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

The FTT Decision sets out in considerable detail and at some length a description of the evidence before the FTT, the FTT’s views of that evidence and the witnesses, the FTT’s findings of fact, and details of HMRC’s investigation, before turning to the issues before the FTT and the FTT’s conclusions on them. We will address some aspects of the FTT Decision in more detail when we turn to the various grounds of appeal. However, for present purposes, we will set out a brief summary of the FTT Decision in order to provide some background to our discussion of the issues.

The FTT identified the issues before it as follows (FTT [4]):

The FTT began its decision by setting out an extensive summary of the evidence before it (FTT [8]-[131]). This summary included an outline of the evidence provided by the witnesses who had appeared before the FTT.

There were 24 officers of HMRC who gave witness evidence and who were cross-examined on their statements. In addition, the witness statements of a further 21 HMRC officers were not challenged, and their statements were admitted into evidence (FTT [108]).

The FTT criticised the evidence of some of the witnesses who appeared on behalf of HMRC. For example, the FTT was critical of the evidence of Mr James Dibb, an officer in HMRC’s Fraud Investigation Office – Organised Crime – Civil MTIC/Alcohol Team. Mr Dibb had undertaken much of the underlying analysis of how SA and Global operated. In the FTT’s view his evidence was “inconsistent to the extent of misleading” (FTT [27]).

The FTT reserved particular criticism for the evidence of Mr Dean Foster. Mr Foster was also a member of HMRC’s Fraud Investigation Service, Organised Crime – Civil MTIC/Alcohol Team. The FTT found that Mr Foster was responsible for the decisions which were the subject of most of the appeals, with the exception of the excise duty assessments (FTT [80]). The FTT found that Mr Foster was “unable to answer our questions in relation to many of the topics he had addressed in his first witness statement” (FTT [52]) and that his answers to questions were “frequently evasive, often obstructive, and on occasions inconsistent, contradictory and misleading” (FTT [53]).

The witnesses who appeared before the FTT also included Mr Malde, and two other witnesses, Mr Andrew Quay and Mr Steven Simmonite, Mr Malde’s tax adviser, who gave evidence on behalf of Global and Mr Malde. Another witness, Mr Eric van de Vondel, produced a witness statement, but did not appear in person. The FTT accepted his evidence albeit with reservations as to the weight that could be afforded to it (FTT [107]).

The FTT was also critical of Mr Malde’s evidence. It found much of his evidence was “inconsistent with statements that he had previously made in interviews and/or correspondence and as such casts doubt on its veracity” (FTT [83]).

The FTT set out its findings of fact in a lengthy section, which begins at FTT [132]. This section includes a limited agreed statement of facts followed by a description of the activities of the various companies over the relevant period. This description includes:

details of various seizures of alcohol by the UK Border Force between 1 July 2011 and 5 November 2013 (FTT [159]-[175]), noting, in relation to those seizures, that SA was designated as the owner of the relevant goods up to a date in 2011, and from 20 December 2011, Adrena was identified as the owner of the relevant goods (FTT [170]-[174]);

a description of the police investigation in relation to Operation Rust in relation to which Mr Malde was interviewed by the police (FTT [185]-[210]);

a description of the formation and operations of SA and Global in relevant periods, including Mr Malde’s authority to act on behalf of both companies and the operation of their bank accounts (FTT [212]-[265]);

details of the trading arrangements of both SA and Global in the relevant periods, as derived from HMRC’s enquiries (FTT [266]-[354]);

details of HMRC’s enquiries into commission payments made by SA and Global to Mr Malde between 24 March 2011 and 21 March 2014 in an aggregate sum of £2,991,794.84 (FTT [355]-[360]);

a description of evidence drawn from various criminal investigations including:

evidence from Operation Rust relating to the sale of alcohol by York Wines to SA (FTT [404]-[413]);

evidence from “Operation Banjax” – which resulted in the convictions of ten individuals for money laundering the proceeds of diversion frauds – which, HMRC say, relates to payments made to and by Global and other companies controlled by Mr Malde (FTT [414]-[436]);

evidence from “Operation Epsom”, a fraud “predicated on the sale of illicit alcohol” (FTT [437]-[456]);

details of interviews given by Mr Malde to HMRC on 1 December 2009, 10 December 2013, and 4 December 2015, the latter of which took place under the Practice Note 160 procedure and was also attended, amongst others, by Mr Simmonite and by Mr Malde’s solicitors (FTT [457]-[485]); and

a summary of the evidence given by Mr Simmonite relating to his analysis of the SAGE records of York Wines, on which HMRC rely in relation to the assessments on SA (FTT [486]-[510]).

The FTT then turned to the various assessments made by HMRC on SA, Global and Mr Malde. We will return to the detail of the manner in which HMRC computed the sums in the assessments and the penalty notices later in this decision. For present purposes, the following summary will suffice.

