[2011] UKFTT 367 (TC)

TC01222

Appeal number: MAN/2009/0357

VAT – refusal of claim for refund of input tax – thirty day time limit for appeal – late application for extension of time to appeal– section 83G(6) VATA and rule 5(3)(A) of the 2009 Procedure Rules – appeal settled by Appellant’s trustee in bankruptcy - Appellant’s bankruptcy subsequently annulled – Appellant then awaited outcome of other appeals coming before the High Court and based on similar facts– eight year delay – factors to be taken into account by the Tribunal – application not allowed

FIRST-TIER TRIBUNAL

TAX

MR D P HYDEAppellant

T/A PENTAGON SOFTWARE

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMSRespondents

TRIBUNAL: Michael S Connell (Tribunal Judge)

Sitting in public at Leeds on 08 March 2011

Mr Richard Smedley, Accountant, for the Appellant

Mr Jonathan Cannan, instructed by General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

1

DECISION

  1. This decision relates to an application of the Appellant dated 30 December 2008 for a direction extending the time for service of Notice of Appeal in respect of assessments to VAT made on 10 August 2000 and notified to the Appellant on 16 August 2000 (‘the assessments’). The appeal is pursuant to section 83 (c) VATA 1994.
  2. HMRC contend that the appeal should be dismissed on the basis that it is made out of time. The time for appealing the assessments expired 30 days after 16 August 2000 that was on 15 September 2000.

3.The assessments initially amounted in total to £34,372 and relate to the following periods:

12/97 £29,402

03/98 £2,736

12/98 £2,234

£34,372

4.The Notice of Appeal states that the sum now in dispute is £17,423.81, arrived at as follows:

Initial assessments £34,372.00

plus interest (as at 24th of July 2001) £2560.95

less agreed repayment offset £19,509.14

Reduced assessment £17,423.81

5. In each period the amounts relate to input tax claimed by the Appellant on purchases from Economy Computers Ltd and Millennium Components Ltd. The claims had been refused because they were, according to HMCE (now HMRC), connected with fraud. The Appellant claimed that he was not a party to any fraud and did not know of any fraud.

6.The ‘Statement of account’ attached to the assessments contained a demand for immediate payment. In the absence of any request for a review, on 20 December 2000, HMRC served the Appellant with a statutory demand for the amounts claimed. Following non-payment a bankruptcy petition was then served on the Appellant on 9 January 2001, which resulted in a bankruptcy order being made against him on 26 February 2001.

7.In a letter dated 1 May 2001 the Appellant’s agent sought a review of the assessments. In that letter the Appellant explained:

‘Whilst we are aware that it has been quite a long time since the……. assessments and the bankruptcy proceedings we would like to appeal against (them) …. We have seen invoices from Economy Computers Ltd. We understand that the assessments, referred to amounts of input VAT wrongly claimed from this supplier and that of Millennium Components Ltd …. We have checked the VAT number and have confirmed that it is a valid VAT number. Surely this is all a prudent trader can do and not to telephone the VAT office every time they deal with a new supplier…. We feel that it is unfair that an ordinary business person can be held liable for the wrongdoing of a third-party supplier with whom they have not colluded or collaborated…’

8. Although the request for a review was considerably out of time HMRC appears to have accepted the request and on 24 July 2001, following correspondence and discussions, wrote to the Appellant confirming a reduction in another assessment and agreeing the repayment offset claim. The balance of the assessment and claim for interest totalling £17,423.81 were otherwise maintained.

9. On 26th July 2001 the Appellant’s agent wrote to the Appellant’s trustee in bankruptcy referring to a telephone conversation with HMRC to the effect that the assessments were to ‘stand’. Nothing further is added to their letter which gives the impression that the Appellant accepted the position. Subsequently the trustee in bankruptcy during the course of winding up of the Appellant’s affairs agreed and settled the assessment by way of ‘crown set-off,’ against the Appellant’s outstanding self assessment. On 4 November 2002 this was notified to the Appellant’s solicitors Messrs Zermansky and Partners by the Trustee in Bankruptcy when submitting his final report to creditors.

