18879

Failure to comply with directions – Directions to achieve early hearing of preliminary issue – Disallowed input tax – Failure by Customs to serve witness statements in time – Failure to include exhibits – Failure to use best endeavours to agree preliminary issue – Failure to provide avoid dates – Prejudice to Appellant through delay – Trib Rules 1986 r 19(4) – Appeal allowed

LONDON TRIBUNAL CENTRE

	UK TRADECORP LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	THEODORE WALLACE  (Chairman)

Sitting in public in London on 6 December 2004

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

Kirsty Morton, of the Solicitors Office of the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This was a directions hearing at which the Appellant applied for the appeals to be allowed under Rule 19(4) by reason of the failure of Customs to comply with a number of directions given by the Tribunal at a directions hearing on 27 September 2004.  The directions were made with a view to an early hearing of a preliminary issue in alleged carousel cases. I directed that the application should be heard in public.

2.	The appeal is against two decisions on 26 July 2004 disallowing claims for input tax of £151,200 for period 04/04 and £80,150 for period 05/04.  The decisions were on the basis that three purchases of mobile telephones by the Appellant from New Way Associates Ltd and three sales to a German company formed part of chains of supply that were circular in nature and contained a defaulting trader and judged objectively were not part of any economic activity. Customs contend that the transactions formed part of carousels as in Bond House Systems Ltd [2003] V&DR 210 which has been referred by the High Court to the Court of Justice and was due to be heard on 8 December 2004.

3.	The Appellant appealed on 9 August 2004.  The Statement of Case and List of Documents were due under the Tribunal Rules by 11 September .  On 1 September Customs applied for an extension to 12 October to which the Appellant objected among other reasons on the grounds that non-payment of the input tax was causing considerable financial difficulties for the Appellant which would be prejudiced if the appeals did not proceed expeditiously.

4.	On 27 September Mr Maugham appeared for the Appellant and Mrs Crinnion, a senior officer, appeared for Customs.  The directions were released on 1 October.  In summary these required –

(2)	a Statement of Case by 12 October setting out in diagrammatic form the circularity alleged, whether it is contended that the Appellant’s knowledge is relevant and whether circularity of money is sufficient without circularity of goods or specific goods;

(3)	a Response by the Appellant by 26 October;

(4)	Statements by all Customs’ witnesses by 2 November exhibiting all necessary documents;

(5)	that the parties use their best endeavours to agree a preliminary issue as to whether the factual allegations were present and notify the Tribunal by 2 November applying for a direction for a preliminary issue;

(6)	that by 2 November the parties to notify avoid dates for a 3 day hearing between January and March 2005.

Further directions covered preparations for hearing a preliminary issue.

5.	The Appellant served its List of Documents together with copies of the 91 documents on 28 September.  These included the returns for 04/04 and 05/04.  That for 04/04 showed inputs claimed as £1,413,312 and that for 05/04 claimed inputs of £572,900, a total of £1,986,212, involving combined repayment claims of £287,919.  It is apparent from these returns that the Appellant was a substantial trader apart from those transactions and that 88 per cent of the input tax claimed in the returns was allowed.

6.	The Statement of Case was served on 12 October having  been settled by a solicitor who left Customs at the end of November. It included the following at paragraph 7:

“The Respondents contend, that if there is evidence showing a carousel fraud, the fact that the Appellant appears to be an unwitting participant in the chain does not justify its claim of credit for input tax.  
The Respondents contend that the evidence of third party payments in the deals completes the necessary picture of circularity.
The Respondents will rely on the decision in Bond House Systems Ltd 18188.  The Appellant has not distinguished its appeal from that decision.”

The List of Documents contained 38 documents.

7.	The Appellant’s solicitors requested copies of Customs’ documents in letters dated 12 and 14 October.  They were told orally on 15 October that they would be provided in the next week.  Further requests on 25 October and 2 November produced no response.  The copies had still not been provided at the date of this hearing.

8.	Meanwhile the Appellant’s response had been served on time on 26 October.

9.	Eleven witness statements were served by Customs on 8 November, four working days late.  Four of the eleven statements failed to include the exhibits referred to therein.  These are still outstanding.

10.	On 25 October the Appellant’s solicitors sent a proposed question for the preliminary issue. This elicited no acknowledgement and no response.

