Should taxpayer have known transactions were connected to fraud?
Jan Garioch CA discusses a recent case, Revive Corporation Ltd v HMRC where the Upper Tribunal decides whether the FTT gave inadequate reasons for its decision and failed to apply the correct approach to the facts it found.
In Revive Corporation Ltd v HMRC the Upper Tribunal (UT) heard an appeal against the First Tier Tribunal (FTT) decision that Revive Corporation Limited (RCL) should have known that it was involved in transactions which were connected to fraud.
The background is that RCL was approached by a businessman who intended to buy electronic goods subject to VAT and sell them on without VAT to a purchaser belonging outside the UK. The businessman claimed to be unable to afford the cash flow cost of waiting for input VAT to be refunded by HMRC. Consequently, he proposed that RCL should step into the transaction by buying the goods from his company and selling them on to the customer belonging outside the UK.
For the purposes of the appeal to UT, the pertinent parts of the FTT’s judgement are that it held the only reasonable explanation for the deals challenged by HMRC was that they were connected with fraud and, furthermore, RCL should have known that they were connected with VAT fraud.
Was the FTT’s decision clear?
RCL appealed to the UT on the grounds that the FTT gave inadequate reasons for its decision and that it had not applied the correct approach to the facts that it found. The UT agreed to hear the appeal, and it is clear that it took issue with aspects of the FTT’s record of the case. The UT stated it was difficult to distinguish between uncontentious evidence which was not challenged in cross examination and contentious evidence which may well have been challenged before the FTT but with that challenge inadequately recorded.
Did the FTT apply the correct principles?
The FTT’s conclusion that RCL should have known that the relevant transactions were connected with fraudulent evasion came under the spotlight and two principles of law were put to the test.
Firstly, the ‘should have known’ condition would not be satisfied if there were a reasonable explanation for the transactions other than fraudulent evasion. Secondly, it is insufficient to show that it is more likely than not that the transactions were connected with evasion. It has to be shown that the transactions were connected with evasion and RCL should have known that.
Given that the UT found it difficult merely to determine whether evidence was regarded as controversial or not, it is unsurprising that the FTT’s lack of factual findings failed to justify its dismissal of the alternative explanation of the transactions submitted by RCL. HMRC argued in vain that the FTT’s reasoning was clear; i.e. that it was unreasonable to think that a reputable businessman of good standing in his industry would be unable to finance the cash flow impact of input VAT by simply getting a bank loan. The UT was not satisfied. The FTT should have explained why it rejected RCL’s explanation as unreasonable. Consequently, the appeal succeeded and the case was remitted back to be heard by a differently constituted tribunal and should be limited to a determination of whether RCL ‘should have known’ that the challenged deals were connected with VAT fraud.
Justice must be seen to be done
This case spotlights that justice has to be seen to be done. HMRC pleaded in vain that RCL’s prior experience of MTIC fraud and denial of VAT repayments was so damning as to render it unnecessary to consider its alternative explanation. Although the UT agreed with them that there is no single correct way to structure a decision, it baulked at HMRC’s contention that a technical failure to give reasons cannot overturn a decision which was the only possible conclusion because the alternative was unreasonable. Instead, the UT regarded it as fundamental that a judgement has to allow the parties to understand why they have won or why they have lost.