out in paragraphs 388 to 392.

Of the banking evidence, the Judge said at paragraph 397:

In paragraph 398, the Judge said that there was a constant problem of correlating invoices and payments and that “without that aspect having been examined further, the banking evidence is susceptible of more than one explanation and fails to establish the likelihood of CCA being aware of an uncommercial and contrived pattern of business…and Mr Birchfield [an HMRC officer who gave evidence] accepted that it was possible for an innocent trader to be caught up in what he described as ‘a very large scheme’”. In paragraph 399, the Judge said that the banking evidence did not demonstrate that CCA was not free to choose its own trading partners nor did it say anything about the “obvious possibility, which is as likely as not, that CCA’s customers had been put forward by the conspirators”. He concluded this paragraph by saying that where the evidence is equally consistent with honesty as dishonesty, the burden of proof has not been discharged.

As regards due diligence, the Judge observed at paragraph 401 that what was required was responsible enquiry in all the circumstances of the case. While there were shortcomings in CCA’s due diligence, CCA’s trading was at all material times monitored by an HMRC officer who expressed dissatisfaction with only one aspect of CCA’s due diligence. As to that, “the evidence shows that Mr Trees addressed the issue frankly and openly, and that it is improbable that his opposition to collecting the data was the result of a calculated desire to conceal fraudulent trading over at least three years”.

The principal point made about insurance was that the insurance for a consignment held in Belgium excluded Belgium from the cover. As to this, the Judge said that it was “clearly not the act of a fraudster: I may not speculate on its cause, and I merely note Mr Trees’ explanation that it was an oversight”. It could not seriously be thought that CCA deliberately excluded cover for the one country where the goods would be held.

At paragraph 407, the Judge rejected any suggestion that HMRC’s close attention to CCA’s business created any legitimate expectation that it would in some way be kept safe from involvement in fraudulent schemes, but he said in paragraph 408:

The FTT had earlier found that CCA had for a period been dealing in significant quantities of two models of mobile phones that were not then on the market in anything like those quantities. As to HMRC’s reliance on this, the Judge said “it is more likely that CCA was duped by people who it is now known are persons convicted of serious fraud, than that CCA themselves were knowingly trading as a pretence”.

The UT took the view that it was necessary for the Judge to consider the evidence about the grey market, the evidence addressed in paragraphs 388 to 391, and the evidence about the banking transactions, due diligence, insurance and the non-existent phone models in combination rather than separately. The UT held that the Judge had not done so but had decided the case in favour of CCA without regard to the evidence about the banking transactions, due diligence, insurance and the non-existent phones and that when he later dealt with that evidence (separately) he effectively said, “because I have decided that Mr Trees neither knew nor should have known that the transactions were concerned with fraud, these later matters are not inconsistent with that finding”.

As to paragraph 411, the UT said that they did not think that it “can fairly be read as a finding that having regard to the combined weight of the circumstances” detailed in the earlier paragraphs, HMRC had not proved its case. On the contrary, the UT thought that the way the Judge expressed his findings in paragraphs 388 to 393 and the way he dealt with the evidence about the banking arrangements, due diligence, insurance and the non-existent phones “clearly reveals that he did not approach the circumstantial evidence in the correct way”. The UT added at [97]:

In my view, the UT was justified in coming to this conclusion. They were right not to subject the Judge’s reasoning to a detailed syntactical analysis, but reading his reasons as a whole it is clear that he dealt with the evidence in a piecemeal fashion, rejecting each item separately, without looking at the evidence as a whole. This defect is not cured by the terms of paragraph 411, which I have earlier quoted, with its reference to “[h]aving regard to all the circumstances”. In a case where, on a fair reading, the Judge has not looked at the evidence as a whole, these few words in a short paragraph stating his conclusion are insufficient to demonstrate that he has done so. The importance of taking an overall view was, as the UT remarked, all the more important in a case that the Judge himself described as borderline.

Under Ground 5, HMRC stated that “The Tribunal erred in …paying insufficient regard to the “should have known” limb of the test”, which was expanded in sub-paragraphs (vii) and (viii) of paragraph 23 of the Grounds. Although in its skeleton argument for the UT hearing, this was put as a challenge on the basis that the FTT had not dealt with this issue at all, the case as put to the UT, after the UT sought clarification, was that the FTT had given insufficient reasons. However briefly, it was manifest that the FTT had given some consideration to this issue in paragraphs 394-395 of its Decision. CCA challenges the decision of the UT to permit this ground to be argued.

