Mobile Export 365 Ltd & Anor v Revenue and Customs

This is an appeal brought by Mobile Export 365 Limited (“Mobile”) and Shelford IT Limited (“Shelford”) against an interlocutory decision of the VAT and Duties Tribunal (“the Tribunal”) (Chairman: Dr David Williams) given in draft form on the 20^th June 2007 and in final form on the 26^th June 2007 (“the Decision”). I shall refer to Mobile and Shelford together as “the Appellants”. The respondents are the Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”)

The Appellants are part of the Axxia group of companies along with Live Telecoms Limited (“Live”) and Shelford Trading Company Limited (“STC”). The Appellants primarily trade as exporters of mobile telephones supplied to them by STC. The major shareholder in the Axxia group is Mr Andrew Nicolas (“Mr Nicolas”) and the Company Secretary of the Appellants is Ms Claire Leak (“Ms Leak”).

The underlying VAT appeals involve:

decisions of the Commissioners which determined that Mobile was not entitled to claim input tax repayments totalling £5,854,170.00 in respect of a number of transactions which took place in the VAT period 03/06 owing to the fact that the transactions to which the claims related were connected to a scheme to defraud the Revenue and that Mobile knew or had the means of knowing that the transactions formed part of such a fraud;

a decision of the Commissioners which determined that Shelford was not entitled to claim a VAT credit in the sum of £1,202,985.00 in respect of transactions which took place in the VAT period 03/06, again owing to the fact that the transactions to which the claim related formed part of an overall scheme to defraud the Revenue and Shelford knew or had the means of knowing that the transactions formed part of such a fraud.

This case arises out of investigations into Missing Trader Intra Community VAT fraud (“MTIC fraud”). In briefest summary, this involves the criminal abuse of the zero rating of movements to and from the rest of the European Community which was introduced as part of the single market in April 1993.

For illustrative purposes it may be helpful to give a simple example of MTIC Fraud. This example is not intended to describe the complex facts of the present case. A supplier on the continent sells wholesale to an importer at a zero rate of value added tax (“VAT”). The importer then sells the goods, which typically are high value low volume items such as mobile telephones, to a first line buffer company. This transaction has full rate VAT charged upon it. As the importer has acquired the goods with 0% VAT and sold them on with 17.5% VAT, it always owes the Commissioners a substantial sum as VAT output tax. The importer then goes missing or simply defaults on its VAT liabilities. The first line buffer company then sells on the goods for a nominal mark up to a further buffer company which does the same. Although VAT is charged at a full rate on these onward transactions, the buffers are in an essentially VAT neutral position as they only have to account to the Commissioners for the VAT on the very small difference between their buying and selling price. The final buffer company sells on to an exporter (frequently referred to as the repayment trader or broker) who buys the goods with full rate VAT charged upon them but sells them to a purchaser on the continent (who is typically the same company who supplied the goods to the importer in the first place) zero-rated. As the exporter has paid full rate VAT on its acquisition but a zero rate on its supply, it claims a substantial credit from the Commissioners in respect of its input tax. It is the Commissioners’ position that in cases of MTIC fraud the importer and the exporter are each (along with all the links in the relevant supply chain) integral to the fraud.

In case C-439/04Kittel, 6^th July 2006, the European Court of Justice (“ECJ”) took the view that:

It is the Commissioners’ case that the Appellants are precluded from recovering VAT with regard to the relevant transactions because they knew or should have known that those transactions were connected to fraud. The burden placed upon the Commissioners in MTIC cases of this kind is to demonstrate that, on the balance of probabilities, there has been a fraudulent tax loss and that the transactions giving rise to that loss are connected to the “taxpayers’” transactions. It is then for the “taxpayer” to show that it nevertheless has a right to reclaim VAT because it did not know and could not have known of the connection to fraud.

The first directions hearing in relation to this matter took place on the 20^th January 2007. A further directions hearing took place on the 12^th April 2007. At the later hearing, directions were given: (1) for consolidation of the appeals by the Appellants; and (2) that the Commissioners serve their witness statements by 4 p.m. on the 26^th April 2007 and that the Appellants serve their witness statements by 4 p.m. on the 11^th May 2007 and both parties serve further lists of documents by the 26^th April 2007. The Commissioners duly served the first witness statements of Mr Matthew Bycroft (“Mr Bycroft”) and of Mr Andrew Barnett (“Mr Barnett”). The Appellants complied with the direction for the service of a further list of documents. The Commissioners did not serve a further list. The next directions hearing was fixed for the 5^th June 2007.

The Appellants applied for an extension until the 21^st May 2007 to serve their witness statements which the Commissioners opposed. On the 21^st May 2007 the Appellants sent the Commissioners a letter stating that they would not be able to comply with their own extension, which had never been sanctioned by the Tribunal, and would therefore “hopefully” be serving the witness statements by the end of the following day.