10. On 7 January 2003 the Appellant’s bankruptcy order was annulled pursuant to s 232 of the Insolvency Act 1986 on the application of the Appellant following payment of his bankruptcy debts and expenses.

11. There was no further correspondence, discussions or other contact from the Appellant until 4 April 2007 when the Appellant’s agent wrote to HMRC enclosing a copy of HMRC’s letter of 24 July 2001 and an article from the ICAEW Faculty Newsletter which referred to the decision of the European Court of Justice (ECJ) in the joined cases of Optigen Limited, Fulcrum Electronics Limited and Bond House Systems Limited. (The ‘joined ECJ cases’).

12. The background to the joined cases can be summarized thus:

  1. The cases had been referred to the ECJ by the UK High Court by agreement between all parties, as they involved a fundamental and, as then untested principle of EU VAT law. The High Court cases followed decisions by two independent VAT and Duties Tribunals concerning ‘Missing Trader Intra Community’ (MTIC) VAT fraud.

2.MTIC VAT fraud involves businesses using a UK VAT registration number to purchase goods VAT-free from other EU Member States, sell them at a VAT-inclusive price in the UK but then not pay the output tax due to HMRC, with the same goods circulating repeatedly through chains of transactions in the UK and between the UK and other EU States. HMRC argued that where goods move in a circle of transactions through the same chain of companies for the purpose of stealing VAT, there is no economic activity as defined in EU VAT legislation, and therefore no VAT is payable or reclaimable on any of the transactions.

3.Optigen, Fulcrum, and Bond House were in the position of being the final trader in the UK in such chains and therefore had submitted large VAT repayment claims (having deducted as input tax the VAT on their purchases, but with no VAT due on the sale of those goods to other EU States). Applying the no economic activity principle, HMRC substantially reduced these claims.

4.The businesses concerned appealed against this decision to the independent VAT Tribunal, which upheld Customs’ decision, and subsequently the High Court. The question put to the ECJ by the High Court was whether transactions constituting part of a fraud scheme set up by others qualify as economic activities within the meaning of Article 4(2) of the Sixth Council Directive 77/388/EEC.

  1. The ECJ found that transactions within a fraudulent trade fell within the Directive. In consequence the ECJ found that the right to deduct input tax of a taxable person who carries out such transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is tainted by a VAT fraud, without that taxable person knowing or having means of knowledge of the fraud.

13. Following the ECJ decision, HMRC published its Business Brief 01/06 which said that all cases in which assessments had been raised, or input tax claims reduced on the same principle were being reviewed ‘in the light of the ECJ’s guidance.’ HMRC said that:

‘The majority of these cases have been stood over for 60 days after the ECJ decision, and HMRC will aim to review each case in the light of that decision, before the stand-over period expires. Where a repayment that had been disallowed is reviewed in the light of the ECJ guidance and is now found to be allowable, HMRC are legally obliged to pay Repayment Supplement for the period of delay whilst awaiting the ECJ decision. This will be repaid automatically with any repayment, subject to the normal rules, as explained in HMRC Notice 700/58, “Treatment of VAT repayment returns and VAT repayment supplement”. Any requests for reconsideration of non-payment of Repayment Supplement, or the amount of any payment should be made in writing to: HM Revenue & Customs, Repayment Supplement Team Liverpool, L74 4AA. A dedicated telephone number has been set up if a business (or its adviser) has a query or requires advice about its particular case. This number will run from 9am - 4pm on weekdays up to and including Friday 20 January. The helpline number is 01737 734510’.

14. The Appellants letter of 4 April 2007 asked HMRC to…..

‘Look carefully at our client’s case as indicated in the (ICAEW Faculty Newsletter) article…’

This was interpreted as a further late request for HMRC to reconsider the claim for

repayment of input tax of £17,423.81, following the ECJ decision in the joined ECJ cases.

