HM Revenue and Customs v Citibank NA & Anor

A taxable person may be denied deduction of input VAT where it knew or should have known that its transaction was connected with fraudulent VAT evasion. Neither limb of that test requires proof that the taxable person was dishonest.

Unless the revenue authority expressly alleges dishonesty or fraud, a tribunal should determine only whether actual or constructive knowledge has been proved. If dishonesty or fraud is expressly alleged, it must be pleaded, particularised and proved in accordance with the ordinary requirements of civil proceedings. In every case, the allegations of actual and constructive knowledge must be particularised sufficiently to permit the taxpayer to understand and answer the case.

HMRC denied Citibank NA and E Buyer UK Ltd deductions of input VAT on the ground that each knew or should have known that its transactions were connected with missing-trader intra-Community fraud. The First-tier Tribunal required HMRC to clarify and particularise dishonesty in Citibank’s case, but refused comparable relief and wider disclosure in E Buyer’s case.

The Upper Tribunal, [2016] UKUT 0123 (TCC), upheld the Citibank decision and reversed the E Buyer decision. It treated HMRC’s allegations of actual knowledge of an orchestrated and contrived fraudulent scheme as allegations of dishonest conduct. It also ordered wider disclosure in E Buyer’s case.

The central issue was whether a first-limb Kittel allegation of actual knowledge required HMRC to plead, particularise and prove dishonesty, and whether E Buyer was entitled to wider disclosure.

1. The appeals were allowed. The Kittel test asks whether the taxpayer knew or should have known that it was taking part in a transaction connected with fraudulent evasion of VAT. Dishonesty or fraud by the taxpayer forms no part of either limb of that test.

2. HMRC may allege dishonesty or fraud, but it need not do so to deny input-tax deduction. It may stop at pleading, particularising and proving actual or constructive knowledge. It was irrelevant for the First-tier Tribunal to ask whether facts supporting an inference of knowledge might also have supported a finding of dishonesty which HMRC neither sought nor needed.

3. If HMRC expressly alleges dishonesty or fraud, the allegation must be distinctly pleaded, properly particularised and proved. The evidential cogency must reflect the gravity of the allegation. The procedural safeguards associated with dishonesty cannot, however, be imposed merely because facts relied upon to prove knowledge could also support a finding of dishonesty.

4. HMRC must give properly informative particulars of actual and constructive knowledge in every Kittel case. In Citibank’s case, Judge Mosedale nevertheless erred by directing that HMRC could not allege knowledge that the transactions were contrived, facilitated fraud or were connected with fraud unless it pleaded dishonesty. The Upper Tribunal erred by upholding that direction. Citibank’s case was remitted to the First-tier Tribunal to reconsider what particulars of knowledge remained necessary after withdrawal of HMRC’s amended dishonesty pleading.

5. In E Buyer’s case, Judge Walters made no error in refusing particulars sought on the premise that dishonesty or complicity in fraud had been alleged. His order was reinstated.

6. The disclosure regime of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 differs from ordinary High Court disclosure. Rule 27 applies to important and complex cases as well as simple ones. The Upper Tribunal’s wider disclosure order rested materially on its erroneous conclusion that dishonesty had been alleged. Judge Walters’ case-management decision refusing wider disclosure was therefore reinstated.

1. Court of Appeal (Civil Division): Allowed HMRC’s appeals. The Citibank matter was remitted for reconsideration of any necessary particulars of knowledge, and the First-tier Tribunal’s E Buyer orders were reinstated.
2. Upper Tribunal (Tax and Chancery Chamber): In [2016] UKUT 0123 (TCC), dismissed HMRC’s Citibank appeal, set aside the E Buyer decision, remitted E Buyer’s application for particulars and ordered wider disclosure.
3. First-tier Tribunal (Tax Chamber): In Citibank, [2014] UKFTT 1063 (TC), directed HMRC to clarify whether dishonesty was alleged. In E Buyer, [2014] UKFTT 921 (TC), refused the taxpayer’s applications for particulars and wider disclosure.