The first three statements, comprising 5 lever arch files, were not received until Thursday the 24^th May 2007 at 5.20 pm. One of those statements (that of Ms Leak) exhibited some 40 spreadsheets. It is estimated that each spreadsheet identifies the names and addresses of up to 60 people who are said to be connected with the companies in the Appellants’ chains of supply. One of the witness statements (that of Mr Deakin) is akin to an expert statement providing opinion evidence on the alleged “legitimate market” for “grey” mobile telephones. No warning was given to the Commissioners, either in writing or at any previous directions hearing, that the Appellants would be relying on such evidence. The Commissioners subsequently received a further lever arch file containing another statement and exhibits on Monday the 4^th June 2007.

On the 4^th May 2007 (a Friday preceding a Bank Holiday) the Appellants sent a letter to the Commissioners asking for disclosure from the Commissioners of material relating to over 50 companies disclosed within 5 days. Further correspondence on this matter followed and disclosure was provided where it was considered to be relevant. A Notice of Application for specific disclosure was produced by the Appellants on the 1^st June 2007 which included a range of new disclosure requests for evidence concerning some 54 companies.

At the directions hearing on the 5^th June 2007 the Commissioners made an application to the Tribunal that by reason of the defaults of the Appellants in service of their evidence and the application for disclosure the date fixed for the main hearing of a 9 day duration commencing on the 18^th June 2007 be vacated. This application was considered together with the Appellants’ application for disclosure. The Tribunal expressed its view that, if the Appellants’ disclosure application was granted in full, that would make the proposed hearing date of the 18^th June 2007 untenable. In the event the Appellants made the decision in order to go ahead with the existing hearing date not to proceed with the majority of their application for disclosure. The Tribunal directed that the Commissioners serve their evidence in rebuttal on or by the 13^th June 2007. The Commissioners indicated that there could, in the light of the late service of the Appellants’ witness statements, still be difficulties and in the Decision (of the 26^th June 2007) the Tribunal fairly and correctly set out the background to its directions of the 5^th June 2007 and acknowledged the difficulties and embarrassment that had been caused to the Commissioners by the Appellants’ defaults:

The anticipated difficulties materialised and the Commissioners were only able to secure the second witness statements of Mr Barnett and Mr Bycroft on the 15^th June 2007 and the third witness statement of Mr Barnett on the 18^th June 2007 and the exhibits to them. The relevance of these witness statements and exhibits is patently obvious and a convincing explanation for the delay in their production is contained in a further witness statement dated the 12^th July 2007 provided by him at my request and with the concurrence of Mr Patchett-Joyce, counsel for the Appellants.

The substantive appeal was due to be heard on the 18^th June 2007 and the succeeding 8 days. Shortly before the second day of the hearing commenced the parties’ counsel discussed outside the Tribunal the respective positions they intended to take regarding the admission in evidence of the three further witness statements to which I have referred and a witness statement of a Mr Roderick Stone. Mr Benson QC, counsel for the Commissioners, said that he would apply for the admission of those statements in evidence and Mr Patchett-Joyce, counsel for the Appellants, stated that he would oppose their admission. At the opening of the hearing the Tribunal made clear that it was minded to admit the evidence whether or not the Appellants categorised it as evidence in rebuttal. In the circumstances this approach was clearly sensible and correct.

In response however without any prior notice to the Commissioners or the Tribunal, Mr Patchett-Joyce made an application under Rules 19(4) and 19(5) of the Tribunal Rules to enter judgment for the Appellants on the grounds that it was impossible to obtain a fair hearing of the issues between the parties by reason of the failure of the Commissioners to comply with the Tribunal Rules generally and more specifically with directions of the Tribunal with regard to lists and disclosure of documents. The particular complaint focussed on the alleged breach by the Commissioners of the order of the 12^th April 2007 constituted by failure to serve a further list of documents listing the documents exhibited to the three late served witness statements and the late date of service of those statements. In support of this application Mr Patchett-Joyce produced from his papers (as a conjurer produces a rabbit out of his hat) a skeleton argument and a bundle of authorities. This course was calculated to take the Commissioners by surprise and did so. The course adopted of applying for judgment was of course scarcely compatible with the course which he had stated that he would be taking of challenging the admission of the evidence: if Mr Patchett-Joyce succeeded on his application under Rules 19(4) and (5), questions of the admission of evidence became irrelevant. The extraordinary tactic on the part of Mr Patchett-Joyce deservedly failed and the Tribunal refused his application. I should add that it was because of the surprise occasioned by the application made in this manner that the Commissioners were disabled from adducing evidence before the Tribunal explaining the delay in adducing their evidence and the position regarding disclosure. They had that opportunity before me.

In order to afford the Appellants an opportunity to consider and make applications in regard to the further evidence adduced by the Commissioners, the Tribunal made clear: (a) that, whilst it proposed to admit in evidence the further witness statements of Mr Barnett and Mr Bycroft, it would leave it open to the Appellants at a later date to challenge their admission in evidence; and (b) that it proposed to order de-consolidation of the two appeals so as to enable at least one of them which could proceed and be concluded within the 9 day period set aside for the hearing of the appeal. When the Tribunal made clear its decision to refuse the application for judgment, Mr Patchett-Joyce stated that the Appellants wished to appeal to this court and did not agree to the Tribunal’s proposal to proceed with one of the appeals. He failed to give any reason.