15.The Appellant’s letter was addressed to HMRC ‘Central Operations Directorate VAT Operations Insolvency’, rather than the ‘Repayments Supplements Team’, in Liverpool. The Appellant appears then to have been told that the matter was being passed onto the HMRC’s ‘Policy Unit’. There is no indication that HMRC's Policy Unit responded, but a reminder letter from the Appellant dated 16 July 2007 to HMRC Insolvency unit and, according to the Appellant, telephone reminders, eventually resulted in an e-mail dated 5 June 2008 from the Insolvency unit referring the Appellant to the procedure by which out of time appeals may be referred to the Appeals Tribunal.

16. Matters were then further left to lie by the Appellant until he signed the Notice of Appeal on 30 December 2008, the appeal being lodged with the Tribunal on 24 March 2009.

17.Before the substantive issues may properly come before the Tribunal, it is necessary for the Appellant to satisfy the Tribunal that the time for appealing should be

extended.

18. Under rule 4 of the Value Added Tax Tribunal Rules 1986 (the relevant rules at the time of the assessment) a notice of appeal was required, generally, to be served on the Tribunal before the expiration of 30 days after the date of the document containing the disputed decision. Rule 19 of those rules gave the Tribunal discretion to extend time within which to appeal. From 1 April 2009, a similar 30 day period applies, the start date depending on the circumstances, such as whether or not there has been a review. Under section 83G (6) VATA an appeal may be made if the Tribunal gives permission.

19.Rule 20 of the Tribunal Procedure (First-Tier Tribunal) (Tax Chamber) Rules (“the Procedure Rules”) which came into force on 1 April 2009 states:

‘(1) where an enactment provides for a person to make or notify an appeal to the

Tribunal, the Appellant must start proceedings by sending or delivering a notice of

appeal to the Tribunal within any time limit imposed by that enactment.

(4) if the Appellant provides the notice of appeal to the Tribunal later than the time

required by paragraph (1) or by an extension of time allowed under rule 5(3) (a)

(power to extend time) –

(a)The notice of appeal must include a request for extension of time and the reason

why the notice of appeal was not provided in time; and

(b)unless the Tribunal extends time for the notice of appeal under rule5 (3) (a) (power to extend time) the Tribunal must not admit the notice of appeal’.

20.Rule 5 (3) of the 2009 Procedure Rules provides:

‘(3)…… The Tribunal may by direction-

(a) extend or shorten the time for complying with any rule, practice direction or direction, unless such extension shortening would conflict with a provision of another enactment setting down a time limit;’

21.At the hearing Mr. Smedley on behalf of the Appellant initially contended that an appeal had been lodged on 1 May 2001, but later conceded that his letter to HMRC could only be interpreted, as it was, as a request for a review and that HMRC’s letter of 24 July 2001 confirmed that the assessments were to be maintained.

22.The time-limit for an appeal expired in September 2000. The appeal was not lodged until 24 March 2009; a delay amounting to some eight and half years. Mr. Smedley accepted that there had been inordinate delay lodging the notice of appeal but put forward a number of reasons why the appeal had not been pursued earlier:

  1. The Appellant had been going through a difficult period at the time of the assessment and, following his bankruptcy, had not been a party to the ‘Crown off set’ arrangement between HMRC and the trustee in bankruptcy referred to in HMRC’s letter of 24 July 2001.
  2. The Appellant did not have the financial resources to pursue an appeal at the time.
  3. The Appellant had become aware of the pending decision in the Optigen case and subsequently the Fulcrum and Bond House cases, which he said involved the same fundamental principles at issue as those in his case and that there was no need possibility of pursuing an appeal until those cases were eventually determined.
  4. The Appellant was aware of HMRC’s Business Brief 01/06 produced in January 2006 but assumed from the wording of the brief that HMRC were under an obligation to review the Appellants case and repay the disputed input tax.

23. When considering its discretion to extend time under rule 5(3) (a) of the Procedure Rules the Tribunal should be mindful of the overriding objective of rule 2, being that cases must be dealt with ‘fairly and justly’. This involves balancing the interests of the parties.

