Judgment summary
The Upper Tribunal heard an appeal by VNS Waste Solutions Limited ("VNS") against a decision of the First-tier Tribunal ("FTT") issued on 27 November 2024, which refused VNS's application to bar HMRC from taking further part in proceedings (paragraph 1).
VNS had appealed against a VAT deregistration decision (withdrawn on 6 November 2023) and against a decision and assessment denying VNS the right to deduct input tax of £1,818,418 in its VAT accounting periods 12/16, 03/17 and 06/17 (paragraph 2).
HMRC's primary case was that the input tax was not allowable under the Kittel principle, namely that VNS knew or should have known that the supplies were connected with the fraudulent evasion of VAT. HMRC's alternative case was that there were in fact no taxable supplies at all (paragraph 3).
The Upper Tribunal, comprising Mr Justice Marcus Smith and Judge Mark Baldwin, dismissed VNS's appeal, upholding the FTT's refusal to debar HMRC (paragraph 71).
Background
The dispute concerned a circular chain of alleged waste removal supplies involving VNS, a company called Construction Supplies & Consumables Ltd ("CSC") and a company called T Davies Utilities Ltd ("TD"), with HMRC analysing the transactions as TD supplying CSC, CSC supplying VNS and VNS supplying TD (paragraphs 9 and 10).
It was common ground between VNS and HMRC that if no supplies were made to VNS, no supplies would be made by VNS either, so that a victory for HMRC on the no supply argument would discharge any net VAT liability for VNS (paragraphs 4 and 11).
HMRC's original decision of 26 November 2018 denying input tax recovery relied only on the Kittel ground; the no supply ground was first pleaded in the alternative in HMRC's original statement of case dated 15 July 2019 (paragraph 19).
A preliminary issue on the burden of proof in relation to the 'no supply' case was decided by the FTT (Judge Citron) on 16 March 2021, holding that the burden of proving a supply lay with VNS and that it was fair to deal with both the Kittel and no supply grounds at the same hearing; this decision was never appealed (paragraphs 24 to 27).
Core dispute
VNS applied to debar HMRC from further participation in the proceedings on the ground that HMRC had no reasonable prospect of success, because HMRC's own pleaded facts supported only a finding of no supply, which would mean there could be no Kittel denial of input tax and no net VAT liability (paragraph 4).
VNS argued that, as the burden of proving a supply rested on VNS, and VNS intended to do nothing to discharge that burden (indeed inviting a finding of no supply), the FTT would be bound to find there was no supply, destroying both the no supply argument and the Kittel argument (paragraph 14).
VNS was granted permission to appeal on six interconnected grounds concerning whether the no supply case took precedence over the Kittel case, whether the FTT correctly identified HMRC's pleaded case, whether HMRC's primary pleaded case was that there was a supply, whether HMRC would succeed even if VNS did nothing, and whether the FTT erred in refusing to debar HMRC (paragraph 7).
Court findings
The Upper Tribunal held that it was not necessary for the no supply argument to be determined first in isolation, agreeing with the FTT's approach and with the observations in Microring Limited v HMRC, [2019] UKFTT 456 (TC) that all issues and evidence should be analysed together rather than artificially separated (paragraphs 38 and 39).
The Tribunal found that HMRC's Further Amended Statement of Case pleaded, as its primary case, that supplies were made to VNS and that the criteria for a Kittel denial were met, with the no supply argument pleaded as an alternative or fallback (paragraphs 51 and 53).
The Tribunal rejected the submission that it was logically impossible for HMRC's primary case to be that there was a supply while also maintaining that the burden of proving a supply lay on VNS, holding that the burden of proof operates only as a final tiebreaker and does not prevent HMRC from leading evidence of a supply or the FTT from finding one (paragraphs 29, 52 and 58).
The Tribunal held that, even if VNS did nothing to prove a supply, this would not mean VNS's appeal would automatically succeed, since HMRC could still seek to prove, and the FTT could still find, that supplies were made (paragraph 61).
Applying the Easyair/First De Sales test for whether a party has a realistic as opposed to fanciful prospect of success, the Tribunal concluded that HMRC's Kittel case was fully pleaded and supported by evidence, including admissions in VNS's own pleadings and witness evidence, and therefore had a reasonable prospect of success (paragraphs 66 and 67).
The Tribunal also noted that even if it considered HMRC had no reasonable prospect of success, it would be premature to debar HMRC given inconsistencies in VNS's pleadings and evidence and the need for fuller investigation at a substantive hearing (paragraph 70).
Outcome
The Upper Tribunal dismissed VNS's appeal, upholding the FTT's decision not to debar HMRC from taking further part in the proceedings (paragraph 71).
Major issues / areas of contention
- Whether a pleaded no supply case must be determined before a pleaded Kittel case
- Whether the FTT adopted an incorrect approach to identifying HMRC's pleaded case
- Whether the FTT correctly identified HMRC's actual pleaded case on whether there was a supply
- Whether the FTT was wrong to find that HMRC's primary pleaded case was that there was a supply
- Whether the FTT was wrong to find that HMRC would succeed even if VNS did nothing
- Whether the FTT erred in refusing to debar HMRC and summarily determine the appeal in VNS's favour