UK Tradecorp Ltd v Customs and Excise [2004] UKVAT V18992 (24 March 2005)

18992
VAT – Practice – Failure to comply with unless direction – Documents in Customs List not provided to Appellant – Failure to serve witness statements as directed – No application for extension of time – Whether breach of direction giving rise to unless order should be waived – Lack of resources no excuse – Trib Rules r.19(4)(5) – Appeal allowed with costs

LONDON TRIBUNAL CENTRE

	UK TRADECORP LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	THEODORE WALLACE  (Chairman)
						K S GODDARD MBE
					 	M A SHARP FCA

Sitting in public in London on 16 February 2005

Jolyon Maughan, counsel, instructed by Michael Welch & Co, solicitors, for the Appellant 

Hugh McKay and Nicola Shaw, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This decision concerns an application by the Appellant for the appeal to be allowed by reason of the failure of Customs to comply with an unless order in a direction released on 17 August 2004 to which Customs had consented.

2.	The application was heard at the outset of an appeal listed for three days against a decision dated 23 March 2004 disallowing input tax of £248,697.50 claimed in the return for June 2003.  The decision was on the basis that the purchases giving rise to the input tax and the related sales to a Dutch company were not economic activities because they formed part of chains of supply which constituted carousel frauds, see Bond House Systems Ltd v Commissioners of Customs and Excise [2003] V&DR 210.   Customs did not allege that the Appellant was knowingly a party to any fraudulent activity.

3.	The direction of 17 August 2003 provided that unless Customs provided copies of the documents in their List of Documents by 3 September the appeal would be allowed.

4.	Mr McKay conceded that Customs did not comply with the direction.  Customs provided some documents on 2 September but by no means all.

5.	Customs made no application at any stage to extend the time limit specified in the direction and prior to this hearing was there no application to waive the breach.

6.	Mr Maughan did not submit that the Tribunal is functus so that it no longer has the power to waive the breach.  We consider that we do have the power in a proper case to waive a breach notwithstanding that an unless order has taken effect.  It would be different if the Tribunal had made a direction after the breach allowing the appeal; that would happen for example where there is a dispute as to whether or not a party has failed to comply with an unless order.  A clear example where a breach might be waived after the event is where the non-compliance is due to serious illness of which the Tribunal was unaware and which prevented an application for an extension of time before the unless order took effect.

7.	Rules 19(4) and (5) of the Tribunals Rules 1986 are as follows,

“(4)	If any party to an appeal or application …  fails to comply with any direction of a tribunal, a tribunal may allow or dismiss the appeal or application.

(5)	A tribunal may, of its own motion or on the application of any party to an appeal or application waive any breach or non-observance of any … direction of a tribunal upon such terms as it may think just.”

The facts

8.	We turn now to consider the facts.  

9.	The Appellant registered for VAT in August 2002 giving its activity as “Exports of gold jewellery, fashion accessories, perfumes.  Local trading also”.  

10.	Being a repayment trader the Appellant made monthly returns.  £45,290 of the input tax for February 2003 was initially disallowed but was agreed in March 2004 after an appeal had been lodged and the Appellant had opposed an extension of time for the statement of case, see UK Tradecorp Ltd v Commissioners of Customs and Excise [2004] V&DR 195.

11.	The return for June 2003 reclaiming £378,047 input tax was submitted in early July 2003.  On 23 July 2003 Customs officers visited the Appellant, established that it had bought six consignments of mobile phones, five of which had been sold to a Dutch company, and informed Mr Kundra, a director, that verification of the mobile phones might take longer than normal due to a national verification exercise on mobile phones.  The officers took copies of sales and purchase invoices and bank statements. On 10 September 2003 the Appellant’s solicitors were informed in writing that the claim was currently being verified to establish whether the transactions were devoid of economic substance, citing Bond House.

12.	Over the ensuing months Customs carried out substantial enquiries involving a considerable number of companies and obtained material from the Dutch tax authorities in respect of the Dutch company to which mobile phones had been sold.

13.	On 23 March 2004 Mr Lam of the Serious Non-Compliance Division informed the Appellant that £131,349 of the June 2003 claim would be allowed but that the balance relating to sales to a Dutch company would be disallowed on the grounds that “the purchases and sales, judged objectively, were devoid of economic substance.”

14.	The Appellant promptly appealed serving grounds of appeal settled by counsel on 30 March 2004.  The appeal was notified by the Tribunal to Customs on 5 April.  The Statement of Case and both parties’ Lists of Documents were therefore due under the Tribunals Rules by 5 May 2004.  On 28 April Customs applied for an extension to 10 June to which the Appellant immediately objected.  An application hearing was listed for 15 July.

