AMW Estates – Part of HMRC's pleaded case struck out as it had no realistic prospect of success

In AMW Estates Ltd v HMRC [2020] UKFTT 410 (TC), the First-tier Tribunal (FTT) struck out part of HMRC's pleaded case which alleged that a taxpayer had actual or constructive knowledge of its supplier's fraud as it had no realistic prospect of success.

Background  

AMW Estates Ltd (AMW) bought and sold real estate. It claimed in its 08/19 VAT return a deduction for input tax in respect of two supplies which had been made to it by a related company, Westbridge Associates Ltd (Westbridge). HMRC refused AMW's claim for input tax and issued a penalty to AMW pursuant to section 69C, Value Added Tax Act 1994. AMW appealed both HMRC's decision and the penalty to the FTT. 

During the course of the appeal proceedings before the FTT, HMRC filed and served its Statement of Case (SoC) in March 2020. Shortly thereafter, AMW made an application to the FTT, pursuant to Rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, for HMRC to be barred from participating further in the appeal because there was no reasonable prospect of HMRC's case succeeding. In July 2020, HMRC filed and served its response to AMW's application and also made an application to the FTT for permission to amend its SoC. 

FTT decision 

The FTT permitted HMRC to amend its SoC but struck out part of its Amended Statement of Case (ASoC), together with the penalty which had been levied against AMW. 

The following three main issues were before the FTT:

(1) was HMRC's SoC properly pleaded, such that HMRC would have a reasonable prospect of successfully resisting the appeal?

(2) should HMRC's application to amend its SoC be allowed? and 

(3) if the answer to (2) above was yes, is the ASoC properly pleaded, such that HMRC would have a reasonable prospect of success in the appeal?

In relation to issue (1), the FTT concluded that the relevant sections of HMRC's SoC did "no more than recite the arguments provided by the Appellant [AMW] and say that those arguments are not credible". Instead, HMRC should have made positive statements of the primary facts on which it relied to establish fraud as set out in the European Court of Justice (ECJ) in I/S Fini H v Skatteministeriet (C-32/03). In Fini, the relevant taxpayer was able to recover input tax which it incurred in paying rent and other charges in relation to its business premises after ceasing to carry on its business, unless the national court determined that it was doing so for fraudulent or abusive reasons. The onus of proving both AMW and Westbrigde's alleged fraud was on HMRC and HMRC's SoC was not sufficiently particularised in order to prove allegations of such gravity.

With regard to issue (2), the FTT concluded that HMRC should be permitted to amend its SoC because:

(i) the delay between service of the SoC and service of the ASoC was extremely brief (especially when the COVID-19 pandemic was taken into account); 

(ii) the application to amend was made at a very early stage in the proceedings; 

(iii) it was important that the SoC be amended in order to set out the underlying 'new' facts in more detail, as those facts were inconsistent with the facts provided in AMW's Grounds of Appeal and the FTT hearing the underlying appeals needed to approach its decision in light of the actual facts (especially in relation to the allegations of fraud); and 

(iv) as AMW's complaint about HMRC's SoC  was that it failed to set out the primary facts on which HMRC intended to rely, the additional clarity provided by HMRC in its ASoC in relation to its position could only be welcomed by both AMW and the FTT.

In relation to issue (3), the FTT concluded that the ASoC set out all the primary facts on which HMRC intended to rely in order to succeed in its case against AMW that the right to deduct input tax was being relied upon for fraudulent evasive ends (the Fini principle).  However, the FTT concluded that there was a "significant defect" in HMRC's ASoC in relation to its pleaded case regarding AMW's actual or constructive knowledge of the alleged fraud (the Kittel principle). In Axel Kittel v Belgian State & Belgian State v Recolta Recycling SPRL (C-439/04 and C-440/04), the ECJ confirmed that the court should refuse the right to deduct input tax where the taxpayer  knew, or should have known, that the supply giving rise to the input tax was connected to fraud but that, in the absence of actual or constructive knowledge of the fraud, the right to deduct remained intact notwithstanding that it was connected with fraud by the supplier, or by a person higher up the supply chain. HMRC's ASoC did not set out the primary facts which needed to be pleaded in order to support a case based on grounds of actual or constructive knowledge. The FTT concluded that the Kittel grounds in HMRC's ASoC were fanciful and had no realistic prospect of success. The Kittel grounds were therefore struck out. As the penalty was also dependent on HMRC succeeding on the Kittel grounds, the penalty was also struck out. 

AMW's appeal against HMRC's decision to deny input tax will now proceed to a hearing before the FTT for determination. 

Comment 

This case provides a useful summary of the current case law for any taxpayer faced with allegations of VAT fraud. It confirms that not only is the burden of proof on HMRC to establish the alleged fraud, but also  that HMRC's Statement of Case must be sufficiently particularised. HMRC must set out all the primary facts on which it intends to rely in order to establish fraud, otherwise there is a real risk that HMRC's Statement of Case will be struck out by the FTT. 

The decision can be viewed here.