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High Court holds that HMRC's winding up petition should be dismissed as an abuse of process.

03 April 2014

The High Court (David Donaldson QC) has held in Enta Technologies Limited v HMRC [2014] EWHC 548 (Ch), that where a winding-up petition was brought by HMRC ...

… based on the non-payment of tax raised in assessments and the taxpayer's appeal against those assessments was pending, the winding-up court should refuse to adjudicate on the merits of the appeal and should leave that question to be dealt with by the First-tier Tribunal (Tax Chamber) ('FTT').

Background

Enta Technologies Limited ('Enta') carries on business as a distributor of personal computers and related products. Most of the business of Enta is as a distributor to UK retail outlets of personal computers and related hardware and software. The Court was informed that it is currently one of the UK's leading IT distributors, dealing with over 60 suppliers including Microsoft. A relatively minor part of the business of Enta was in the buying and reselling of stock on what was described as a back to back basis. This included the export sales of high value, low bulk, products such as computer chips and drives. In relation to such transactions the sale is zero rated for VAT leaving the seller with a claim against HMRC for the repayment of the input tax. Enta made claims for the repayment of input tax on such upstream purchases in its VAT returns. Since Enta faced a substantial net liability to HMRC in respect of other trading, these repayment claims would in effect reduce, or substantially eliminate, that liability.

HMRC had carried out an investigation into Enta's VAT returns. This had resulted in the making of various assessments denying the repayment of Enta's claims and required payment by it of a sum of in excess of £35 million. The first batch of assessments were based on HMRC's view that the transactions were connected to tax losses arising from Missing Trader Intra- Community ('MTIC') frauds. These assessments were appealed and were progressing towards a hearing before the FTT in the usual way. The second batch of assessments also reflected the view of HMRC that the transactions were connected to MTIC frauds of which Enta knew, or ought to have known, and it was accepted by HMRC that the issues and evidence involved in the second batch of cases overlapped with those in the first batch of appeals to the extent that a decision in favour of HMRC on those appeals was likely to be determinative of the appeals in the second batch of cases. A third batch of assessments had been made based on non-MTIC matters and an application had been made to the FTT for permission to submit the appeals out of time.

Winding-up petition

Before the application to the FTT for permission to appeal out of time had been determined by the FTT, HMRC presented a winding-up petition against Enta based on the non-payment of assessments in the second and third batches referred to.

The winding-up petition was stayed, pending a decision by the FTT in relation to the application for permission to appeal out of time.

Application to the FTT for permission to appeal out of time

The FTT granted permission to Enta to appeal the third batch of assessments out of time and in doing so stated that it was not persuaded by HMRC's argument that the appeals were hopeless. The FTT further ordered that the appeals against the assessments in the second batch should be stayed until the determination of the MTIC appeals in the first batch.

High Court decision

In considering the substantive issue, it was noted by the Court that it was well established that the winding-up jurisdiction was not to be used to resolve real disputes as to the existence of a debt and that a petition should be dismissed as an abuse of process and its advertisement restrained by injunction if the debt relied upon by the petitioner was in good faith disputed on substantial grounds (Arena Corporation Ltd [2004] BIPR 415 [53]).

The Court noted that in VAT cases, the picture was complicated by the fact that the existence of the assessment created a statutory debt which remained extant unless and until any appeal to the tax tribunal was successful and the assessment cancelled or adjusted. The judge referred to the fact that Rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, provides that the FTT may strike out the whole or part of proceedings before it if: "the Tribunal considers there is no reasonable prospect of the appellant's case, or any part of it succeeding".  

Having particular regard to the power contained in Rule 8(3)(c), the judge concluded that the appropriate forum to consider whether the appeal had real prospects of success must be the FTT itself. The adjudication on the correctness of the tax assessments had been entrusted to that specialist tribunal. In such circumstances, the judge was of the view that the winding-up court should not adjudicate on the prospective merits of the appeals and leave such questions to be dealt with by the FTT. The need for such abdication or deference by the winding-up court was compounded in the present case by the fact that the FTT had already ruled that the appeals were not "hopeless". The judge held that the petition should be dismissed as an abuse of process and/or as a matter of discretion and the advertisement restrained.

Comment

This case highlights HMRC's increasingly aggressive approach to the collection of tax. However, it is clear from this decision that the appropriate procedure in cases involving the appeal of assessments is for HMRC to attempt to strike out the appeal in the FTT, under Rule 8(3)(c), before attempting to issue a winding-up petition against the taxpayer. Any attempt by HMRC to circumvent this route should be vigorously resisted by taxpayers.

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