Megantic Services Ltd (Megantic) appealed against a case management decision of the First-tier Tribunal granting HMRC permission to rely upon evidence obtained under s 7 of the Crime (International Co-operation) Act 2003 (the 2003 Act) in an appeal; Megantic Services Ltd v HMRC [2010] UKFTT 125 TC.
Background to the case
HMRC had refused Megantic's claims for recovery of input tax on the basis that the relevant transactions were connected with Missing Trader Intra-Community (MTIC) fraud and Megantic knew, or should have known, that the transactions were connected with the fraudulent evasion of VAT. Megantic appealed against this refusal to the First-tier Tribunal.
Before the First-tier Tribunal HMRC wanted to rely on evidence which included information that the Dutch Public Prosecutor had obtained about the fraud and had supplied to HMRC in compliance with HMRC's request under s 7 of the 2003 Act.
Part 1 of the 2003 Act provided for mutual assistance between nations in criminal proceedings. However, s 9(2) provided that the evidence obtained pursuant to a s 7 request for information should not be used for any purpose other than that specified in the request unless the consent of the appropriate overseas authority was given.
Megantic objected to the use of the Dutch evidence before the First-tier Tribunal on the basis that an appeal relating to the recovery of input tax did not constitute criminal proceedings and so the material should not have been admitted.
The First-tier Tribunal held that HMRC was not prevented from using the evidence for the purposes of Megantic's appeal provided HMRC confirmed that they had the consent of the Dutch Public Prosecutor to use this material.
The First-tier Tribunal also held that the evidence should not be excluded on the grounds that it was unreliable or that its admission was barred by earlier directions of the First-tier Tribunal.
Megantic appealed to the Upper Tribunal. The issues to be determined were whether the Dutch evidence was inadmissible under s 9(2) of the 2003 Act and whether, if the evidence was admissible, it should not have been admitted either because it was unreliable or because its admission was barred by earlier directions of the First-tier Tribunal.
The decision of the Upper Tribunal
The Upper Tribunal held that s 9(2) did not preclude the admission of the evidence in Megantic's appeal for the recovery of input tax, and the Dutch material would be admissible even if the Dutch Public Prosecutor had not agreed to that use.
In any event, the Upper Tribunal held that it was bound by the decision of the Court of Appeal in BOC Ltd v Instrument Technology Ltd [2001] EWCA Civ 854. In BOC the Court of Appeal had held that the relevant section of the predecessor to the 2003 Act did not prevent the use in civil proceedings of evidence obtained by means of letters of request even without the consent of the foreign authority.
Parliament was presumed to have intended that s 9(2) be interpreted in the same manner as the predecessor legislation was interpreted in BOC, and therefore s 9(2) was only concerned with how the relevant evidence could be used in relation to criminal proceedings.
The Upper Tribunal held that the circumstances of Megantic's appeal could not be distinguished from BOC. Therefore the Dutch material was not inadmissible and HMRC were not precluded from using it in Megantic's appeal in relation to the recovery of input tax.
The Upper Tribunal also held that it was clear that the Dutch Public Prosecutor had given consent for the evidence to be used in proceedings before the First-tier Tribunal. Such consent had been provided on the condition that the British government indemnify the Dutch government from the consequences of successful compensation claims brought by third parties in respect of the possible unlawfulness of the making the information available to the UK for use in civil proceedings.
On the remaining issues, the Upper Tribunal held that the decision of the First-tier Tribunal to admit the Dutch material did not disclose any error of law as it was within the ambit of the judge's discretion. It was a case management decision and the Upper Tribunal held that it should be slow to interfere with such a decision.
Why it matters
This case provides an interesting insight into the interplay between civil and criminal tax and how evidence gathered for the purposes of a tax prosecution may find its way into the civil Tax Tribunals.
This is an issue of increasing relevance, given that HMRC are expected to conduct more criminal prosecutions over the next few years as a result of increased funds being made available to the department in its drive against tax avoidance and tax evasion.
In this case, the Upper Tribunal considered that it was bound by the earlier decision of the Court of Appeal in BOC and so Megantic could not have been decided differently. It will be interesting to see whether Megantic seeks permission to appeal to the Court of Appeal in order to raise its arguments before a court which is not bound by precedent.
If so, the taxpayer may well have an uphill struggle given that, if there is relevant evidence of fraud involved, the court may well listen sympathetically to HMRC's arguments.
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Jonathan Levy, Partner, Reynolds Partner Chamberlain
