HMRC left in poor spirits following severe rebuke from the Tribunal
In Sintra Global Inc and Parul Malde v HMRC  UKFTT 00365 (TC), the First-tier Tribunal (FTT) upheld a series of appeals against decisions of HMRC relating to non-payment of VAT, excise duty and associated penalties, including personal liability notices (PLNs) and a director’s liability notice (DLN) and in so doing criticised HMRC's evidence and its investigation.
The first appellant, Sintra Global Inc (Global) and the second appellant, Parul Malde (Mr Malde), appealed against decisions of HMRC relating to non-payment of VAT, excise duty and associated penalties, including PLNs and a DLN, which HMRC contended had arisen as a result of inward diversion fraud, ie the fraudulent diversion of alcohol into the UK from the European Union and its subsequent sale in the UK, by Global and a company which was incorporated in Belize, Sintra SA (SA), both of which HMRC claimed were controlled by Mr Malde.
HMRC had carried out investigations into inward diversion fraud involving various companies with which entities associated with Mr Malde had traded. As a result of these investigations criminal convictions had been secured against various third parties for cheating the public revenue and money laundering offences.
In outline, the fraud perpetrated by these other companies and individuals involved alcohol originating in the UK being supplied under duty suspension to warehouses in Europe (principally in France). Some of the alcohol was consigned back to the UK, still under duty suspension under an Administrative Reference Code (ARC) (required for movements of suspense goods within the Excise Movement Control Scheme (EMCS)) despite purportedly being released for consumption in other European countries and duty paid on the goods at lower rates. Several consignments of alcohol (mirror loads) would be moved to the UK under the same ARC (which remained valid for a period of time), until either the ARC expired or a consignment was intercepted by HMRC. The mirror loads were typically sold for cash immediately following their arrival in the UK (termed 'slaughtering'), and the UK customers created false paper trails to give the impression that the alcohol had been purchased legitimately.
In 2015, HMRC had obtained a without notice freezing injunction from the High Court against Mr Malde, on the basis that it had 'established' that a third party had transferred alcohol from its UK warehouse to its warehouse in France, following which it would be sold to SA and smuggled back into the UK by SA or Corkteck Ltd (a company associated with Mr Malde).
HMRC contended that the appellants had participated in an inward diversion fraud involving SA. It issued a decision that Global was liable to be registered for VAT during the relevant period, on the basis that it had 'slaughtered' the loads in the UK (and had received significant cash payments that HMRC claimed related to UK alcohol sales), and imposed penalties for its failure to so register and for handling of goods subject to unpaid excise duty. It also issued PLNs and DLNs to Mr Malde, in respect of these penalties.
Global and Mr Malde appealed to the FTT.
The appeals were allowed.
A significant volume of evidence was led before the FTT, and much of the lengthy decision comprises a review and assessment of that evidence.
The FTT noted that the burden of proof was on HMRC both in connection with the penalty assessments and the allegations of fraud. HMRC was required to prove its case on the balance of probabilities (rather than to the criminal standard of beyond reasonable doubt).
The FTT considered that, on balance, SA had been the owner of some of the alcohol smuggled into and supplied in the UK and should therefore have been registered for VAT. However, there was no evidence that Global owned goods supplied in the UK. Even if it had been knowingly involved in illegality by selling alcohol in the EU to UK traders, or to those that Global knew intended to smuggle the goods, this was not enough to support the penalties that HMRC had issued. In the view of the FTT, other corporate entities had owned the alcohol seized and supplied the alcohol sold in the UK in the supply chains in which Global had been involved. The FTT concluded that Global was not liable to be registered for VAT and therefore all penalties issued in respect of Global and the associated DLNs and PLNs fell away.
The FTT concluded that, on the evidence before it, SA was controlled by Mr Malde. It therefore had to consider the validity of the DLN that had been issued against Mr Malde in respect of the civil evasion penalty charged against SA. The assessment against SA had been issued on a 'best judgment' basis. However, in the view of the FTT, HMRC in general and Mr Foster (the lead HMRC investigating officer) in particular, had taken a deliberate decision to ignore bank statements relating to one of the companies involved in the alleged fraud. The FTT considered that this failure was a grave error. Counsel for the appellants suggested that this failure was a result of a blinkered approach to the investigation – HMRC had formed a view and ignored evidence that did not support that view. This meant that the penalty assessment against SA could not have been made to the best of the officer's judgment. Because the assessment was the foundation of the DLN, the DLN also fell away.
The FTT's criticism of much of HMRC's evidence and the witnesses who gave it is noteworthy. While some of the officers are described as having given 'credible' and 'fair-minded' evidence – as should be the case for all witnesses, and in particular those giving evidence on behalf of a public authority – this description does not apply across the board. One of HMRC's witnesses is described as having given evidence that was 'inconsistent to the extent of being misleading' and another as 'reluctant to accept anything put to him that did not appear to reflect well on HMRC in general or [another HMRC officer] in particular'. The lead officer in the investigation was described by the FTT as being frequently unable to respond substantively to questions and when he was able to respond, as giving answers that were 'frequently evasive, often obstructive and on occasions inconsistent, contradictory and misleading'. A further HMRC witness was 'obstructive' in cross-examination and another was described by the FTT as 'an unhelpful witness whose stock answer to almost every question was that she "cannot recall at this time"'. Further HMRC witnesses were of limited value to the FTT as they were unable to recall much of the detail or had adopted the statements of their predecessors. Two of HMRC's witnesses were adjudged by the FTT to be incapable of distinguishing between a company and its shareholders (which was a key element in HMRC's decision-making).
For the FTT to note that 'had HMRC, and Mr Foster in particular, taken a less myopic approach to this case, particularly with regard to Mr Malde, from the commencement of their investigations we may well have reached entirely different conclusions' is a serious criticism and one that should have systemic implications for HMRC's investigative practice and its approach to evidence before the FTT.
It is to be hoped that HMRC and in particular the officers involved in this case, will reflect on the FTT's critical comments and adapt their approach accordingly.
The decision can be viewed here.