The High Court upheld the refusal of the VAT tribunal to enter judgment in the taxpayer's favour based on the alleged failure of Customs to comply with the procedural rules relating to service of documents and witness statements where the tribunal had fully and carefully considered the application before rejecting it.

Facts

The taxpayers were part of a group of companies. Customs determined that the taxpayers were not entitled to claim input tax repayments totalling £5,854,170.00 and £1,202,985.00 respectively in relation to a number of transactions, on the basis that they were connected to a scheme to defraud the Revenue and that the taxpayers knew or had the means of knowing that the transactions formed part of such a fraud. The case arose out of investigations into missing trader intra Community ('MTIC') VAT fraud involving the criminal abuse of the zero rating of movements to and from the rest of the European Union.

Customs contended that the taxpayers were 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 Customs in MTIC cases of this kind was to demonstrate that, on the balance of probabilities, there had been a fraudulent tax loss and that the transactions giving rise to that loss were connected to the taxpayers' transactions. It was then for the taxpayer to show that it nevertheless had a right to reclaim VAT because it did not know and could not have known of the connection to fraud. At a directions hearing, the court gave directions for consolidation of the appeals by the taxpayers and required both parties to serve their witness statements by a specified time and date. At the hearing of the substantive appeal, before the tribunal, the taxpayers made an application under r. 19(4) and (5) of the Value Added Tax Tribunals Rules 1986 to enter judgment for the taxpayers on the grounds that it was impossible to obtain a fair hearing of the issues between the parties by reason of the failure of Customs 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 Customs of an order made on 12 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 the application, counsel for the taxpayers had produced a skeleton argument and a bundle of authorities. That course was calculated to take Customs by surprise and did so. The course adopted of applying for judgment was not compatible with the course which he had stated that he would be taking of challenging the admission of the evidence: if the taxpayers succeeded on the application under r. 19(4) and (5), questions of the admission of evidence became irrelevant. The tribunal refused the application. Because of the way the application had been made, Customs were unable to adduce evidence before the tribunal explaining the delay and the position regarding disclosure. The taxpayers appealed to the High Court.

Issue

Whether the tribunal had erred in its decision to refuse to enter judgment for the taxpayers.

Decision

Lightman J (dismissing the appeal) said that the appeal against the tribunal's decision on the application was hopeless. Such a draconian order was very much a last resort where a party's misconduct was of a serious nature and the prejudice to the applicant was not otherwise remediable. The tribunal had taken the view that those conditions were not satisfied. The decision was clearly correct and there could be no question of the court interfering with that decision.

The taxpayers had contended primarily that the alleged late disclosure and late serving of evidence would result in a delay in the conclusion of the proceedings and, if the taxpayers succeeded on the appeals, the repayment of any sum due to the taxpayers. The tribunal had all that well in mind and made plain its anxiety to expedite a final hearing and (to that 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 taxpayers however insisted on proceeding with an appeal to the court and the consequent vacation of the time slot.

The delay in the progress of the proceedings was not on the part of Customs alone. The most significant delay had followed from the insistence by the taxpayers on the (hopeless) appeal and the refusal without reasons to proceed with the hearing of the main appeals in the time available. The appeal was dismissed. There was no reason for interfering with the exercise of discretion by the tribunal. The decision was plainly correct.

In giving directions, the tribunal had to decide which of the outstanding appeals should be consolidated or otherwise heard together. In the absence of countervailing considerations, there had to be powerful reasons of expedition and economy why (so far as practicable) all related appeals were heard at the same time. There was plainly a degree of urgency in obtaining the final decision in these cases in view of the potential cash flow implications for taxpayers of being kept out of money to which they might have a claim.

In the current and all future appeals the tribunal had to 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 specified witnesses on which Customs wished to rely.

The presumption had to be that all relevant evidence should be admitted unless there was a compelling reason to the contrary. Problems of complying with any previous timetable for trial were no longer relevant. A timetable for further sequential witness statements (beyond the currently served witness statements) in default of agreement between the parties had to be directed. The tribunal could not (as it had proposed in the decision) decide to admit evidence on the basis that it could later reverse that decision if it considered it just. The tribunal had (at least in any ordinary case such as the present) to make a final decision either way. Pending such a final decision, the tribunal might find it necessary to allow evidence to be read and referred to before finally deciding on its admissibility. The availability of that course did not afford a green light to postponing a final decision on admissibility longer than was necessary. Reference had been made to the relevance and admissibility of convictions in 2000 and 2004 of one witness for MTIC fraud. Those convictions appeared to be of substantial potential significance. Much might turn on the role of that witness in the company and in relation to the transactions in question. His failure to give evidence on those and other issues might of itself be highly significant and invite adverse inferences.

Accordingly the court would not exclude at the trial as irrelevant the evidence of the convictions. Finally, it was not acceptable conduct in any civil proceedings to spring surprises on opponents. They were clearly repugnant to the overriding objective laid down in CPR, r. 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 was not limited to proceedings to which the CPR were applicable. The court fully accepted that taxpayers' counsel did not at the time appreciate that what he was doing was objectionable.

Chancery Division.
Judgment delivered 20 July 2007.