R & C Commrs v Kishore – Court of Appeal allows VAT penalty appeal to be heard

The Court of Appeal (CoA) have upheld a decision by the Upper Tribunal (UT) which set out that the First Tier Tribunal (FTT) had been incorrect to strike out an Appellant’s grounds of appeal.

In the case of the Commissioners for Her Majesty’s Revenue and Customs  v Dhalomal Kishore [2021] EWCA Civ 1565, the CoA confirmed that Kishore had the right to advance issues which could have been raised in the FTT relating to the deduction of input tax which has previously been struck out.

Summary of the facts:

• HMRC had denied the input tax claimed by Kishore in VAT periods 03/06 and 06/06 on the basis that he ‘knew or should have known’ that the relevant transactions were connected with fraud under the Kittel principle.
• Kishore appealed however the FTT struck out his claim on the basis that he had failed to comply with directions and failed to respond to an Unless Order.
• Kishore applied for the appeals to be reinstated but the application was refused. Kishore sought permission to appeal that decision but was refused by both the FTT and UT.
• Shortly before the refusal to reinstate the appeals was confirmed by the UT, HMRC imposed penalties under section 63 (now repealed) of the VAT Act 1994 for inaccuracies in his 03/06 and 06/06 VAT returns.
• Kishore appealed against this penalty however HMRC contended it would be an abuse of process for Kishore to be permitted to litigate the Kittel issues in the penalty appeals because they could have been litigated in the original Kittel appeal had the case not been struck out because of Kishore’s “disregard of the rules”.
• The FTT considered Kishore had no prospect of success in proving that it would not be an abuse of process to re-open issues in the Kittel case or of disputing the penalty assessments on the basis that there been a breach of article 6 of the Convention. Article 6 of the Convention states that everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.
• However on appeal to the UT it was concluded that the FTT had in fact erred in striking out Kishore’s penalty appeal grounds as they failed to take into account Kishore’s argument that “it would not be abusive to advance arguments in the penalty appeal relevant to reasonable excuse, even though they were also relevant to the issue of knowledge in the Kittel appeals, in circumstances where throughout the Kittel appeals there had been no intimation by HMRC of an intention to make a penalty assessment”.
• The UT judgement was upheld in Kishore’s favour and referred the case back to the FTT.
• HMRC appealed this decision to the CoA on the basis that they believed that the UT had applied the wrong test. The UT had approached the case on the basis that the “broad, merits-based” approach adopted in Johnson v Gore Wood & Co was applicable as opposed to the stricter line of authority stemming from Arbuthnot and so allowed Kishore to re-litigate issues raised in Kittel appeals only. HMRC contended that the sterner test used in Arbuthnot   ought to be applied because there had been intentional and contumelious conduct, wholesale disregard of the rules or otherwise inexcusable conduct by Kishore in the Kittel appeals.  
• Kishore cross appealed this, submitting that the penalties should be set aside as HMRC had breached his Article 6(1) and article 6(3)(a) rights due to unreasonable delay in raising the penalties and additionally the delay in determining whether he is liable to a penalty.
• The CoA dismissed both appeals.
• The CoA stated that it would permit all of HMRC’s grounds of appeal but dismiss the appeal.  It has not been evidenced that Kishore was guilty of intentional, contumelious or inexcusable conduct.
• The COA held that the UT was correct to proceed on the principles derived in Johnson v Gore Wood & Co. The question of whether Kishore was permitted to re-litigate issues in the penalty appeals which had previously been considered in the Kittel appeals should be determined on “broad, merits-based judgement” taking all of the facts into account. The only reason this came into question was because the Kittel appeals had not been voluntarily withdrawn and instead been struck out.

The case has now been handed down to the FTT to hear the substantive issues on the misdeclaration penalty.

Aspire comment:

Importantly, the penalty regime under section 63 of the VATA 1994 has been replaced and, more recently, we are seeing penalties both on companies and company officers raised under section 69C and section 69D of the VATA. Albeit section 63 was actually replaced by Schedule 24 of the Finance Act 2007. It is important to understand the various penalty regimes which can be applied for wrongdoings in all areas of business compliance. Get in touch today and let’s have a discussion about penalties or business compliance in general.

See our recent blogs on penalties here;

Penalties…penalties and more penalties

The use of ADR in challenging penalties under section 69C and 69D of the VAT Act 1994