15.	Meanwhile on 3 June the Appellant’s List containing 32 documents was served with copies being provided.

16.	On 4 June Customs’ Statement of Case and List were served.  The Statement of Case was a substantial document settled by Counsel and included diagrams and schedules involving ten companies including the Appellant in respect of transactions by the Appellant on 27 June 2003 and nine companies in respect of transactions by the Appellant on 30 June 2003.  In each transaction there was a missing trader.  The Statement of Case stated in terms that it was not alleged that the Appellant was knowingly a party to any fraudulent activity.

17.	The List of Documents was brief in the extreme:

“1.	Copy VAT 1;
 2.	Copy VAT return for period 06/03;
 3.	Copy paperwork relating to the 5 disputes (sic) purchases.”

This was wholly inadequate to constitute proper compliance with Rule 20(1).  It is to be noted that the bundles for the hearing ran to 757 pages, the vast majority of which were produced by Customs, and most of those must have been in their possession when the Statement of Case and List were settled.

18.	On 24 June Customs agreed on the telephone to provide copies of the documents in the List.  The Appellant’s solicitors confirmed the request on 30 June and wrote on 6 July that the documents had still not been received.  The later letter also asked for a copy of the report by the Dutch fiscal authorities.

19.	On 21 July the Appellant served an application asking for directions for Customs to make available or provide copies of the documents listed and for a list of correspondence with the Dutch authorities relevant to the appeal.  The application also sought particulars of Customs’ Statement of Case. This application was listed to be heard on 12 August.

20.	Meanwhile on 3 June 2004 Customs applied to consolidate appeals by two other companies with that of the Appellant, there being some companies common to the transactions giving rise to all of the appeals. Customs wished to add a further three Appellants who had not been notified of the application.  The application was varied to an application that the appeals be heard together.  The Appellant and the two companies present opposed the application and it was dismissed in an anonymised decision released on 11 August 2004, R P Ltd v Customs and Excise Commissioners (2004) Decision  No.18935.

21.	On 3 August 2004 Customs responded to the application referred to at paragraph 19 above contesting the need for particulars of their Statement of Case but agreeing to list the Dutch documents with copies by 3 September and to provide copies of the documents in a List of Documents to be updated by 6 September, the case officer being on leave until the end of August.

22.	In a telephone conversation on 11 August 2004 a senior member of the Solicitor’s Office of Customs agreed to the direction to provide copies of the documents in the List “taking the form of an unless order.”  The Appellant’s solicitor’s recorded this agreement in an e-mail of that date.  There was no agreement as to the Statement of Case.

23.	The Appellant’s application of 21 July came before the chairman in the present hearing on 12 August with both parties being legally represented.  After a hearing of an hour and 24 minutes the Tribunal gave directions with the consent of both parties. These included,

“(3)	that unless by 3 September 2004 the Respondents make available for inspection the documents in their List and those under paragraph (2) above or provide copies of the same the appeal shall be allowed.”

The Appellant was pressing for an early hearing of the appeal.  The Tribunal directed a Response to the Statement of Case by 16 September, statements by all Customs’ witnesses exhibiting all necessary documents by 30 September and witness statements by the Appellant by 14 October. The Tribunal directed that the appeal be listed as soon as possible after 31 October for 3 days.

24.	On 25 August Customs provided the Appellant with 36 pages of Dutch documents and on 2 September provided copies of 108 pages of documents from their List.  Three further documents which had been inadvertently omitted were sent on 10 September.

25.	On 16 September the Appellant served the Response to the Statement of Case.

26.	On 15 September, the Appellant having provided avoid dates for the appeal hearing, the Tribunal directed Customs to provide avoid dates together with available dates between 1 November and 17 December.  On 20 September Customs notified the Tribunal that their counsel were not available between those dates but gave dates to avoid between January and March.  On 29 September the hearing dates 16 to 18 February 2005 were notified.

27.	On 30 September 2004 Customs served witness statements by four officers with exhibits.  The exhibits were some 140 pages apart from a report which was served separately. Customs’ covering letter stated that 3 further witness statements would be served as soon as possible.  No application was made for an extension of time for those statements.  Statements by three further witnesses with 82 pages of exhibits were included in the trial bundle without ever being served on the Tribunal.  These were served on the Appellant on 31 January.

28.	Mr Maughan told the Tribunal that a schedule of 69 pages dated 23 July 2003 exhibited by Mr Mandelia was not in either of the Lists provided by Customs although it was clearly intended to be produced. He said that three further tranches of documents were produced later by Customs which could and should have been produced on 6 September.  Some of those were critical and one was central showing that Mr Lam who made the decision under appeal had changed his mind his witness statement being contrary to part of the schedules to the Statement of Case.

