Foundry Supplies UK Limited v The Commissioners for HMRC

In essence the Appellants’ application for further and better particulars seeks to require HMRC to particularise the type of fraud which is alleged on the basis that “if an MTIC fraud is alleged then one set of inferences may be sought by [HMRC] and [Foundry] needs to be in a position to deal with a) the facts said to underly that assertion, and b) the inferences to be drawn from them.” If however, the fraud alleged is a carousel fraud or an acquisition fraud apparently difference facts and inferences will need to be dealt with. Accordingly, “it is not asking too much” of HMRC to precisely particularise the nature of the scheme alleged. In the absence of a label being put on the type of fraud Foundry contend that they must be provided with sufficient understanding of how the alleged fraud is said to work.

By reference to the statement of case Foundry contends that HMRC have failed to show that there was an export/dispatch post the transaction with Foundry so as to indicate there is a “broker” company as would be required in an MTIC fraud. Neither has HMRC established in pleadings that the goods were, at any point, supplied from outside the UK such that an acquisition or MTIC fraud might be established. Nor is there a suggestion of a carousel fraud. Having excluded these variants of fraud it is, at least implicit, that Foundry is contending that there cannot have been a scheme to defraud at all and hence HMRC should be required to further particularise their case.

As is conventional in Kittel cases directions in this case include what is known as a Fairford direction. Such direction provides for Foundry to state whether they accept (without making any admission of knowledge or means of knowledge) that the transactions chains on which input tax has been denied “were part of an orchestrated overall scheme to defraud the revenue”. Foundry contend that without the information as to the nature of the scheme they cannot comply with the Fairford direction.

Further, it was contended that Foundry would not be able to determine the evidence it needed to call without the particularisation sought. For instance, it was asserted that if they knew the alleged fraud was an MTIC fraud Foundry might call expert evidence regarding the market but that such evidence would not be necessary were an acquisition fraud alleged. Various further permutations of complexity in determining what evidence might be necessary were advanced to demonstrate why it was contended that particularisation was critical to fairness when facing Kittel assessments and associated penalties and liability notices which, I was reminded, are criminal notices for the purposes of Article 6(3)(a) European Convention on Human Rights. Particular reliance was placed on this feature of the case it being essentially contended that there was no material difference between a case in which dishonesty was asserted and one in which penalties (amounting to criminal sanctions) were issued.

Foundry contend that the information they seek is reasonably necessary and proportionate to enable them to prepare their own case and/or understand the case that they need to meet. This, they contend, rule 5(3) FTT Rules should be interpreted in an way which is consistent with that provided for in Practice Direction 18 to CPR rule 1.2 and by reference to the case law regarding further and better particulars under the CPR. In this regard Foundry referenced Lord Millet’s judgment in Three Rivers District Council v Bank of England [2001] UKHL 16 [184] – [186] as justifying the application on the basis that an allegation of fraud must be distinctly alleged and distinctly proven requiring therefore that it must be sufficiently particularised.

I was taken to the judgments in Gamatronic (UK) Ltd v Hamilton and others [2012] EWHC 3287, Portland Stone Firms Ltd v Barclays Bank Plc and others [2018] EWHC 2341 as reinforcing the imperative that a the case where dishonesty or comparable impropriety is alleged it is for HMRC and not Foundry to lay out the allegations clearly. And by reference to similar Kittel cases that the Court of Appeal had clearly required in HMRC v Citibank NA and another [2017] EWCA Civ 1416 and Davis and Dann v HMRC [2016] EWCA Civ 142 for proper particulars of the frauds to be pleaded. This was so even where the fraud (as here) is not alleged against the taxpayer facing the Kittel assessments.

Reliance was placed on the judgment of the Tribunal in Ronald Hull v HMRC [2016] UKFTT 525 (TC) in which the Tribunal had directed HMRC to provide further and better particulars as to how “the alleged contrived scheme was supposed to work” so that the appellant in that case knew what was alleged against it.

Mr Watkinson, for Foundry, submitted that HMRC had made a rod for their own back by pleading an “overall scheme”. He indicated that had the case been pleaded only on the basis of Kittel then HMRC would not have been required to particularise any underlying fraud. He invited, as an alternative to his application for further and better particulars, that HMRC simply withdraw the allegation of overall scheme, but it was not appropriate to “leave the door open” and not plead it adequately.

HMRC contend that there is no requirement on them to particularise the statement of case further. They contend that Foundry’s application is, in essence, an attempt to reframe the Kittel test which simply provides that HMRC may deny input tax recovery where: “it is ascertained, having regard to objective factors, that the person knew or should have known that, by his purchase, he was participating in a transaction concerned with the fraudulent evasion of VAT”. As determined in paragraph [59] in Mobilix Ltd (in administration and others v HMRC [2010] EWCA Civ 517:

“The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround the transaction that they are connected to fraudulent evasion. If the trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transactions was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.”

It was acknowledged by Mr Hayhurst that the Kittel test did not require any scheme of fraud to be alleged only that a tax loss be proven. It was surmised by Mr Hayhurst that the practice of pleading some scheme (including an overall scheme without particularisation of its nature) was likely derived from the judgment of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563 (as recorded in Mobilix) in which he stated:

“[109] Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.”

HMRC contend that all that is said to be meant by “overall scheme” is that there a pattern of similarities in what may be hundreds of transactions with a limited number of sources but through a large number of counterparties and that the pattern and the relationships are sufficient to indicate that the tax loss was fraudulent. The present statement of case, certainly as further particularised in Annex A, sets out the nature of the patterns and connections on which HMRC’s case is founded.