As a matter of language, it seems to me that “paying insufficient regard to” includes giving insufficient reasons but, in any event and more importantly, the decision whether to permit the appeal to be argued on grounds that included insufficient reasons was one for the UT. It cannot be doubted that it had jurisdiction to entertain that ground, if necessary by an amendment to the Grounds of Appeal, although in my view that was not necessary.

CCA’s challenge is to the exercise by the UT of its discretion in this regard and it is well-established that an appellate court will not interfere with the exercise of a discretion by the lower court or tribunal except on well-known and limited grounds. CCA’s point is that a reasons challenge should have been clearly stated when permission to appeal was sought from the FTT. If it had been clearly stated, the FTT could have reviewed its Decision and considered whether to expand its reasons.

Undoubtedly, it is important that a party makes clear to a court or tribunal that the reasons are so insufficient as to merit an appeal, thereby giving the opportunity for the reasons to be supplemented if the court or tribunal thinks fit. But it cannot be said that a failure to do so prevents the appellate court or tribunal from permitting the reasons challenge to be argued before it. This factor was advanced by Mr Pickup on behalf of CCA and was considered by the UT. While acknowledging there was force in the point, the UT nonetheless concluded that HMRC should be permitted to proceed with this ground. In my judgment, that was a decision that they were entitled to reach and there is no basis on which this court can interfere with it.

The UT held that the Judge had given insufficient reasons for his conclusion that HMRC failed to establish that, through Mr Trees, CCA should have known that its transactions were connected with a fraudulent scheme. The conclusion was stated in paragraphs 394-395 of the FTT Decision which read as follows:

The Judge there identified 20 points about the pattern of trading put forward by HMRC, and summarised at paragraph 354 of the FTT Decision, as the grounds relied on by HMRC for its case on this basis against CCA. At paragraph 395 he went on to reject them as an adequate basis for HMRC’s case that CCA should have known of the connection with fraud.

There can be no doubt that, if paragraphs 394-395 stood alone, they would not provide sufficient reasons for the Judge’s conclusion. But the UT rightly looked elsewhere in the Decision for fuller reasoning and identified paragraphs 376-382 where both members of the FTT addressed the 20 points. The UT concluded that the FTT had not given adequate reasons for rejecting the case based on the 20 points. The 20 points “required much more by way of an intellectual exchange from the Judge than they had received”; the 20 points “did not receive a coherent reasoned rebuttal from the judge”; and the Judge had failed to apply the correct legal test, being that of a reasonable businessman, without the need for expert evidence of the normal characteristics of legitimate trade in the grey market for mobile phones (see S&I Electrical plc v HMRC [2015] UKUT 0162 (TCC)).

The problem with the UT’s approach to the FTT’s discussion and conclusion on the 20 pointsis that HMRC had specifically and in considerable detail sought permission to appeal against these very conclusions. Permission was refused by the FTT and by the UT both on paper and after an oral hearing before Judge Sinfield. This formed “Ground 1: commerciality” in HMRC’s application for permission to appeal, a section that ran to over four pages and raised all the submissions then made by them under Ground 5 and accepted by the UT.

In these circumstances, it was not in my judgment open to HMRC to rely on a challenge to the FTT’s reasons for rejecting the 20 points as a ground for concluding that the Judge had given insufficient reasons for rejecting the case that CCA should have known that its transactions were connected to fraud. Nor therefore was it open to the UT to rely on that challenge. By refusing permission to appeal on Ground 1, the UT had precluded any challenge to the FTT’s reasons for rejecting the 20 points.

HMRC also point to evidence, noted by the Judge at paragraph 390, given by Mr Trees on the apparent inefficiency of importing goods to the UK from the EU and then re-exporting them back to the EU. Mr Trees said that “he never thought of querying the situation because, whatever its explanation, it offered an opportunity for him”. At paragraph 390, the Judge went on to connect this with his rejection of the 20 points; if Mr Trees had in fact addressed his mind to these points, they would not for the reasons previously given by the Judge have led to the conclusion that he should have known of the connection of CCA’s transactions with a fraudulent scheme. I do not think that paragraph 390 provides a free-standing basis for this aspect of Ground 5.

