Megtian Ltd v HM Revenue & Customs

On an appeal limited to points of law, an appellate court must identify the challenged finding, its significance, the relevant evidence, and why the tribunal was not entitled to make it. It must not reweigh evidence or conduct a general merits review. A finding may disclose an error of law where it rests on no evidence, inadequate evidence, an irrational inference, or a conclusion contradicted by all the evidence.

In MTIC fraud cases, a tribunal may assess the overall effect of primary facts cumulatively. In a contra-trading case, the law does not invariably require the broker’s knowledge to be analysed by assigning it to one precisely identified aspect of a sophisticated fraud. Actual knowledge and constructive knowledge remain distinct states of mind, and dishonesty must be specifically pleaded and put in cross-examination.

Megtian appealed from a decision of the VAT and Duties Tribunal, released on 11 December 2008, dismissing its appeal against HMRC’s refusal of input-tax claims and related repayments totalling £5,909,067.50.

HMRC alleged that transactions in April and May 2006 were connected with missing-trader or MTIC fraud and that Megtian knew, or ought to have known, of that connection. The appeal concerned grounds alleging errors in the Tribunal’s fact-finding, its treatment of contra-trading transactions, and the adequacy of the case advanced on Megtian’s state of mind. Grounds 2, 6 and 7 were reserved for a later hearing.

1. Disposition. Grounds 1, 3, 4 and 5 failed. The merits of grounds 2, 6 and 7 remained to be determined at a further hearing.
2. Scope of appellate review. An appeal on a point of law cannot become a general attack on factual conclusions. The appellant must identify the finding challenged, show its significance, identify the relevant evidence, and demonstrate that the tribunal was not entitled to make the finding. The appellate court does not decide whether the finding was correct or reweigh competing evidence. A finding may involve an error of law where it is based on no evidence, inadequate evidence, an irrational or unreasonable inference, or a conclusion contradicted by all the evidence.
3. Fraud and evidential assessment. The applicable MTIC analysis required HMRC to establish a tax loss caused by fraud, a sufficient connection between the transactions and that fraud, and that the taxpayer knew or ought to have known of the connection. The Tribunal was entitled to infer fraud and dishonest knowledge from primary facts assessed cumulatively. Evidence sufficient to permit an inference need not make that inference the only possible view.
4. Contra-trading. HMRC v Livewire Telecom Ltd [2009] EWHC 15 (Ch) did not prescribe a rigid requirement that every contra-trading case identify whether the broker knew of the missing trader’s fraud or the contra-trader’s cover-up. Sophisticated frauds may be analysed as an overall scheme, and a participant may know, or ought to know, that a transaction is connected with fraud without knowing its precise structure or component.
5. State of mind. Actual knowledge of a connection with fraudulent tax evasion denotes dishonest participation, whereas knowledge that ought to have been acquired is broadly equivalent to negligence. The distinction is fundamental. An allegation of dishonesty must be clearly and specifically pleaded and, where the witness gives evidence, put in cross-examination. On the evidence, HMRC had advanced both cases, so the Tribunal’s findings were open to it.

VAT and Duties Tribunal. The Tribunal dismissed Megtian’s appeal against HMRC’s refusal of input-tax claims and consequential repayments. Its decision was released on 11 December 2008.

High Court (Chancery Division). The court rejected grounds 1, 3, 4 and 5. The merits of grounds 2, 6 and 7 were left for a further hearing.