HMRC fails to discharge burden of proof in appeal against personal liability notices

In Neegum Sheth and Sam Ghazi v HMRC [2022] UHKFTT 0167 (TC), the First-tier Tribunal (FTT) held that HMRC was unable to impose personal liability notices on senior staff of a company that was allegedly involved with MTIC fraud and had claimed zero rating.

Background

Neegum Sheth and Sam Ghazi (the Appellants) had been a director and 'operations director', respectively, of Aircall International Ltd (AIL), a company that had claimed zero-rating in respect of 28 dispatches of mobile telephones.  On 2 November 2015, HMRC notified AIL of assessments of output VAT under section 73, Value Added Tax Act 1994, in the sum of £2,959,239 plus interest.  The following day, AIL entered creditors' voluntary liquidation.  On 2 December 2015, AIL (by this point controlled by a liquidator) submitted a notice of appeal of the denial of zero-rating and assessment.  In August 2016, the appeal was withdrawn by AIL due to lack of funds to pursue it.  In July 2017, HMRC notified a penalty calculation summary to AIL and in August 2017 notified it of a penalty assessment in the sum of £1,760,747.19 and issued personal liability notices (PLNs) to the Appellants.  In September 2017, the liquidator of AIL wrote to HMRC to say that he had not received AIL's penalty assessment.  As a result of deductions for disclosure and a typographical error in HMRC's original calculations, the total assessment and the PLNs were reduced, with the result that HMRC sought £877,921.87 from each  Appellant.

The Appellants appealed the PLNs, on the grounds that they had neither the knowledge of the fraudulent connection of AIL's transactions or the means to acquire it at the relevant time, their behaviour had not met the threshold for 'deliberate' behaviour and they had undertaken sufficient and reasonable due diligence. They put HMRC to proof in respect of their allegation of fraudulent evasion of VAT.

Legislation and relevant case law

Paragraph 1, Schedule 24, Finance Act 2007 (Schedule 24) provides for the imposition of a penalty on a person who gives HMRC one of a specified class of documents that contains an inaccuracy which amounts to, or leads to, an understatement of a liability to tax, a false or inflated statement of a loss, or a false or inflated claim to repayment of tax, where the inaccuracy is 'careless' or 'deliberate'.  

Paragraph 19 of Schedule 24 provides that 'Where a penalty under paragraph 1 is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company, the officer is liable to pay such portion of the penalty (which may be 100%) as HMRC may specify by written notice to the officer'. The term 'officer', for these purposes, includes a director, a shadow director, a manager, or a secretary.

In Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL C-439/04, the European Court of Justice (ECJ) held that in the context of MTIC fraud, traders who 'knew or should have known' that the transactions in which they were engaging were connected to MTIC fraud would not be entitled to reclaim input tax.  

The ECJ in Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága C-273/11, confirmed that where the purchaser had committed VAT fraud, the vendor's right (here, AIL's right) to exemption from VAT was conditional on its good faith.

FTT decision

The appeal was allowed.

HMRC argued that the Appellants' case relating to the underlying assessments imposed on AIL, should be struck out on the ground that the Appellants had previously had the opportunity (as director and operations director of AIL) to argue that the input tax was recoverable and as the appeal had been withdrawn it would be an abuse of process to allow the the point to be taken now.   

The FTT refused the application to strike out, since HMRC had been on notice that the basis of the underlying denial of the zero-rating was challenged for at least two years and it was incumbent on it to apply for a strike-out explicitly, and at an earlier stage in the proceedings.  Further, it was intrinsic to the consideration of the case for the FTT to consider the level of the Appellants' alleged knowledge and to what it related.  It was not therefore in the interests of justice for the appeal to be struck out.  

The FTT then considered the substantive issues, namely (1) whether there was an inaccuracy in AIL's returns; and (2) if so, whether it was deliberate, which in turn hinged on whether AIL, through its directors, knew that the relevant transactions related to a fraud and whether AIL took every reasonable step within its power to prevent its own participation in that fraud, and whether AIL's conduct was properly attributable to each of the Appellants.

The FTT noted that it had been provided with more than 4,500 pages of evidence.  Much of the evidence from HMRC related to other proceedings (which the FTT described as 'not a helpful way of presenting the case') and unsubstantiated assertions that provided 'little assistance' to the FTT in its fact-finding role.  

The FTT concluded that this was insufficient to discharge the burden of proof (which rested with HMRC) to show that there were inaccuracies in the returns and the PLNs should therefore be cancelled.

Comment

This decision highlights the importance of factual evidence before the FTT. Crucially,  the burden of proof was on HMRC and not the Appellants. It would appear from the published decision that HMRC spent a great deal of time explaining the fraudulent behaviour of a third party overseas business in the supply chain, rather than concentrating on the actions of AIL and its directors. Ultimately, the FTT concluded that HMRC had not provided enough evidence to establish that the directors had deliberately underpaid VAT and therefore the PLNs had to be cancelled. In order to be successful in cases of this nature,  HMRC must provide conclusive evidence of fraud.

The decision can be viewed here.