It was submitted that in a case, where, as here, tax loss has been established in circumstances where there is a sufficient pattern of behaviour to be satisfied that the Kittel test is met so as to deny input tax to Foundry, that is sufficient. HMRC may not know the precise nature of the fraud, but they do not need to. Tax loss plus pattern and connections is sufficient and where their case is founded only on tax loss and patterns and connections, that is all that needs to be pleaded. As confirmed in Mobilix paragraph [62] as the fraudulent transaction may arise upstream or downstream from the taxpayer facing a Kittel assessment the nature of the scheme is ultimately irrelevant.

In essence, it was contended `that the nomenclature of “overall scheme” means “we do not know the precise fraud perpetrated but we know that there has been tax loss, and the patterns and connections indicate the tax loss arose from fraudulent activity of which the taxpayer who has been assessed knew of should have known.”

Mr Hayhurst sought to demonstrate that section B.9 of the statement of case, including the annexes referenced to in that section, sufficiently particularise the primary facts on which the overall scheme alleged i.e. that there has been tax loss and the patterns and connections which demonstrate such tax loss to be as a result of fraudulent conduct of which Foundry was or should have been aware. Sufficient detail being given of the pattern to meet any requirement that Foundry understand the allegations against it. To the extent necessary further particularisation in Annex A is sufficient.

It was readily acknowledged that where HMRC had sufficient information to particularise the nature of the fraud they will (and should) so particularise it. But where that information is not yet available, there is no requirement to wait until it is (which might result in tax falling out of time) in order to facilitate what Foundry contend would be a sufficient pleading. In such cases “overall scheme” with particularisation of the relevant pattern is enough.

Having carefully considered the submissions of both parties I consider that those made by Mr Watkinson with much energy and force have no substantive foundation in the case law. As HMRC noted the highwater point for Foundry’s case is Ronald Hull a case which is not binding on me and which, in any event, is to be distinguished factually because in that case HMRC alleged that the taxpayer was a complicit participant in the fraud itself and not “simply” that it knew or should have known of the existence of the relevant fraud.

I am satisfied, in particular by reference to an analysis of Mobilix, and as acknowledged by Mr Watkinson, that knowledge (by either HMRC or the taxpayer) as to the nature of the fraud is not a necessary component of a Kittel assessment. I accept, in full, HMRC’s submission that provided that they can show that there is a tax loss and that by reference to all the facts and circumstances that loss arise from dishonest conduct somewhere in the chain (determined by reference to the patterns and connections such as those identified in paragraph [10] above i.e. including the improbability of co-incidence, repeated pattern of being supplies by traders who then go on to be de-registered, the trading model and environment etc.) and that the relevant taxpayer knew or should have known of the fraud the case for a Kittel assessment will have been made out.

In Hull Judge Mosedale undertook a careful review of the terms on which a Kittel case was required to be pleaded. I agree her analysis. The primary facts underpinning the assessment must be adequately pleaded. But that does not require all facts to be pleaded.

I note that in relation to pleadings for fraud in respect of third parties Judge Mosedale said at paragraph [34]:

“… where a third party’s alleged fraud is a primary fact alleged against a party to an appeal, it must be leaded with sufficient details to justify it, but it does not itself have to be pleaded in the same degree of detail as it would need to be pleased if the non-party were a party to the case. The SOC does not have to contain a full SOC for every non-party alleged to have committed fraud. The details can wait for exchange of evidence.”

Here HMRC have set out the primary facts on which they contend that there was a tax loss, the patterns and connections which indicate: 1) that the tax loss arise as a consequence of fraud and, 2) by reference to the participation of Foundry why it is asserted that they knew or should have known that the transaction in connection with which input tax was claimed were connected with such fraud.

Paragraphs 110 – 111 of Ronald Hull relied upon by Foundry concern allegations in the statement of case in that matter alleging that transactions from two non-parties through two others were part of a contrived scheme and that “all participants in the scheme including the appellant knew its place in the fraud” (emphasis added). In such circumstances it was necessary for HMRC to more fully explain how the contrived scheme was to work. Drawing a comparison or analogy to the present case is not, in my view, appropriate where here, the allegation made is only that the Foundry knew or should have known of the frauds in the transaction chains.

That is so despite the ECHR treatment of the penalties imposed. There is no actual allegation of dishonesty, indeed dishonesty on the part of Foundry has been expressly avowed. If HMRC cannot, by evidence, meet the burden of proof and make out their case then it will fail. Kittel cases are not uniformly successful. In each case, the Tribunal listed to hear the matter will carefully consider all the evidence and whether HMRC have shown, on the balance of probabilities, that there was fraudulent tax loss of which the taxpayer knew or should have known. That is precisely what will happen in this appeal in due course. Somewhat obviously, if HMRC cannot prove their case the assessments to tax, the penalties and liability notifications will fail. In those circumstances I do not consider the fact that penalties have been issued to make a difference.

The Appellants have been provided with sufficient information (in Annex J to the statement of case) of the parties in the relevant supply chains generating the tax loss. Similarly they have sufficient information as to what HMRC allege as the patterns and connections on which they found firstly the allegation that the tax loss is fraudulent and secondly the contention that Foundry knew of should have known of the relevant VAT frauds (in the statement of case section B.9 and by reference to Annex A). The particularisation provides a sufficient understanding of the basis on which the Kittel assessments have been raised and no further particularisation is required.

I therefore refuse the Appellants application for further and better particulars.

I was not provided with copies of any tribunal directions made in respect of the future case management of the consolidated appeals. I assume that, as yet, none have been made. Accordingly, the parties are to agree relevant directions in similar form to the Tribunal standard form for Kittel cases and provide the Tribunal with such directions no later than 5pm 30 days from the released of this judgment.

This document contains full findings of fact and reasons for the preliminary decision. Any party dissatisfied with this preliminary decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.