24.Mr. Cannan for HMRC said that having regard to the correlation between the Tribunal's overriding objective and the corresponding objective under rule1.1 of the Civil Procedure Rules (CPR), the factors which the Tribunal should take into account on an application to extend the time for service of a notice of appeal should be those set out in CPR 3.9, see The Medical House PLC [2006 19859]. The Tribunal took the view that in considering what is ‘fair and just’ and undertaking a balancing exercise, all relevant factors should be taken into account. The discretion of the Tribunal is at large, see R (Brownwallia Cal Ltd) v General Commissioners [2004] STC 296.

25.The decision which the Appellant appeals was made in August 2000 and relates to periods in 1997 and 1998. The time for appealing expired in September 2000, except that arguably time was implicitly extended under rule 4.2 of the 1986 rules when the subsequent querying of the assessment in May 2001 was accepted by HMRC as a late request reconsideration. However even on that basis, the time-limit for appealing would have expired 21 days after the assessments were confirmed by agreement between HMRC and the Appellant’s trustee in bankruptcy in July 2001. At that point, following the bankruptcy order of February 2001, matters were largely out of the Appellants hands but in any event he appears at that time to have taken a conscious decision not to pursue an appeal.

26.Was there a good explanation for the Appellant’s failure to appeal? Addressing the arguments put forward by Mr. Smedley (Para 22 above).

  1. The effect of s.306 of the Insolvency Act 1986 under which a bankrupt’s estate vests in the Trustee in Bankruptcy immediately upon his appointment is that the bankrupt is divested of his interest in his property and any liability for his debts. The Trustee has sole responsibility for determining the debts outstanding and for accepting or discharging them. Although the Appellant was not a party to the ‘crown set-off’ agreement between his trustee in bankruptcy and HMRC, the trustee was ‘a person acting on behalf of the Appellant…’, within the meaning of s.54(5) TMA 1970 and therefore could enter into an agreement on behalf of the taxpayer. The Trustee had therefore settled HMRC’s claim by agreement under s.54. If the Appellant had any issue with this, he should have taken steps to have that agreement set aside.
  1. The making of an appeal to the Tribunal is relatively simple and accessible to an Appellant in person and lack of financial resources is not in the Tribunal’s view, a good reason for the Appellant not to pursue the appeal when in a position to do so.
  2. If as argued by Mr. Smedley, the Appellant was intent on questioning HMRC’s interpretation of the law with regard to input tax recovery connected with the issues raised in the joined cases, why was a protective appeal not lodged? The Appellant was clearly aware in May 2001 when seeking a review of the assessment that the time-limit for an appeal had by then long since passed and must have taken a conscious decision not to appeal until he did so in late 2008. It is only in exceptional circumstances that an extension of time to appeal should be granted where the appeal has been prompted by a change in the law or change in understanding of the law (Property and Reversionary Trust Templar [1977] 1 WLR 1223). There would appear to be no exceptional circumstances in this case.
  3. There is established case law that member states are required as a matter of principle to repay taxes collected in breach of Community Law (assuming for this purpose that there may be some merit in the appeal). However member states may place procedural limitations on the recovery of such taxes and the ECJ has held that in the interests of legal certainty, which protects both the taxpayer and the administration, it is compatible with Community Law to lay down reasonable time limits for bringing proceedings - Marks & Spencer plc v C and E (2002 STC 1036). HMRC's Business Brief 01/06 did not state unequivocally that all cases potentially affected by the ECJ decision in the joined cases would be reviewed and given the background to the case and the passage of time it was clearly incumbent upon the Appellant to lodge an appeal at the earliest possible opportunity. However more than a year elapsed following the release of HMRC's Business Brief before the Appellant raised the issue of the disputed input tax again in April 2007. Even then matters were left by the Appellant until he signed the Notice of Appeal on 30 December 2008, with the Appeal itself not being lodged with the Tribunal until 24 March 2009.

27.The fact that the Appellant does or does not have a reasonable excuse for failing to make the appeal on time is not necessarily decisive. However, it is not in the interests of the administration of justice to permit appeals after an extensive period of delay, particularly were no explanation for the failure to appeal within a reasonable time has been offered. There is public interest in legal certainty and the finality of litigation.