Ammanford Recycling Limited v The Commissioners for HMRC

In a corporate VAT-fraud case, HMRC may plead that an unidentified person acting for the company had actual knowledge that transactions were connected with fraud. That general pleading does not, however, permit HMRC to allege in cross-examination that a particular witness had such knowledge unless it has first pleaded that allegation against the identified person.

An allegation of actual knowledge of a connection with fraud is serious. Fairness requires notice sufficient to enable the taxpayer to prepare targeted evidence and disclosure. HMRC must therefore seek permission to amend its pleading before advancing that individual allegation.

HMRC need not characterise the fraud by a label such as MTIC or acquisition fraud where its pleaded facts sufficiently identify the transaction features and alleged lack of commercial logic from which knowledge is to be inferred.

The appellant, a scrap-metal dealer, appealed against a procedural decision of the First-tier Tribunal refusing directions requiring HMRC to give further information in pending appeals concerning denied input-VAT deductions and a penalty.

HMRC alleged that the appellant knew or ought to have known that its transactions were connected with fraudulent evasion of VAT under the Kittel principles. The appellant sought identification of every person alleged to have actual knowledge, particulars of the alleged fraud, and an explanation of its alleged role in it. HMRC maintained that it could prove corporate actual knowledge without identifying a particular individual, while retaining the ability to put actual knowledge to individual witnesses in cross-examination.

The central issue was whether that course was procedurally fair, and whether the information already provided sufficiently enabled the appellant to meet HMRC’s case.

1. Appeal allowed in part. The Upper Tribunal set aside and remade the First-tier Tribunal’s decision only to correct an error of legal principle concerning cross-examination.

2. HMRC may establish a company’s actual knowledge by proving that someone acting for it must have had the requisite knowledge, without identifying that person. That approach accommodates the evidential difficulty of locating knowledge within a corporate body.

3. However, if HMRC wish to put to an identified witness that the witness personally had actual knowledge that transactions were connected with fraud, it must first plead that case against that person. The allegation either becomes a direct route to proving corporate knowledge or is a primary fact supporting that allegation. In either event, its seriousness requires advance notice.

4. Cross-examination alone is insufficient. Pleadings define the case to be met and may affect responsive evidence and disclosure. Requiring HMRC to seek permission to amend protects fairness and permits any resulting prejudice to be addressed. This does not require advance pleading of serious allegations where the taxpayer, rather than HMRC, bears the relevant burden of proof.

5. The First-tier Tribunal made no error in finding that HMRC had sufficiently pleaded the primary facts concerning the directors’ potential liability under sections 69C and 69D of the Value Added Tax Act 1994. Its conclusion rested on the pleaded case and served evidence about this particular company, not merely on the directors’ status.

6. Nor was HMRC required to label the alleged fraud as MTIC or acquisition fraud. Although the First-tier Tribunal wrongly treated the absence of a need to prove the taxpayer knew the fraud’s details as decisive, that error was immaterial. HMRC had sufficiently identified the alleged lack of commercial logic and the transactional features from which the relevant inference was said to arise.

7. The remade decision therefore prevents HMRC from putting personal actual knowledge to a specified witness without an amended pleading. In all other respects, it maintains the refusal of the appellant’s information application.

• Upper Tribunal (Tax and Chancery Chamber): Allowed the procedural appeal in part and remade the decision: [2023] UKUT 302 (TCC).

• First-tier Tribunal (Tax Chamber): Refused the appellant’s application for directions requiring HMRC to provide further information in the substantive VAT and penalty appeals. The Upper Tribunal set aside that decision only insofar as it permitted HMRC to put actual knowledge to an identified witness without first pleading it.