UT/2022/000157 - [2024] UKUT 00346 (TCC)

As we have described above, it is HMRC’s case that SA and Global were involved in the fraudulent diversion of alcohol into the UK from the EU by a process known as “inward diversion fraud” resulting in unpaid VAT and excise duties. There is a description of inward diversion fraud in the Decision at FTT [7]. This description was taken from the decision of Judge Falk, as she then was, in Dale Global Ltd v HMRC [2018] UKFTT 363 (TC) at [50] to [52]. We set out those paragraphs for ease of reference below.

In the FTT Decision, the FTT made extensive findings about the background to these appeals. We will refer to some of the detail of the FTT’s findings later in this decision, but we have set out below a summary of the factual background in order to provide some context for our explanation of the various issues.

SA was incorporated in Belize on 10 June 2004 (FTT [132(3)]). At all material times, SA was controlled by Mr Malde.

SA engaged in trading goods, principally alcohol (wine and beer), between 2004 and 2011 (FTT [266]).

As part of its trade, SA purchased beer and wine in other EU member states from traders and wholesalers and sold those goods to Corkteck Limited (“Corkteck”), a UK registered alcohol trader, which was also controlled by Mr Malde (FTT [132)], [148], [266], [267]). In particular, between 2004 and 2007, SA purchased beer and wine from an unconnected company, York Wines Limited (“York Wines”), and sold those goods to Corkteck (FTT [266, [267]).

It is HMRC’s case that the sales to Corkteck were the “cover loads” as part of an inward diversion fraud, and that SA owned the alcohol that was supplied to Corkteck in the UK. It is also HMRC’s case that SA owned other alcohol which was sold in the UK as the “mirror loads”, as evidenced by sums deposited in SA’s bank accounts. The FTT found that SA made supplies of beer and wine in the UK (FTT [637]).

York Wines was subsequently the subject of a criminal investigation, referred to as “Operation Rust”, which resulted in the conviction, amongst others, of its sole director, Mr Kevin Burrage, for cheating the public revenue as a result of involvement in inward and outward diversion fraud (FTT [132(24)], [132(25)], [299]).

Global was incorporated in Panama on 16 February 2011 (FTT [132(7)]). It is HMRC’s case that Global was, at all material times, controlled by Mr Malde, although for reasons to which we shall return, the FTT made no finding of fact on that question.

At some point in 2011, Global took over the trade of SA and began trading in alcohol and other goods. As part of that trade, Global purchased alcohol from traders based in other EU member states (FTT [266], [300]). It sold alcohol to various purchasers. Some of the sales were made via Adrena sp. z o. o. (“Adrena”), a Polish company, to Corkteck in the UK. It is also HMRC’s case that Adrena was, at all material times, controlled by Mr Malde, although the FTT made no finding of fact on that question.

Once again, it is HMRC’s case that the sales to Corkteck were “cover loads” as part of an inward diversion fraud, and that Global owned other alcohol which was sold in the UK as the relevant “mirror loads”, as evidenced by sums deposited in Global’s bank accounts. For reasons to which we shall return, the FTT found that there was insufficient evidence that Global was the owner of alcohol that was supplied in the UK (FTT [644]).

HMRC launched an investigation into the activities of SA and Global. As a result of that investigation, HMRC concluded that SA and Global were controlled by Mr Malde, and that SA and Global had evaded VAT and excise duties on alcohol supplied in the UK by falsely declaring that the goods were destined for other EU countries or were in duty suspension.

As a result of their enquiries, HMRC issued the following decisions and assessments to SA, Global and Mr Malde.

In relation to SA:

In a letter dated 16 July 2015:

HMRC informed SA that it was liable to be registered for VAT for the period from 1 December 2004 to 26 March 2012 under section 3 of and Schedule 1 to the Value Added Tax Act 1994 (“VATA”);

HMRC assessed the amount of VAT payable by SA in respect of that period in the amount of £11,749,664.22 by a “best judgment” assessment under section 73 VATA.

In a letter dated 20 July 2015, HMRC issued an assessment to SA under section 12(1) Finance Act 1994 (“FA 1994”) in respect of unpaid excise duty for the period from 1 December 2004 to 26 March 2012 in the amount of £19,583,773.

In a letter dated 8 December 2016, HMRC informed SA that they intended to charge a civil evasion penalty under section 60 VATA in the amount of £11,162,180 as a result of SA’s dishonest failure to register for VAT and to submit VAT returns for the period from 1 December 2004 to 26 March 2012 (the “civil evasion penalty”). HMRC informed SA that they intended to recover 100% of the civil evasion penalty from Mr Malde by notice under section 61 VATA. As a result, HMRC would not be seeking to recover any of the civil evasion penalty from SA.

