Butt v Revenue And Customs

A criminal VAT penalty may be imposed where Value Added Tax Act 1994, section 60, clearly covers a dishonest act done to evade VAT by claiming a VAT credit to which the claimant is not entitled. The EU-law abuse principle means that a taxpayer who knew that its transactions were connected with MTIC fraud cannot obtain input-tax deduction, even where invoices and supplies are formally genuine. Refusal of the credit is not itself a criminal penalty. An additional penalty is lawful where section 60 provides a clear and unambiguous domestic basis, and section 61 permits recovery from a named officer whose dishonesty is attributable to the company. Applying that construction does not create a new offence or breach legal certainty.

Waterfire Ltd claimed input-tax credit. HMRC refused the claim and imposed a penalty under sections 60 and 61 of the Value Added Tax Act 1994, part of which was transferred to Mr Butt as a director. The First-tier Tribunal dismissed his appeal, and the Upper Tribunal upheld that decision in [2017] UKUT 325 (TCC). Mr Butt accepted the findings of actual knowledge and dishonesty, but argued that the statutory wording could not be enlarged by the EU-law principles in Kittel and Halifax to support a criminal penalty. The central issue was whether specific domestic legislation was required before those principles could affect the statutory entitlement to a VAT credit and the resulting penalty.

Appeal dismissed unanimously. The findings that Waterfire’s transactions were artificial, connected with MTIC fraud, and known by Mr Butt to be fraudulent were accepted.

1. Section 60 of the Value Added Tax Act 1994 supplied a clear and unambiguous basis for a penalty where a person dishonestly acted for the purpose of evading VAT. In this case, claiming a VAT credit to which Waterfire was not entitled fell within that provision. Section 61 permitted recovery from a named officer of the relevant portion of the company’s basic penalty.

2. The Halifax abuse principle, as developed in Kittel, Italmoda and Cussens, is a free-standing general principle of EU law inherent in the VAT system. It applies irrespective of whether the wording of the domestic provisions can be given a conforming interpretation. A taxpayer who knew or should have known that its purchase was connected with fraudulent evasion of VAT could not claim input-tax deduction. Formal invoices and genuine supplies did not alter that conclusion.

3. The principle in Procura della Repubblica, that criminal liability cannot be extended detrimentally by an expansive conforming interpretation, did not prevent the penalty. Section 60 already defined the relevant dishonest conduct and did not expressly restrict penalties to wholly fictitious transactions. The court was construing an existing criminal provision, not creating a new offence. That was consistent with Withers.

4. Refusal of a fraudulent VAT benefit was not itself a criminal penalty. An additional penalty nevertheless required a clear domestic legal basis. Section 60 met that requirement, consistently with Halifax and Emsland-Stärke. The binding effect of CJEU judgments under section 3 of the European Communities Act 1972 did not replace that domestic basis.

5. The later introduction of sections 69C and 69D did not demonstrate any defect in sections 60 and 61. The Upper Tribunal was right to uphold the penalty, and Mobilx was correctly decided. Application of the relevant EU-law principles did not offend legal certainty or create a new criminal offence.

• Court of Appeal (Civil Division): dismissed the appeal against the Upper Tribunal’s decision, reported at [2019] EWCA Civ 554.
• Upper Tribunal (Tax and Chancery Chamber): dismissed Mr Butt’s appeal and upheld the First-tier Tribunal’s decision in [2017] UKUT 325 (TCC).
• First-tier Tribunal: dismissed Mr Butt’s appeal against the VAT penalty imposed by HMRC.