At the hearing of the appeal before me it was common ground that there was only one substantive issue requiring determination, namely whether I should allow an appeal against the part of the Decision refusing to enter judgment for the Appellants. For if this appeal was refused, there would have to be a further hearing before the Tribunal at which it would give directions regarding consolidation of appeals, disclosure and evidence. The time constraints which limited the freedom of action of the Tribunal if the 9 day slot was to be used for the purpose of hearing one or more appeals would no longer be in play. I am however asked in this judgment to afford guidance to the Tribunal on actual or potential issues raised before me which may assist the Tribunal in giving directions.

I turn accordingly first to Mr Patchett-Joyce’s appeal against the Tribunal’s refusal to enter judgment for the Appellants.

In my judgment the appeal against the Tribunal’s decision on this application is hopeless. The Tribunal (which had the benefit of a clear understanding of the factual and legal context) in the Decision fully and carefully examined its merits and rejected it as wanting. Such a draconian order is very much a last resort where a party’s misconduct is of a serious nature and the prejudice to the applicant is not otherwise remediable. The Tribunal took the view that none of these conditions were satisfied. The Decision was clearly correct and there can be no question of this court interfering with that decision. Mr Patchett-Joyce placed foremost in his submissions the contention that the alleged late disclosure and late serving of evidence would result in a delay in the conclusion of the proceedings and if the Appellants succeeded on the appeals, the repayment of any sum due to the Appellants. The Tribunal had all this well in mind and made plain its anxiety to expedite a final hearing and (to this end) accordingly proposed deconsolidation of part one of the appeals (relating to “contra” transactions) so as to enable the two main appeals (involving direct transactions) to be concluded within the time slot available. The Appellants however insisted on proceeding with an appeal to this court and the consequent vacation of the time slot. The delay in the progress of the proceedings prior to the 18^th June 2007 was not on the part of the Commissioners alone. Further the most grievous delay has followed from the insistence by the Appellants on this (hopeless) appeal and the refusal without reasons to proceed with the hearing of the main appeals in the time available in June. I dismiss this appeal. There is no reason for interfering with the exercise of its discretion by the Tribunal. Indeed their decision was plainly correct.

I now turn to giving certain directions and guidance to the Tribunal. (1) The Tribunal must decide which of the outstanding appeals should be consolidated or otherwise heard together. In the absence of countervailing considerations, there must be powerful reasons of expedition and economy why (so far as practicable) all related appeals are heard at the same time. There is plainly a degree of urgency in obtaining the final decision in these cases in view of the potential cash flow implications for tax payers of being kept out of money to which they may have a claim. (2) In the current and all future appeals the Tribunal should determine once and for all whether to accede to applications to admit or exclude evidence and in particular on the current appeals the evidence of Mr Bycroft, Mr Barnett and Mr Stone on which the Commissioners wish to rely. The presumption must be that all relevant evidence should be admitted unless there is a compelling reason to the contrary. As I have already said, problems of complying with any previous timetable for trial are no longer relevant. A timetable for further sequential witness statements (beyond the currently served witness statements) in default of agreement between the parties must be directed; (3) the Tribunal cannot (as it has proposed in the Decision) decide to admit evidence on the basis that it can later reverse this decision if it considers it just. The Tribunal must (at least in any ordinary case such as the present) make a final decision either way. Pending such a final decision, the Tribunal may find it necessary to allow evidence to be read and referred to “de bene esse” before finally deciding on its admissibility. The availability of this course does not afford a green light to postponing a final decision on admissibility longer than is necessary; (4) reference has been made to the relevance and admissibility of convictions in 2000 and 2004 of Mr Nicolas for MTIC Fraud. Mr Patchett-Joyce told me that the Appellants contend that the evidence of the convictions is irrelevant and accordingly should not be admitted because Mr Nicolas had no part in any of the relevant transactions. Nonetheless he told me that Mr Nicolas would not be giving evidence at the trial. I need only say that the convictions appear to me of substantial potential significance. Much may turn on the role of Mr Nicolas in the company and in relation to the transactions in question. His failure to give evidence on these and other issues may of itself be highly significant and invite adverse inferences. Accordingly I would not exclude at the trial as irrelevant the evidence of the convictions, as Mr Patchett-Joyce argues.

I should conclude by saying a word about springing surprises on opponents, as were sprung on the Commissioners and the Tribunal in this case. Such tactics are not acceptable conduct today in any civil proceedings. They are clearly repugnant to the Overriding Objective laid down in CPR 1.1 (where applicable) and the duty of the parties and their legal representatives to help the court to further that objective. The objection to them is not limited to proceedings to which the CPR are applicable. I fully accept that Mr Patchett-Joyce did not at the time appreciate that what he was doing was objectionable.