11.	On 2 November the Appellant’s solicitors wrote stating that they were applying for a direction for a preliminary issue and stated that they were also applying for a direction to provide copies of the documents requested.  They asked for a response by 3.30pm. There was no response and the application was served on the following day.

12.	On 15 October the Appellant had provided avoid dates as directed including the whole of February. On 9 November Customs wrote to the Tribunal that it was too early to give dates to avoid because the Appellant had not had the opportunity to object to Customs’ witness statements.

Appellant’s submissions

13.	Mr Maugham relied on the unreported decision of Lightman J in Customs and Excise Commissioners v Eastwood Care Homes on 18 January 2000 setting out factors to be taken into account which were not exclusive.  Although that case considered an appeal out of time to the High Court, he submitted that the same principle apply.

14.	He said that in September the Tribunal had laid down a careful timetable for an early hearing.  He said that the Statement of Case did not comply with the Tribunal’s directions and that more than a month after 2 November Customs remained in breach of Directions (4), (5) and (6).  No application had been made for an extension of time.

15.	He said that no explanation had been given to the Appellant for the delay.  The Appellant’s letters had not been answered.  Pressure of work is not a satisfactory explanation, see Eastwood Care Homes at paragraphs 10 and 11.

16.	Mr Maugham said that the Appellant was being denied the use of its working capital being caused serious and ongoing prejudice. An award of interest if the appeal succeeded would not cure this.  The Appellant had been obliged to borrow £300,000 at 12 per cent interest.

17.	He submitted that although it was not the time for the Tribunal express a view on the prospects there was a real prospect on the face of the documents that the Appellant would succeed.  In two of the alleged chains, the Appellant had sold the mobile telephones before the purchase said to be part of a chain.

18.	As to the effect on the delay on public administration, he said that the non-compliance by Customs had necessitated the present hearing with a resultant effect on the Tribunal’s resources 

19.	As to the importance of complying with time limits, he said that this was the second substantial delay in the present case through failure to comply with time limits.

20.	As to the resources of the parties, he said that Customs have the resources of the Crown, whereas the delay reduced the Appellant’s means still further.

21.	Mr Maugham said that whereas in Eastwood Care Homes and Customs and Excise Commissioners v Neways International (UK) Ltd [2003] STC 795 the breaches had been remedied at the time of the hearings, here the breaches were continuing.  The Statement of Case remained defective, no documents had been exhibited to four witness statements, there had been no effort to agree the question for a preliminary issue until that day and no avoid dates had been provided.  Customs had not provided copies of the documents in their List in spite of repeated requests.  He said that Customs had not taken the directions of the Tribunal seriously.

22.	At the Tribunal’s suggestion over the luncheon break the parties agreed a draft preliminary issue for the Tribunal’s consideration in the event that Mr Maugham’s application to allow the appeal did not succeed.

Customs’ submissions

23.	Miss Morton said that the Statement of Case had not been criticised until this hearing.  There had been other appeals by the Appellant relating to earlier periods and eleven witnesses as well as the Review Officer’s report to consider.  She said that when read as a whole, paragraph 7 of the Statement of Case made it clear that Customs’ case is that the Appellant’s lack of knowledge of the chain is not relevant.  The schedules and diagrams accompanying the Statement of Case showed the basis of the circularity alleged.

24.	She said that before the hearing she did not know that the Appellant had still not got the documents.  A note on the file passed on by her predecessor indicated that they had been sent by support staff on 29 October; she assumed they were lost in the post.

25.	She said that the witness statements had been despatched by the Review Officer at Poole to the Solicitor’s Office on 1 November and would have arrived on 2 or 3 November.  She did not know whether the Review Officer had been told of the dates in the direction.  She could not say why four of the statements omitted the exhibits.  She assumed that the witnesses still have the exhibits and could provide copies within 14 days.

26.	As to avoid dates, her predecessor must have misunderstood the rules as to objections to witness statements.  She pointed out that a letter from a Proper Officer at the Tribunal dated 13 October had asked for avoid dates within 21 days.

27.	Miss Morton said that the Appellant had suffered no real prejudice.  The statements were only four working days late and the missing documents and avoid dates could be provided within 14 days.  Any non-observance could be dealt with by a costs order or a penalty under Schedule 12, paragraph 10.  It would be severely prejudicial to Customs if the appeal was to be allowed.