29.	Mr McKay accepted that Customs had not complied with the direction.  We observe that, comparing the 757 pages in the trial bundle with the pages exhibited to the witness statements totalling some 220 pages, it is clear that many documents included in the bundle were never listed.  It is most unlikely that the Tribunal would have listed the appeal for only three days if Customs had complied properly with the directions so that the extent of the material was apparent to the Tribunal. The Solicitor’s Office wrote on 4 February 2005 that the last three statements had been posted by the case officer but had not reached that office.  Some of the exhibits to those statements were missing.

30.	On 11 February 2005 the Appellant’s solicitors wrote to Customs complaining about the breaches of the unless order and in particular the service of further documents on 31 January and stating that an application would be made at the hearing for the appeal to be allowed.

31.	Mr Maughan put in a bundle of correspondence relevant to the application together with a chronology.

Appellant’s Submissions

32.	Mr Maughan said that the leading case on the breach of an unless order is Hytec Information Systems Ltd v Coventry City Council [1997] WLR 1666 where Ward LJ at page 1974H encapsulated the approach to the failure to comply with an unless order.  He said that here there was a history of failure to comply with the Rules in that the Statement of Case and List were served late, the original List was inadequate and a series of requests for copies of documents were ignored.  A failure to comply would ordinarily result in the sanction being imposed.  Ward LJ had said,

“(3)	This sanction is a necessary forensic weapon which the broader interests of the administration of justice require to be deployed unless the most compelling reason is advanced to exempt his failure.”

Mr Maughan submitted that the likely reason for the non-compliance was the structural organisation of Customs which made it difficult to comply with Rules and Directions : there was no reason why the direction should not have been complied with within the time specified.  He said that the Appellant did not say that the direction had been deliberately flouted.  He quoted Ward LJ further,  

“(5)	A sufficient exoneration will almost inevitably require that he satisfies the Court that something beyond his control has caused his failure to comply with the order.”

This had not been shown.  The relevant control in this case was that of the Commissioners not that of any individual officer.  

33.	Mr Maughan accepted that the Tribunal must exercise its discretion when deciding whether to waive the breach.  He said that here there had been four breaches of the unless order some in relation to crucial documents and that the breaches should not be waived.

Customs’ Submissions

34.	Mr McKay started by accepting that things had gone wrong and apologising on behalf of Customs.  He said that in Hytec Ward LJ had referred to an “unless order” as a weapon of last resort.  He said that there were tremendous resource pressures on Customs and no deliberate non-compliance.  He said that although compliance had been fitful and late, the direction had now been complied with.

35.	He said that the Tribunal’s powers under rule 19(1) extend to making an unless order, but that an unless order by consent was a curious notion.  Hytec was of limited assistance : it was factually very different.  Although Lord Woolf MR had agreed with Ward LJ he had warned against the guidance being treated with excessive respect.  This was not a case where the Tribunal had stepped in to inject some discipline and had been disregarded.  He said that the Tribunal should consider what had happened and whether the Appellant had suffered prejudice.  No prejudice had been asserted.  In such circumstances it would be disproportionate to allow the appeal.

Conclusions

36.	We observe at the outset that this was a case where no allegation of impropriety was made against the Appellant in relation to the disputed input tax. The Appellant waited eight months for the decision disallowing its claim.  It appealed promptly and apart from serving its own List of Documents a month late did everything in its power to speed the hearing of the appeal.

37.	The List of Documents served by Customs on 3 June 2004 was wholly inadequate and the hearing on 12 August 2004 was listed after a series of unsuccessful attempts by the Appellant to obtain copies of the documents.  Customs had obtained a substantial volume of material from third parties which was clearly outside the Appellant’s knowledge.  If Customs’ application on 5 August 2004 for this appeal to be heard with a number of other appeals had been granted there would clearly have been a substantial delay before the appeal hearing.

38.	Although the consent to an unless order on the day before the hearing on 12 August may seem surprising at least in relation to the date by which the material was to be provided, it was by a senior solicitor who no doubt realised that there was a real possibility that the Tribunal would give an unless order in any event.  The failure to produce documents on which Customs intended to rely strikes at the heart of the Tribunal’s procedures.  It may well have been that a longer period would have been allowed if requested; however it was not requested. There was no application for an extension before the time limit expired and no application after. Once the date had passed with only partial compliance the direction appears to have been treated as past history although the continuing non-compliance was substantial.

39.	The matter was compounded by the failure to serve three of the witness statements until 31 January 2005 with substantial additional documents.  Since the last of those was dated 12 October 2004, this default was serious.

40.	Customs must have been well aware of the potential consequences of failure to comply with directions of the Tribunal since in UK Tradecorp Ltd v Commissioners of Customs and Excise (2004) Decision No.18879 released on 14 December 2004 appeals by this same trader in respect of the disallowance of input tax for periods 04/04 and 05/04 were allowed by reason of the failure of Customs to comply with directions given on 27 September 2004.

