Court strikes out HMRC’s claim in alleged VAT fraud
In the recent decision of the High Court (Warren J) in the case of Revenue and Customs Comrs v Sunico A/S and ors  All ER (D) 172, which involved a claim brought by HMRC alleging conspiracy to deprive HMRC of VAT through missing trader fraud, the Court ruled that the defendants were entitled to summary judgment and struck out HMRC’s claim.
HMRC alleged a conspiracy by a number of defendants to deprive HMRC to deprive HMRC of millions of pounds of VAT. HMRC’s pleading alleged that in various transaction chains between August 2004 and January 2006, each of the defendants fraudulently conspired with various persons involved in the claims and with each other to divert monies that were properly payable to HMRC, to the first defendant company (‘Sunico’) and later to a number of the other defendants, with the object of inflicting harm on HMRC as an end in itself or as a means to another end, to injure HMRC by unlawful means. HMRC amended their particulars of claim and alleged that the defendants had been involved in the negotiation of a ‘commission agreement’ on behalf of PT Naina Limited, which it was alleged was used as a vehicle for dividing the proceeds of the fraud and that they had been involved in certain arrangements which had not been bona fide commercial arrangements. HMRC did not expressly allege that the commission agreement was a sham. The amended particulars of claim did not indicate which of the conspirators was ultimately to share in the proceeds of the fraud, or what shares. The defendants contended that the pleadings in respect of each of them was inadequate and applied to the court under CPR 24, for summary judgment dismissing the claims against them. HMRC sought an order from the Court to re-amend their amended particulars of claim.
The issues before the Court were whether an arguable case had been established against the defendants and whether HMRC ought to be granted permission to amend their particulars of claim.
The Court’s decision
The Court confirmed that it was a settled principle that there are two separate aspects to the requirements relating to the pleading of fraud, namely:
(1) there had to be an express allegation of fraud; and
(2) a defendant was entitled to know from the pleadings the fraud which he was alleged to have perpetrated and the allegations of fact which were made against him in order to establish the fraud alleged as knowledge was of the essence of fraud.
Usually the knowledge of a defendant was to be inferred from all of the facts and accordingly, a plea of fraud was not to be struck out if the pleading alleged:
(1) fraud or dishonesty;
(2) the primary facts relied on to found an inference; and
(3) the extent of the knowledge of the fraud which it was said was to be inferred.
In the instant case, the Court was of the view that the evidence before it was insufficient to support the allegation that the defendants had negotiated the commission agreement on behalf of PT Naina Limited. As that allegation was the only allegation pleaded in support of the fraud claim, the inferences sought to be drawn by HMRC was unsustainable. Further, nothing had been pleaded by HMRC on which reliance was placed to demonstrate that the defendants had been a party to a conspiracy or in any other way dishonest. The Court concluded that, in all the circumstances, HMRC should not be allowed to amend their case. Accordingly, in relation to the conspiracy claim as pleaded by HMRC in the amended statement of claim, the defendants were entitled to summary judgment against HMRC and HMRC’s application to re-amend their particulars of claim was dismissed.
It is of some concern that HMRC appear to be incapable of satisfying the relatively straightforward requirements relating to the pleading of fraud. This was a case involving alleged fraud on a large scale where it was claimed that the defendants had conspired to deprive the Exchequer of millions of pounds of VAT. It is not unreasonable to expect a government department, with the resources that HMRC has available to it, to be capable of pleading its case properly. In this instance, because of the shortcomings of HMRC, the defendants have succeeded by ‘default’ and have not had to defend the claim that was brought against them. This decision is an embarrassment for HMRC and it is to be hoped that appropriate lessons have been learnt.