VAT Fraud: Tribunal rules both Company and Director liable for HMRC’s costs

In Eurochoice Ltd v HMRC [2020] UKFTT 449 (TC), the First Tier Tax Tribunal has held that a company and its director were jointly and severally liable for HMRC’s costs, in an appeal in which only the company (and not the director personally) was party to the proceedings. Ordinarily under the Tribunal rules, in non-complex cases, each party bears its own costs irrespective of the outcome. This case was however allocated to the complex category and HMRC succeeded in its application for the company’s appeal to be struck out as it stood no reasonable prospect of success as the appellant did not respond to the application.

The decision is a warning to those that have been accused of VAT fraud that HMRC are taking a hardline approach and that the corporate veil will not always provide protection to directors of companies, particularly in circumstances where fraud is alleged- and not defended. HM Revenue and Customs (HMRC) have actively sought to clamp down on tax fraud and increasingly more businesses in a variety of sectors (away from the traditional MTIC cases involving alcohol or mobile phones) are subject to HMRC decisions de-registering a VAT number. It is vital that any company deal with tax issues as soon as they occur to prevent their appeal from being time-barred (and such decisions are usually subject to a strict 30 day time limit).

Our London Tax Solicitors and Barristers have vast experience of tax laws and first hand commercial, litigation and advocacy experience. We have a proven track record of successfully contesting disputed tax assessments and penalties with HMRC. The tax authorities have lost many cases that are appealed through negotiation, internal review or through the Tax Tribunal.

The Facts

On 13 October 2015 HMRC notified the Company of the decision to refuse it the right to deduct input tax in the sum of £5,843,093.00 and raise a corresponding VAT assessment in respect of its VAT accounting periods 10/13, 01/14, 04/14 and 07/14 on the basis that the Company knew or should have known that the transactions concerned were connected with a fraudulent loss of tax. The Company appealed to the Tribunal on 12 February 2016.

On receipt by the Tribunal, the appeal was allocated to the “complex” category in accordance with Rule 23 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The effect of such an allocation was that the case was subject to the full cost shifting regime unless the Company gave notice under Rule 10 that the case be excluded from potential liability for costs. No such notice was given by the Company.

On 5 September 2019 HMRC applied to the Tribunal for a direction to strike out the appeal, under Rule 8(3)(c), on the grounds that it had no reasonable prospects of success. In the absence of any response to its letter, dated 8 November 2019, inviting representations on HMRC’s application, the Tribunal issued an “unless” order to the Company directing the Company to confirm in writing by no later than 30 January 2020 that it intended to proceed with its appeal.

The Company was warned that if no response was received the appeal may be struck out without further reference to the parties. As no response was received within the time stated or at all, and because of the failure to co-operate with the Tribunal to such an extent that it was unable to deal with proceedings fairly and justly, on 4 March 2020, Judge Geraint Williams struck out the appeal.

The Judgment

HMRC contend that as Rule 10(1)(c), unlike Rule 10(1)(b), does not refer to “a party or their representative” the Tribunal has the power to direct that a non-party, such as the director of the company, pay the costs of the proceedings. The Tribunal found it did have the power to make a costs order against a non-party to a case:

It is clear from s 29 TCEA that, subject to the Rules, the Tribunal has “full power to determine by whom and to what extent the costs are to be paid.” As HMRC submit it is apparent that the Rules anticipate that applications for costs will be made by, and against, persons who are not a party (or a representative). For example, Rule 10(3) refers to the requirement that “[a] person making an application to the Tribunal” for costs must send the application to “the person against whom it is proposed the order be made”. Rules 10(5) and 10(6) introduce the definitions of “paying person” and “receiving person”, definitions which are not contingent on being a formal party to the appeal which contrasts with the language used in Rule 10(1)(b) which specifically refers to “a party”..

.Therefore, given the wide scope of s 29 TCEA which is not limited, at least in relation to costs in complex cases, by the Rules, I consider that the Tribunal does have the power to make an order for costs against a non-party. The question therefore, is whether I should do so in this case.

Tribunal Judge Brooks, Eurochoice Ltd v HMRC [2020] UKFTT 449 (TC)

Can a director be jointly and severally liable for HMRC’s costs?

Yes, should there be bad faith on part of the director and where a director is considered the controlling mind of the company.

HMRC submitted that this is an exceptional case where the Tribunal should direct that Mr Ahmed, the director of the Company, should pay the costs of the proceedings that he caused the company to instigate and continue. They contend that as Mr Ahmed has been the sole director and shareholder of the Company since 1 February 2012 he can be considered the controlling mind of the company, and “the real party” to the litigation in the terms described by the Privy Council in Dymocks.

HMRC refer to the Company’s grounds of appeal which must have been approved by Mr Ahmed in the full knowledge that these were not only unsustainable but, given his conviction, false. As such, it is contended that the appeal was commenced by the Company at the instigation of Mr Ahmed in bad faith, and such conduct falls well outside the “ordinary run of cases”.

Download the First Tier Tribunal Decision

HMRC investigations on Labour/Payroll chains connected with fraud

We have seen a number of decision letters and investigations from HMRC’s Fraud Investigation Service against companies in the construction and car industries alleging supply chain fraud.

These letters- if related to an investigation- seek a meeting. Or alternatively, if a decision has been made by HMRC- a notification that a company is not entitled to deduct input tax or ultimately the VAT number has been de-registered. In the latter case, an appeal must be made within the strict time limits (see below).

Supply chain connected with fraud?

Case law such as Kittel (C-439/04) and Mecsek (C-273/11) establishes the principle that community law cannot be relied on for fraudulent ends and the right to input tax recovery can be denied in circumstances where a transaction chain is connected with VAT fraud and the trader is found to have the requisite level of knowledge.

Therefore, we have seen cases where HMRC cancel a VAT registration where the Commissioners conclude that a trader is using its VAT registration for fraudulent purposes (or will do so in the future).

Notified of a decision to refuse entitlement to the right to deduct input tax?

Following Kittel, HMRC are increasingly sending decision letters alleging that labour/payroll supplies are connected with the fraudulent evasion of VAT (and that the taxpayer knew or should have known that this was the case). HMRC will normally allege that services received were from fraudulent defaulters. HMRC may also state that there is no evidence of any meaningful due diligence undertaken by the taxpayer on their clients or suppliers. So what can a company do in this situation? The answer is an appeal of the decision should be sought as soon as possible, and in any event, within 30 days of the date of the decision.

How can a company appeal the decision to refuse the entitlement to deduct input tax?

The answer is, it depends on the facts of each individual case. For example, in cases where fraud is alleged, the onus is on HMRC to establish that fraudulent activyt has occured or that the company is part of a chain of fraudulent transactions and that the trader knew- or ought to have known- about the fraud. Fraud is a serious accusation to level and HMRC should be put to the proof on this at the outset. Normally, such decision letters from HMRC do not go into detail. Deregistration would ordinarily be a step taken after months of investigation by HMRC into a company’s affairs.

In other cases, HMRC seek to import a wider interpretation to Community law than what the judges intended at the time. For example, Kittel refers to taxable goods, however, we have seen cases where HMRC attempt to expand the meaning of Kittel to include taxable supplies. It is not known at this stage how a Tribunal would interpret such a wide importation given by HMRC.

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We are experts in adeptly presenting evidence and employing bespoke arguments combining the facts of your case, previous cases and current legislation to ensure your appeal is a successful one. We provide urgent advice and representation to clients from our unique expert team of established tax and duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].