41.	Customs were not taken by surprise by the application, having been notified on 11 February 2005.  Mr McKay said everything that could be said but was not in a position to advance any valid reason for non-compliance.  We accept that there are substantial pressures on Customs officers and on the Solicitor’s office.  However lack of resources to conduct litigation properly is a matter for the Board and ultimately the Treasury. Cases of this type involve substantial resources.  It is clear that sufficient resources were not devoted to this appeal.  We sympathise with the individual officers and Solicitors, however lack of resources is no excuse for the non-compliance; still less is it a “compelling reason”. Lack of resources is regularly rejected by Customs as an excuse for defaults by traders.

42.	The strongest point made by Mr McKay was the fact that the Appellant did not assert any prejudice which could not be cured by costs.  In fact, due to the additional material, the case might well have overrun the three days allotted which clearly would have involved prejudice since it is not clear when the hearing could have been completed. In Customs and Excise Commissioners v Young [1993] STC 394 the Court of Session upheld the Tribunal’s decision to allow the appeal when the Statement of Case was a few days late due to being put in the wrong mail box.  Counsel for the Crown pointed out that the Appellant had suffered no prejudice. The default in that case was much less serious than in the present case.

43.	In Wine Warehouses Europe Ltd v Customs and Excise Commissioners [1993] VATTR 307 the Tribunal said this at page 313 I,

“It cannot not be assumed that the lack of any substantial prejudice will preclude the tribunal from acting under Rule 19(4).”

This was part of a passage cited with approval by Lloyd J in Customs and Excise Commissioners v Neways International (UK) Ltd [2003] STC 795 at [25] where Young was applied.  We do not accept that the fact that the Appellant has not asserted any prejudice means that on the facts of  this case it would be disproportionate to allow the appeal.  The failure to comply properly with directions by the Tribunal makes case management extremely difficult to say the least.

44.	At the outset of the hearing Mr McKay very properly handed in to the Tribunal copies of the opinion of the Advocate-General released on that day in Joined Cases C-354/03, C-355/03 and C-484/03 which include Bond House Systems Ltd.  The conclusion at [43] is as follows:

“In order to determine whether a transaction in a supply chain qualifies as an economic activity within the meaning of Article 4(2) …, the transaction must be considered individually and per se.  Transaction forming part of a circular chain in which a trader misappropriates the amounts paid to it as VAT instead of accounting for those amounts to the tax authorities do not on that account cease to constitute an economic activity within the meaning of Article 4(2) of the Sixth Directive.”

If the Court of Justice follows that opinion it is difficult to see how Customs could succeed in the present appeal where no allegation of impropriety has been made against the Appellant.  Our decision would however have been the same even if we had not been aware of the Advocate General’s opinion.

45.	In the present case Customs were in breach of an “unless order” the terms of which provide that the appeal shall be allowed.  It follows that Customs must show why the breach should be waived and the terms of the direction should be varied.  This in our view is a greater burden than resisting an application under Rule 19(4) for the appeal to be allowed.  As it happens on the facts of this case this distinction made no difference to our conclusion. Customs were not only in breach of direction (3) but also of the direction for witness statements. We concluded that the appeal should be allowed.

Costs

46.	We turn finally to costs.  Mr McKay did not resist the Appellant’s application for costs, however the Tribunal raised the question of  whether some costs might have been saved if the application had been made earlier enough to avoid final preparation and briefs for the appeal.

47.	Mr Maughan in response stressed that the non-compliance was continuing being accentuated by the service of the three statements with substantial documents on 31 January 2005 by which date it was too late for an application to be heard before the day fixed for the appeal to start. Before then it was not apparent to the Appellant that new documents were to be produced.  He said that the Appellant’s legal advisers had a difficult judgment to make as to whether to make an earlier application and having succeeded should not be penalised in costs.  They had been placed in a dilemma by Customs.  The outcome of an earlier application would have been more uncertain.

48.	Having considered these submissions and Mr McKay’s observation that the Appellant should have put Customs on notice before 11 February, we concluded that the Appellant should have its full costs.  We do stress that when a party is in breach of a direction the other party should notify the Tribunal at an early stage.  Since the direction involved the provision of copies of documents to the Appellant, the Tribunal relied on the Appellant to inform it of any breach. This need not necessarily involve an application.

49.	We direct that the appeal be allowed and that the Commissioners do pay to the Appellant the costs of and incidental to and consequent upon the appeal to be assessed by a Taxing Master of the Supreme Court under Rule 29(1)(b) by way of detailed assessment on the standard basis.

THEODORE WALLACE
CHAIRMAN

RELEASED: 24 March 2005

LON/04/749