For these reasons, I accept that CCA’s submissions on this aspect of Ground 5 are well-founded.

HMRC presented, as a significant part of its case, an analysis of the money flows in chains of transactions in which CCA had been involved. It was common ground before the FTT that these were chains of fraudulent transactions and HMRC relied on this analysis as part of the evidence to show that CCA had known or should have known that its transactions were connected to fraudulent transactions. The significance attached to it by HMRC is demonstrated by the fact that it occupied over 30% of its closing submissions before the FTT. By contrast, CCA devoted only 5% of its submissions to it.

The Judge rejected the evidence as establishing that CCA knew or should have known of the connection with fraudulent transactions. Mr Agboola placed considerable weight on this evidence as showing, in his view, that Mr Trees knew that CCA’s transactions were connected with fraudulent transactions.

The UT summarised Ground 8 as having six features. First, the Judge reached conclusions that no reasonable tribunal could reach on the evidence. Second, he wrongly disregarded relevant evidence. Third, he failed to take into account the submissions made on behalf of HMRC. Fourth, his conclusions were based on errors of fact. Fifth, he took account of irrelevant matters. Sixth, he failed to give an adequate explanation or reasons for dismissing the banking evidence.

Having decided the appeal in HMRC’s favour on Grounds 3 and 5 and having regard to the detail involved in fully considering Ground 8, the UT decided that it was unnecessary to address and rule on Ground 8. They said that there was a danger that “we would have to comment on what are essentially factual assessments which ought to be left to the ultimate fact-finding tribunal”.

There are four relevant parts of the Decision in which the banking evidence is addressed. In paragraphs 98 to 116, the FTT summarised some of the banking evidence, in particular giving details of each of six transactions that the FTT was willing to accept as relevant. These paragraphs contain errors that the Judge repeated later in the Decision: none of the evidence related to the transactions under appeal and all the analyses of the banking evidence had been prepared in the context of another case and they “incidentally” showed money flowing through CCA’s account. These paragraphs do not summarise the case made by HMRC on the banking evidence.

Paragraphs 296-301 summarise CCA’s submissions on the banking evidence, as part of a long section, between paragraphs 241 and 306, summarising CCA’s submissions on all aspects of the evidence. Surprisingly, in the equivalent section summarising HMRC’s evidence (paragraphs 307-356), there is no reference to or acknowledgement of HMRC’s submissions on the banking evidence, still less a summary of it. In paragraphs 396-399, the Judge states his conclusions on the banking evidence, while in paragraphs 413-415 Mr Agboola states his own, very different, conclusions on that evidence.

Having read those paragraphs, it is impossible to discern the essential points of HMRC’s case on the banking evidence. In paragraphs 396-398, the Judge summarised and adopted the submissions of CCA without stating or dealing directly with HMRC’s case. In doing so, the Judge made clear errors. For example, he treated as fatal to HMRC’s case that, if Mr Trees’ explanation given for the first time in oral evidence was accepted, the book-keeper’s annotations on invoices differed from the actual payments. However, it has no impact on the core elements of HMRC’s case which concerned the evidence of circularity, the rapid transfers of funds and the pattern of payments.

While CCA accepts that the FTT’s Decision was less than full in its summary of HMRC’s submissions, it submits that it is “inconceivable” that the Judge did not take into account those detailed submissions or that they were ignored.

The difficulty is that there is no evidence in the text of the Decision that the Judge got to grips with and sufficiently analysed HMRC’s submissions to be in a position to reject them. CCA is, of course, right to say that it was not necessary to set out all the written and oral submissions advanced by HMRC. But, given that the Judge was rejecting those submissions, it was necessary for him to summarise their essential elements and explain why he was rejecting them. His failure to do so constituted, in my view, an error of law and, on this additional ground also, I would uphold the order of the UT and dismiss this appeal.

While disagreeing with the UT on one element of Ground 5, I wouldnonetheless dismiss CCA’s appeal for the reasons given in this judgment. The order of the UT, setting aside the Decision of the FTT and remitting the case to be determined by a differently constituted tribunal, therefore stands.

I agree.