UT clarifies pleading requirements in VAT fraud cases: Ammanford Recycling Limited v HMRC

Citation: [2023] UKUT 302 (TCC)
Judgment on

Introduction

The case of Ammanford Recycling Limited v The Commissioners for HM Revenue and Customs (HMRC) presents an appeal against a procedural decision by the First-tier Tribunal (Tax and Chancery Chamber). The core issues discussed pertain to the requirements of pleading and particularization in ‘Kittel’ cases of VAT fraud and the subsequent implications for cross-examination in a tribunal setting.

Key Facts

Ammanford Recycling Limited operates as a scrap metal dealer and has contested HMRC’s denial of VAT repayment, which was purportedly connected to fraudulent VAT evasion. Central to the dispute is whether the company had actual knowledge or should have known about the fraud—a claim rooted in the Kittel principle. The case also touches on penalties imposed on the company’s directors under sections 69C and 69D of the Value Added Tax Act 1994 (VATA 1994). Notably, for the case to proceed, it was contested whether HMRC needed to disclose specific individuals within the company who had such knowledge and the particulars of the alleged fraud.

The legal principles in this case revolve around the provisions for pleading serious allegations such as fraud or actual knowledge of fraud. The Upper Tribunal (UT) confirmed that while allegations of actual knowledge in Kittel-related cases do not necessarily imply dishonesty, they are considered serious and require specificity in pleading to inform the opposing party sufficiently. Notably, the UT acknowledged several legal principles:

  1. HMRC’s Ability to Plead a ‘Someone Knew’ Case: HMRC can plead that someone within the company must have had actual knowledge for a corporate entity without identifying a specific individual—a principle upheld in previous cases such as ‘Tower Bridge GP Ltd v HMRC’ and ‘Ronald Hull Junior Limited v HMRC’.

  2. Necessity to Plead for Specific Individuals when Knowledge is Alleged: If HMRC wishes to assert that an individual witness had actual knowledge, it must first be specifically pleaded—not done in ‘blanket’ terms that someone within the company knew.

  3. Provision of Primary Facts: In cases where there are serious allegations against individuals, such as the company’s directors, primary facts outlining these assertions must be disclosed to enable sufficient defense.

  4. Implications for Cross-Examination: Pleading that a specific individual had actual knowledge implicates that if HMRC intends to suggest as much during cross-examination, they must first amend their Statement of Case to specifically allege this.

  5. Fonecomp Principle: The UT referred to the principle stated in ‘Fonecomp Ltd v HMRC’, which clarifies that a taxpayer doesn’t need to know the specifics of the fraud to be held accountable under Kittel, but HMRC must still provide sufficient information for a party to prepare their case adequately.

Outcomes

The UT agreed in part with Ammanford’s appeal. It was decided:

  • HMRC can affront a ‘someone knew’ case without specific identification.
  • If HMRC intends to question a witness’s actual knowledge during cross-examination, they must first amend their pleadings to include this specific allegation, granting the appellant an opportunity to respond appropriately.
  • HMRC is not obliged to disclose the details or the specific type of fraudulent scheme alleged. Instead, the focus is on indications that the entity lacked commercial logic and coerced transactions within the supply chain to facilitate fraud.
  • HMRC must provide primary facts regarding serious allegations against individuals—this aspect was satisfied by HMRC in relation to the appellant’s directors.

Conclusion

The UT’s decision in Ammanford Recycling Limited v HMRC emphasizes the nuances in pleading serious allegations such as actual knowledge of fraud. The UT drew a line between general and specific allegations, mandating HMRC to amend pleadings before attributing actual knowledge to specific individuals in cross-examination. This clarification strengthens the fairness and procedural integrity within the judicial process, ensuring that appellants are appropriately informed and can prepare for the case they need to meet. The decision serves as guidance for future cases, especially where complex and serious allegations are concerned.