In the absence of information from SA, Mr Foster computed the VAT liability of SA for the period 1 December 2004 to 26 March 2012 for the purposes of the assessment under section 73 VATA in the following manner:

For periods for which this information was available, Mr Foster computed the ratio which the purchases of alcohol made by SA from York Wines (as taken from SA’s bank statements) bore to the total sales made by York Wines to SA as shown in its SAGE records (referred to as the “cash/bank ratio”).

Mr Foster applied that cash/bank ratio to the purchases of alcohol made by SA (as taken from SA’s bank statements) for other periods for which the SAGE records were not available to produce a figure of total purchases by SA for all periods.

Mr Foster applied a mark-up of 19.61% to that total figure to produce a total value of sales from which to calculate the VAT due. The mark-up was derived from the average gross profit ratio for wholesalers and cash and carry businesses provided by HMRC’s Business Information Unit. No allowance was given for input tax.

In the absence of information from Global, Mr Foster computed the VAT liability of Global for the period 1 May 2012 to 13 May 2014 for the purposes of the assessment under section 73 VATA by:

applying the same cash/bank ratio to the movements on the cash at bank figures derived from Global’s bank statements and, in some cases, allowing a discount of 10% for bank charges and non-trading expenditure, to produce a figure for the purchases of alcohol;

applying the same mark-up of 19.61% to that total figure to produce a total value of sales from which to calculate the VAT due. No allowance was given for input tax.

The civil evasion penalty on SA, the registration penalty on Global and the related DLN and the PLN were all calculated by reference to these figures. Mr Malde was treated by HMRC as a director or officer of SA and Global and the failures to register as being attributable to him (FTT [543]-[548]).

The inaccuracy penalty and the related PLN were issued by HMRC when Mr Malde submitted a “nil” VAT return for Global for the period 1 July 2012 to 30 June 2015 (FTT [549]).

The excise duty assessments were based entirely on the VAT assessments (FTT [554]).

Having set out the procedural issues and summarized the applicable legislation, the FTT addressed two preliminary issues before turning to the issues that it had identified as being before it: the first of these was the burden of proof; the second was the order in which it proposed to address the relevant issues.

As regards the burden of proof, the FTT noted that the “general position” on tax appeals was that it was “for the taxpayer to establish the correct amount of tax due” and that “this burden of proof does not change merely because allegations of fraud may be involved” (FTT [593]). The FTT cited the judgment of Mustill LJ in Brady (Inspector of Taxes) v Group Lotus Car Companies plc [1987] 3 All ER 1050 (“Brady”) in support of this principle.

The FTT noted two exceptions to this general position.

The first was where “fraud was an essential element of the basis of assessment” as in the case of missing trader intra-community (“MTIC”) appeals based on the Kittel principle or “where fraud or dishonesty is pleaded with full particularity”. In such cases, the burden was on HMRC (FTT [593]-[594]).

The second was that HMRC bore the burden of proving that a person is liable to a penalty on the grounds that Article 6 of the European Convention on Human Rights (“ECHR”) was engaged (FTT [595]).

On that basis, the FTT concluded that it was for HMRC “to establish the allegations before the tribunal and the liabilities to penalties” (FTT [596]), with the exception of issues of the quantum of the liability for the purposes of the best judgment assessments, which the FTT proposed to address separately.

The FTT then addressed the order in which it intended to approach the issues that were before it. It concluded – after accepting a submission from Mr Webster KC that to do otherwise would, in effect, reverse the burden of proof – that it was appropriate to determine the questions as to whether SA and Global diverted alcohol to and sold alcohol in the UK (which the FTT referred to as the “place of supply issue”) before turning to the question of whether Mr Malde was the controlling mind behind SA and Global (FTT [598]-[605]).

As regards the main issues before it, the FTT reached the following conclusions.

SA was the owner of alcohol that was smuggled into the UK and sold in the UK between 2004 and 2011 (FTT [637]).

In “the absence of evidence that Global was the owner of goods that were supplied in the UK”, Global was not liable to be registered for VAT in the relevant periods (FTT [644]).

Given its conclusion on the question of place of supply it was not necessary for the FTT to determine whether Mr Malde was the controlling mind behind Global (FTT [645]).

Mr Malde controlled SA in all relevant periods (FTT [649]).

HMRC and, in particular, Mr Foster did not “fairly consider” the evidence before them and accordingly the assessment made against SA was not made to the best of their judgment as required by section 73 VATA. The FTT considered that the failings of HMRC and Mr Foster in this regard were of such a degree that, had the assessment been appealed by SA, it would have been necessary to set it aside in its entirety “in the interests of justice” (FTT [664]).

As a consequence of these findings, the FTT allowed Global and Mr Malde’s appeals against all the decisions and assessments (FTT [666]). The FTT did not need to determine whether the PLN issued to Mr Malde in respect of the excise duty penalty had been issued in time and it did not do so (FTT [665]).

The FTT commented (at FTT [667]):