28.	Mr Maugham in reply said that the administrative procedures adopted by Customs did not excuse the failure to comply with the Tribunal’s directions.  Structural defects in administration and pressure of work were no excuse.  It was, he said, difficult to see a principled basis for distinguishing the factors set out in Eastwood Care Homes.  It was not merely a question of the prejudice to the parties.  However the delay here caused a clear prejudice for which the Appellant could not be compensated in costs or interest; section 79 of he VAT Act did not apply.  No explanation had been provided for the inaction since the application was served on 3 November.

Conclusions

29.	I consider first the instances of non-compliance on which the Appellant relies.

30.	The first matter concerned the Statement of Case.  Mr Maugham complained that it did not as directed state whether it is contended that the knowledge of the Appellant is relevant.  While paragraph 7 might have been more happily worded, in my judgment its effect is that the knowledge of the Appellant is not relevant.  That was the basis of the reference in Bond House Systems.  Furthermore if Customs wished to contend that the Appellant had knowledge of the alleged fraud, such allegation would have had to be pleaded clearly in the Statement of Case.

31.	The other criticism was that the Statement of Case did not state whether it is contended that circularity of money is sufficient without circularity of goods or specific goods. The Statement of Case specifies three separate deals, listing the chain of transactions alleged in each and annexing schedules showing the chains in diagrammatic form and tables showing the profit by each party in the chains and the VAT which specified traders did not pay to Customs.  I accept that the Statement of Case did not state in terms whether it is alleged that circularity of money is sufficient, however what matters is that when read with the schedules the facts on which circularity is alleged are sufficiently specified for the Appellant to know the case to be met.

32.	In my judgment any failure to comply as regards the Statement of Case was technical and not a matter of substance.  I do not consider that any failings in that pleading are a ground for allowing the appeal.

33.	The next complaint was the late service of witness statements and the omission of the exhibits to four statements.  This was a clear breach aggravated by the total failure to respond to the letters from the Appellant’s solicitors asking for copies of the documents in Customs’ List and the continued failure to provide the exhibits.  It is apparent that Miss Morton’s predecessor cannot have looked at the statements before they were served.  It is clear that essential parts of the preparation for the case were not carried out by the Solicitor’s Office and not supervised by that office.  The witness statements which were apparently collected at Poole from officers at six different offices bore dates varying from 7 October to 28 October.

34.	Although the last witness statement was dated five days before the date directed by the Tribunal, there is no indication that anyone took responsibility for ensuring compliance with the direction for service by 2 November with exhibits.  There was no application for an extension.  The witness statements were not served until after the Appellant’s application of 3 November that the appeal be allowed unless they were served within 14 days and until after a chasing letter from the Tribunal.

35.	Although the statements were only four working days late, their late service disrupted the timetable laid down by the Tribunal since they were relevant both to avoid dates and to whether the Appellant should serve witness statements by 16 November. This late and incomplete service of witness statements was a serious and material non-compliance. This was aggravated by the failure to provide copies of the listed documents. Whatever was on the file (see paragraph 24) it must have been apparent from the application of 3 November that the Appellant had not received the documents.

36.	The next matter of complaint was the failure by Customs to respond to the direction to use their best endeavours to agree a preliminary issue.  The whole basis of the direction in September was that a preliminary issue would be heard between January and March 2005 provided the issue was approved by the Tribunal.  The direction envisaged a hearing date notified in the first half of November unless a further hearing was needed to identify the issue.

37.	The fact is that Customs appear totally to have ignored that part of the direction and did not even acknowledge the proposed question faxed by the Appellant’s solicitors on 25 October. The first response was the production of an alternative question at this hearing which was then agreed with a minor change.

38.	The next non-compliance was the failure to provide avoid dates. On 8 November the Tribunal wrote to Customs stating that avoid dates had not been received. This elicited the reply that the Appellant had not had the opportunity to object to the witness statements and “it is too early for the Commissioners to give helpful dates to avoid.”

39.	This was misconceived since the statements were too late for service under Rule 21, so that the question of objections did not arise.  It was clearly likely that the Appellant would wish to cross-examine most of the witnesses given that factual circularity is in issue.  I can see no satisfactory reason why dates to avoid were not obtained at the same time as the witness statements.  Even at the date of this hearing no attempt had apparently been made.  Mr Maugham’s comment that Customs chose which directions to observe unfortunately appears to be correct.

