HMRC Dishonesty Allegation "seriously flawed"
The First-tier Tribunal (Tax Chamber) ("FTT") has ruled, in Citibank NA v Revenue and Customs Commissioners, that HMRC's pleadings were "seriously flawed".
When alleging fraud against a taxpayer, HMRC must clearly plead that the taxpayer had a dishonest state of mind.
On 27 August 2013, HMRC issued an assessment to Citibank NA (the Appellant) for over £10m in respect of VAT on sales of European Emissions Allowances, in respect of which HMRC was of the view it was not entitled. The Appellant appealed to the FTT.
In its Statement of Case ("SOC") HMRC said:
"[HMRC] contend that the appellant’s transactions formed part of an overall scheme to defraud the Revenue, that the scheme involved an orchestrated and contrived series of transactions, and that there were features of those transactions which demonstrate that the appellant knew or ought to have known that this was the case…”
In response, the Appellant requested Further and Better Particulars from HMRC in respect of these allegations. HMRC did not respond substantively to the Appellant's request and the issue came before the FTT to resolve.
The Appellant contended that there were inferences of fraud in HMRC's SOC, but that fraud had not been clearly pleaded. The Appellant argued that the SOC lacked necessary detail, and that HMRC had failed to provide that detail upon request. The current pleadings therefore prejudiced the Appellant by failing to provide certainty as to what was being alleged against it.
HMRC contended that no amendment to their SOC was needed as it was sufficiently particularised and denied that dishonesty had been pleaded at all. HMRC argued that they had not used the word "dishonesty" and had merely alleged that the Appellant had knowledge that the transaction was connected to a fraud. In any event, HMRC claimed that the special rules that applied to pleadings of fraud in the courts did not necessarily apply to the FTT.
The FTT confirmed that whilst the strict rules of pleading which apply in the courts do not apply to litigation before the FTT, the rules in court proceedings on what should be pleaded are a guide to what a statement of case in the FTT ought to contain. Gamatronic (UK) Ltd was applied by the FTT, specifically that: "parties should not have to dig behind what is pleaded to detect what is alleged (particularly where dishonesty or comparable impropriety is alleged)… Its meaning should be plain to the court as well as other parties".
The FTT was of the view that in relation to cases where fraud is alleged, an appellant is entitled to know the particulars on which the allegation is based. A pleading of fraud should thus be made plain in the statement of case, or else the FTT ought to proceed as if dishonesty is not alleged.
The FTT agreed with the Appellant that dishonesty had been implied in the wording of HMRC's pleading, specifically by alleging that the Appellant knew its transaction was connected to MTIC fraud. The FTT confirmed that an allegation that an appellant "knew its transactions were connected to fraud", had always been considered by the FTT, in MTIC cases, to be a clear pleading of dishonesty.
As a result, the FTT found that HMRC's position on dishonesty was not clear. HMRC had either intended to allege behaviour amounting to dishonesty, but failed to plead it with clarity, or HMRC did not intend to allege behaviour amounting to dishonesty but nevertheless insinuated it.
The FTT therefore advised HMRC to apply to amend its SOC to make it clear whether or not it is alleging a dishonest state of mind on the part of the Appellant. If no amendment was made, HMRC would not be able to invite the FTT to find that the Appellant knew:
(1) its transactions were contrived,
(2) the transactions facilitated fraud by others, and
(3) its transactions were connected to fraud.
Even though the strict rules in relation to pleading fraud do not necessarily apply to litigation before the FTT, an allegation of fraud is a serious matter and such allegations made by HMRC should be clear and detailed enough to enable the appellant taxpayer to know the particulars on which the allegation is based. A pleading of fraud by HMRC must be made plain in their statement of case. Failure to comply with this requirement is likely to lead to the FTT proceeding on the basis that dishonesty is not alleged.
  UKFTT 1063 (TC).
  EWHC 3287 (QB).
 Missing Trader Intra-Communication Fraud.