UT (Tax & Chancery) UT/2022/000099 - [2024] UKUT 00184 (TCC)

This case has a long history. On 1 October 2012, HMRC denied the Appellant its right to deduct input tax of £462,854 on purchases of soft drinks during VAT periods 03/11 to 06/11. The suppliers were Irwin Enterprises (“Irwin”), Paul Magee Wholesale Beverages (“Magee”), and PCB Logistics Limited (“PCB”). Around 90% of the denied VAT related to Irwin, a company owned and controlled by Mr Fearghal Keenan.

HMRC denied the right to deduct on the basis that the Appellant knew or should have known its transactions were connected to the fraudulent evasion of VAT, following the principle set out by the ECJ in Cases C-439/04 and C-440/04 Axel Kittel v Belgium; Belgium v-Recolta Recycling SPRL, EU:C:2006:446.

The Appellant’s appeal was heard by the FTT (Judge Cannan and Mr Adrain) in November 2015 (“the First Decision").

The Appellant appealed that decision to the Upper Tribunal, see [2016] UKUT 342 (TCC)) (Arnold J and Judge Hellier), but was unsuccessful; this was followed by a further appeal to the Court of Appeal in Northern Ireland. On 9 May 2017, the Court of Appeal (McBride J and Gillen and Weir LJJ) held that it had been procedurally unfair for the FTT to have decided the appeal on the basis of a “third man theory”, in other words, a ground which had not been pleaded, without having given the Appellant “sufficient opportunity to respond to the new case”, see [2017] NICA 26. The Court remitted the appeal to a differently constituted FTT for rehearing, and subsequently awarded the Appellant all its costs to date.

After carrying out “substantial further work” on the Irwin deal chains, HMRC filed and served their Statement of Case for the remitted hearing; this repeated their earlier submission that the Irwin deals traced to fraudulent traders.

The Appellant applied to strike-out certain passages of that Statement of Case and/or to bar HMRC from putting forward what it said was “the self-same case that was rejected by Judge Cannan”. The application submitted that HMRC’s approach was an abuse of process “made more egregious by the fact that the Appellant is, because of the passage of time, at a serious disadvantage in attempting to call relevant evidence” in response. Mr Donaldson filed and served a witness statement in support of the application, in which he said the Appellant would be prejudiced if HMRC were permitted to repeat the deal chain submissions, because he was no longer able to call Mr Keenan to give evidence.

The strike-out application was dismissed by Judge McNall in a decision published on 13 June 2019 under reference [2019] UKFTT 385(TC). Judge McNall found that the Court of Appeal had remitted the case to be reheard “in its entirety”, and that HMRC were therefore able to put forward the same submissions about the Irwin deal chains.

The remitted hearing took place between October 2020 and February 2021 before Judge McNall and Mr Farooq. Mr Donaldson and his accountant, Mr Liban Ahmed of CTM Tax Litigation Ltd, both provided witness statements, gave oral evidence and were cross-examined. In the course of the hearing, HMRC accepted that the denial of input tax on certain deals could not be maintained, and the VAT in dispute accordingly reduced to around £380,000.

The FTT Decision was issued on 12 August 2021, under reference [2021] UKFTT 286 (TC). The FTT allowed the Appellant’s appeal in respect of the Irwin transactions on the basis that HMRC had failed to prove the deal chains, but dismissed its appeal against the Magee/PCB transactions. The FTT also made a number of findings about Mr Donaldson’s dishonesty and his approach to litigation. We return to these findings, and to the FTT’s criticisms of HMRC’s case in relation to the Irwin deals, later in our judgment.

On 30 September 2021, as a result of the FTT Decision, HMRC applied a £427,278 credit to the Appellant’s VAT account.