40.	Mrs Morton said that the documents and exhibits and the avoid dates could be provided within 14 days, which would be 20 December.

41.	There is now no prospect of listing a 3 day hearing in January and little prospect in February.  A more realistic date will be in March.  Indeed Mr Maugham is not available in February.

42.	If Customs had complied properly with the earlier directions, there would have been a real prospect of a January hearing.

43.	No satisfactory explanation was advanced for the failure to comply with the Tribunal’s directions.  I would stress that this was not the fault of Miss Morton who was only allocated the case on the departure of her predecessor to the private sector at the end of November.  She did not seek to cast the blame on anyone.

44.	The most important factor is prejudice. Any decision to allow an appeal necessarily involves prejudice to Customs.  That means that it is not a step to be taken lightly, however it cannot make Customs immune to Rule 19(4) which gives power to allow or dismiss an appeal for non-compliance.

45.	The Appellant has clearly been prejudiced by the appeal being delayed probably by two months.  Miss Morton pointed out that there were other appeals by the Appellant.  One of those concerned input tax for period 02/03 in which the decision to disallow part of the input tax was withdrawn before service of the Statement of Case.  Another concerns disallowed input tax for period 06/03 where as here it is alleged that the Appellant was involved in a carousel without its knowledge; that appeal is due to be heard from 16 to 18 February 2005 which is one of the reasons making a February hearing of this appeal unlikely.

46.	The delay in this case thus has a cumulative effect.  I see no reason to doubt Mr Maugham’s assertion that the denial of working capital is causing ongoing prejudice to the Appellant which can only partially be remedied by an award of interest if it succeeds.

47.	In my judgment it is relevant that no allegation has been made that the Appellant was privy to a carousel.  Furthermore it is clear from the returns that the Appellant had a substantial business which is not challenged by Customs. Whatever the outcome of the reference to the Court of Justice in Bond House Systems, it cannot be said that the Appellant has no real prospect of success on the facts.  Indeed this was not suggested by Miss Morton

48.	The non-compliance by Customs had had some adverse effect on Tribunal resources in that it gave rise to this hearing; however it has not delayed other cases and is only a minor aspect.  The decision of this Tribunal in Wine Warehouse Europe Ltd [1993] VATTR 307 stressing the importance of complying with time limits was cited by Lloyd J in Neways International (UK) Ltd at page 801. I accept Mr  Maugham’s submission that it is important in the present case that Customs are still in breach of some of the directions in the present case.  It is also relevant that Customs were in breach of not just one but three of the directions given following a hearing occasioned by their failure to serve the Statement  of  Case on time and have failed to provide copies of the documents in their list in spite of repeated requests.

49.	On the other hand I bear in mind that this is an appeal of some complexity and that it is still only four months since the Notice of Appeal.

50.	As pointed out in Wine Warehouses it has become standard practice for Customs to seek extensions of time for the Statement of Case and too often time limits are not observed. In many cases appellants are in no hurry and acquiesce in delays.  In the present case the Appellant company was anxious to progress matters and has done all that is required of it.  While the facts are somewhat complex, most of them had been collated by Customs before making the decisions under appeal.  If the time table presented serious difficulty, Customs’ advocate at the September hearing should have said so.  With minor amendments, the directions released on 1 October were given orally on 27 September in order to speed matters.  If Customs needed more time they should have applied for the directions to be varied.  They must however have known that any substantial departure from the timetable would be resisted.  The reality is that Customs have not devoted proper resources to this appeal.

51.	I have considered the balancing exercise referred to by Lloyd J in Neways International (UK) at paragraph 29 and the matter of proportionality. The earlier directions intended to achieve an expedited hearing have been frustrated. The intermediate courses are of limited value to the Appellant. An indemnity costs order will not undo the delay. An award of interest under section 84(8) in the event of ultimate success will not compensate the Appellant for loss of business or for expensive borrowing. The imposition of a penalty not exceeding £1000 under Schedule 12, paragraph 10 would not benefit the Appellant.

Direction

52.	I direct that the appeal should be allowed with costs on the standard basis and that any application for determination or taxation of costs be made within two months of the release of this direction.

THEODORE WALLACE
CHAIRMAN

RELEASED: 14 December 2004

LON/04/1206