In relation to Global:

In a letter dated 16 July 2015:

HMRC informed Global that it was liable to be registered for VAT between 1 April 2012 and 30 June 2015 under section 3 of and Schedule 1 to VATA;

HMRC assessed the amount of VAT payable by Global in respect of that period in the amount of £8,921,064.64 under section 73 VATA;

Also on 16 July 2015, HMRC issued a penalty assessment to Global under section 123 of and paragraph 1 of Schedule 41 to the Finance Act 2008 (“FA 2008”) in the sum of £8,698,035.42 (the “registration penalty”) in relation to the failure of Global to notify HMRC of its liability to register for VAT for the period from 1 April 2012 to 30 June 2015.

In a letter dated 20 July 2015, HMRC issued an assessment to Global under section 12(1) FA 1994 in respect of unpaid excise duty for the period from 1 April 2012 to 30 June 2015 in the amount of £14,184,948.

On 11 October 2017, HMRC issued a penalty assessment to Global under Schedule 24 to the Finance Act 2007 (“FA 2007”) in the sum of £8,698,035.42 in relation to an inaccurate VAT return submitted on 12 October 2016 (the “inaccuracy penalty”) (in the alternative to the registration penalty).

On 21 December 2017, HMRC issued a penalty assessment to Global in the sum of £13,830,324 pursuant to paragraph 4 Schedule 41 FA 2008 for handling goods subject to unpaid excise duty (the “excise duty penalty”).

In relation to Mr Malde:

HMRC issued a personal liability notice (“PLN”) to Mr Malde on 16 July 2015 pursuant to paragraph 22 Schedule 41 FA 2008, making Mr Malde liable for the registration penalty.

HMRC issued a PLN to Mr Malde on 11 October 2017, pursuant to paragraph 19 of Schedule 24 to the Finance Act 2007 (“FA 2007”), in the alternative to the registration penalty, making Mr Malde liable for the inaccuracy penalty.

HMRC issued a director’s liability notice (“DLN”), dated 8 December 2016, to Mr Malde pursuant to section 61 VATA, making Mr Malde liable for the payment of the civil evasion penalty.

HMRC issued a PLN to Mr Malde on 21 December 2017, pursuant to paragraph 22 Schedule 41 FA 2008, making Mr Malde liable for the excise duty penalty.

SA did not appeal against the decision that it was liable to be registered for VAT and the related VAT assessment (at [17(1)(a)] and [17(1)(b)] above), or the excise duty assessment (at [17(2)] above), or the civil evasion penalty (at [17(3)] above).

Global did not appeal against the inaccuracy penalty (at [18(4)] above) or the excise duty penalty (at [18(5)] above). Global appealed to the FTT against the other decisions and assessments.

Mr Malde appealed to the FTT against each of the PLNs and the DLN that were issued to him.

In its statements of case for each of the relevant appeals, HMRC pleaded that both SA and Global “were involved in alcohol diversion fraud; selling large quantities of beer and wine in the UK without accounting for VAT and excise duty”.

Global’s appeals against the VAT assessment (at [18(1)(b)] above) and the excise duty assessment (at [18(3)] above) could not be entertained by the FTT unless either Global deposited the disputed amount of tax or excise duty with HMRC or HMRC was satisfied or the FTT decided that the requirement to deposit that amount would cause Global to suffer hardship (section 83(3) and (3B) VATA and section 16(3) FA 1994). Global applied to the FTT for a decision that it would suffer hardship if it were required to deposit the tax or the duty. That application was refused by the FTT in a decision dated 26 October 2016 (Footnote: ³).

As a result, the matters before the FTT were in summary as follows:

the appeals of Global against:

the decision of HMRC, contained in the letter dated 16 July 2015, that Global was liable to be registered for VAT between 1 April 2012 and 30 June 2015;

the registration penalty issued by HMRC on 16 July 2015;

the appeals of Mr Malde against:

the PLN issued by HMRC on 16 July 2015 in respect of the registration penalty;

the PLN issued by HMRC to Mr Malde on 11 October 2017 in respect of the inaccuracy penalty;

the PLN issued by HMRC to Mr Malde on 21 December 2017 in respect of the excise duty penalty; and

the DLN, dated 8 December 2016, issued by HMRC to Mr Malde pursuant to section 61 VATA in respect of the civil evasion penalty.

Before we turn to the FTT Decision, we will set out some of the legislative background.