Clarifying Abuse of Process and Article 6 in VAT Penalty Assessments: Revenue and Customs v Kishore ([2021] EWCA Civ 1565)

Introduction

Revenue and Customs v Kishore is a pivotal case adjudicated by the England and Wales Court of Appeal (Civil Division) on October 28, 2021. The case centers around Mr. Dhalomal Kishore, who was assessed substantial penalties by HM Revenue and Customs (HMRC) under the Value Added Tax Act 1994 (VATA) for alleged inaccuracies in his VAT returns. Mr. Kishore challenged these penalties, invoking potential breaches of Article 6 of the European Convention on Human Rights (ECHR) and alleging abuse of process by HMRC for advancing issues from previously struck-out appeals.

Summary of the Judgment

The Court of Appeal dismissed HMRC's appeal against the Upper Tribunal's (UT) partial allowance of Mr. Kishore's appeal. The key issue revolved around whether HMRC's approach in imposing penalties constituted an abuse of process, particularly by re-litigating matters previously addressed in appeals that were struck out due to procedural failures. The court upheld the UT's decision, affirming that Mr. Kishore's arguments concerning a breach of Article 6 had a reasonable prospect of success and that HMRC had not abused the legal process in their penalty assessments.

Analysis

Precedents Cited

The judgment extensively references several key legal precedents that shaped the court's reasoning:

Kittel v Belgium (2008): Established that entitlement to deduct input tax can be refused if a taxpayer knew or should have known of fraudulent VAT evasion in their transactions.
Joined Cases C-439/04 and C-440/04 Kittel: Influenced HMRC's stance that Mr. Kishore's transactions were connected to VAT fraud.
Johnson v Gore Wood & Co [2002] 2 AC 1: Provided a "broad, merits-based" approach to determining abuse of process.
Arbuthnot Latham Bank Ltd v Trafalgar Holdings Ltd [1998] 1 WLR 1426 and Securum Finance Ltd v Ashton [2001] Ch 291: Addressed how courts should handle second actions in cases where the first was struck out for abuse of process.
Littlewoods Retail Ltd v Revenue and Customs Commissioners [2014] EWHC 868 (Ch): Extended the Caffoor principle to VAT, reinforcing that issue estoppel has limited application in tax disputes.
Caffoor v Income Tax Commissioner [1961] AC 584: Established that tax liabilities are assessed annually, limiting the scope of res judicata in tax matters.
King v Walden [2001] STC 822: Highlighted complexities in res judicata within tax assessments.
C (A Child) v CPS Fuels Ltd [2002] CP Rep 6: Emphasized that special reasons must be identified to prevent striking out a second claim as abuse of process.

These precedents collectively informed the court's stance on abuse of process and the applicability of issue estoppel in the context of VAT penalties.

Legal Reasoning

The Court of Appeal's reasoning was multifaceted, addressing both procedural and substantive legal issues:

Abuse of Process: The court examined whether HMRC's attempt to re-litigate issues from previously struck-out Kittel appeals constituted an abuse of process. Drawing on Johnson v Gore Wood & Co, the court adopted a broad, merits-based assessment rather than the stricter tests from Arbuthnot.
Issue Estoppel: The judgment reaffirmed the limited role of issue estoppel in tax cases, following the principles established in Caffoor and Littlewoods. It was determined that unresolved issues from previous appeals could still be addressed in separate penalty appeal proceedings.
Article 6 of the ECHR: The court considered whether there was an undue delay in determining Mr. Kishore's case, potentially violating his right to a fair hearing within a reasonable time. The UT had assumed the start of the delay from HMRC's denial of input tax claims in 2007-2008, and the court found that determining the reasonable nature of the delay required a merits-based trial.
Procedural Compliance: HMRC's compliance with procedural directions and the timing of penalty assessments under VATA were scrutinized. The court upheld that HMRC acted within the legal framework, referencing section 77(2) of VATA, which allows penalty assessments within two years of determining VAT liabilities.

The court ultimately balanced the need for legal finality and procedural fairness against HMRC's enforcement actions, determining that HMRC did not misuse the legal process in imposing penalties.

Impact

This judgment has significant implications for the enforcement of VAT penalties and the broader understanding of abuse of process within tax litigation:

Clarification on Abuse of Process: The case reinforces a merits-based approach when assessing abuse of process, especially in complex tax matters where initial proceedings may be struck out for procedural reasons.
Limited Role of Issue Estoppel in Tax Law: Affirming the Caffoor principle's applicability to VAT, the judgment underscores that tax assessments are typically treated as separate annual matters, preventing the blanket application of res judicata in ongoing tax disputes.
Timing and Article 6 Considerations: By acknowledging that determining whether delays breach Article 6 requires a factual, merits-based analysis, the judgment signals courts to carefully evaluate each case's unique circumstances rather than apply rigid temporal rules.
Procedural Compliance by Tax Authorities: The case sets a precedent that tax authorities like HMRC can impose penalties within statutory timeframes even if earlier related appeals were dismissed, provided they adhere to legal procedures.

Future litigants and tax authorities will refer to this case when navigating the complexities of tax penalty assessments, procedural fairness, and the boundaries of legal process abuse.

Complex Concepts Simplified

Abuse of Process

Abuse of process occurs when legal procedures are misused beyond their intended purpose, often to harass or unfairly disadvantage the opposing party. In this case, the core question was whether HMRC improperly tried to readdress issues from prior appeals that were dismissed due to procedural shortcomings.

Issue Estoppel

Issue estoppel prevents parties from re-litigating issues that have already been definitively resolved in previous proceedings between the same parties. However, in tax cases, issue estoppel is limited because each tax year or assessment is treated separately, preventing overarching conclusions from one period affecting another.

Article 6 of the ECHR

Article 6 of the European Convention on Human Rights guarantees the right to a fair and public hearing within a reasonable time. Mr. Kishore argued that HMRC's delayed penalty assessments violated this right, contending that the prolonged process undermined the fairness of the judicial proceedings against him.

Caffoor Principle

The Caffoor principle states that tax assessments are generally treated as independent for each period, meaning that decisions made for one year do not automatically influence or bar proceedings for another. This principle was instrumental in the court's assessment of issue estoppel applicability in VAT matters.

Conclusion

Revenue and Customs v Kishore serves as a critical examination of the interplay between procedural fairness, the prohibition of abuse of process, and the enforcement of tax penalties under VATA. The Court of Appeal's decision underscores the necessity for a balanced, merits-based approach in adjudicating complex tax disputes, allowing for the readdressing of previously dismissed issues within the bounds of fairness and legal propriety.

The judgment reaffirms the limited scope of issue estoppel in tax law, ensuring that each tax assessment stands on its individual merits while cautioning against the potential misuse of legal processes by tax authorities. Furthermore, it highlights the importance of adherence to procedural timelines as mandated by legislative frameworks and human rights obligations.

As tax laws and enforcement mechanisms continue to evolve, Revenue and Customs v Kishore will remain a cornerstone for legal practitioners and tax authorities alike, guiding the equitable administration of tax laws and the protection of taxpayers' rights within the judicial system.