Revenue And Customs v Pacific Computers Ltd

Factual and Procedural Background

This appeal concerns a decision of the First-tier Tribunal ("FTT") allowing the appeal of Pacific Computers Limited ("the Respondent") against Her Majesty's Revenue and Customs ("HMRC") refusal to permit recovery of input VAT for the accounting period 09/06. The case involves allegations of missing trader intra-community (MTIC) fraud relating to transactions in computer processing units and iPods. The Respondent conceded that the transactions were connected with fraudulent VAT evasion, but disputed that it had actual or constructive knowledge of the fraud. The sole issue before the FTT was whether HMRC had proved, on the balance of probabilities, that the Respondent knew or should have known of the connection to fraud. The FTT ruled in favour of the Respondent, finding no such knowledge or means of knowledge. HMRC appealed this decision to the Upper Tribunal.

Legal Issues Presented

1. Whether the FTT erred in law in its approach to the evidence and submissions regarding the Respondent's knowledge or means of knowledge of fraud.
2. Whether the FTT erred in law by failing to give proper weight to evidence from witnesses whose witness statements were unchallenged and not subject to cross-examination.
3. Whether the FTT erred in law by refusing to admit or give weight to certain evidence tracing money movements contained in a schedule evidenced in an unchallenged witness statement.
4. Whether the FTT erred in law by making unspecified findings of fact to justify its decision rather than finding specific facts and then reaching a decision based on them.

Arguments of the Parties

Appellants' Arguments (HMRC)

• The FTT wrongly treated evidence of the overall fraudulent scheme as incapable of proving the Respondent's knowledge of fraud, leading to perverse findings of "no evidence" of knowledge.
• The FTT erred in law by refusing to give significant weight to unchallenged witness statements, particularly that of Officer Clarke, whose evidence supported the tracing of money flows in the fraudulent scheme.
• The FTT failed to provide proper reasons for its decision, improperly making unspecified findings of fact to support its conclusions.
• The FTT erred in refusing to draw adverse inferences against the Respondent for failure to produce witness statements from relevant witnesses, misunderstanding the principles governing such inferences.
• HMRC submitted that the totality of the evidence, including the orchestration, contrivance, and circularity of the transactions, indicated that the Respondent must have known or should have known of the fraud.

Respondent's Arguments (Pacific Computers Limited)

• The FTT's decision complied with relevant case law and the principles governing appellate review of findings of fact and credibility assessments.
• HMRC's appeal amounted to an impermissible challenge to the FTT's findings of fact and value judgments, which the FTT was entitled to make.
• The Respondent accepted the principles requiring appellate caution in overturning factual findings and emphasized that the FTT had properly considered the evidence and credibility of witnesses.
• The Respondent contended that the Clarke schedule evidence was hearsay and defective, and that it was not responsible for seeking disclosure of underlying documents.

Table of Precedents Cited

Court's Reasoning and Analysis

The Upper Tribunal carefully examined the FTT's approach to the evidence and submissions. It identified several key errors of law:

• The FTT erred by treating unchallenged witness statements, including those of HMRC officers who were not cross-examined but whose evidence was accepted as undisputed, as having little or no weight. The Tribunal emphasized that unchallenged evidence must be accorded full weight, referencing the Court of Appeal's decision in Merthyr Tydfil Car Auction Limited v Thomas.
• The FTT improperly rejected the Clarke schedule and related evidence tracing money flows, despite the Respondent's acceptance of the schedule's contents and the absence of any challenge or request for underlying documents. The Upper Tribunal found this refusal to give weight to unchallenged evidence was an error of law.
• The FTT made unspecified factual findings to support its conclusions rather than finding specific facts first and then making reasoned decisions. This approach contravened the duty to give reasons as established in Flannery v Halifax Estate Agencies Ltd and related authorities, undermining the transparency and fairness of the decision.
• The FTT misunderstood and mischaracterized HMRC's case, particularly regarding the relevance of evidence of orchestration, contrivance, and circularity of transactions. It failed to properly consider or explain why it rejected inferences urged by HMRC that the Respondent must have known or should have known of fraud given the highly orchestrated nature of the transactions.
• The FTT improperly separated the Respondent's transactions from the wider fraudulent scheme, failing to connect evidence of fraudulent companies involved in the chains to the question of the Respondent's knowledge. It dismissed evidence of involvement of certain companies as irrelevant to the Respondent's knowledge without adequate reasoning.
• The FTT's assessment of witness credibility was flawed by its failure to weigh HMRC's evidence against that of the Respondent's witnesses in a reasoned manner, effectively preferring the Respondent's evidence in all conflicts without sufficient analysis of the competing evidence and inferences.

Overall, the Upper Tribunal concluded that the FTT failed properly to examine the evidence, misunderstood the case presented by HMRC, and failed to provide adequate reasoning for its conclusions. These errors were material to the outcome.

Holding and Implications

The appeal by HMRC is ALLOWED. The decision of the First-tier Tribunal is set aside.

The case is remitted to the First-tier Tribunal for re-hearing in its entirety by a fresh panel. The Upper Tribunal emphasized that it is not in a position to re-make the decision due to the need for a proper evaluation of all evidence, including witness credibility and the weighing of competing inferences. No new precedent was established; the direct effect is that the matter must be reconsidered afresh with due regard to the legal principles and evidence as properly applied.