Did Tax Just Become Less Taxing?

Enta Technologies Limited v The Commissioners for Her Majesty’s Revenue and Customs [2014]

Background

Enta Technologies Limited (Company) is a distributor to UK retail outlets of personal computers and related products, with a turnover exceeding £100 million and 125 employees.

A minor part of the Company’s business includes export sales of products such as computer chips and drives. The sale of these products was zero-rated for VAT purposes, which left the seller with a claim against HMRC for the repayment of the input tax.

HMRC carried out an investigation into the Company’s VAT returns. This led to 36 assessments, which denied repayment claims made by the Company and required further payments of more than £35 million. The first group of assessments were based upon HMRC’s view that the relevant transactions were connected to tax losses resulting from Missing Trader Intra-Community (MTIC) frauds. The Company appealed these assessments and this was proceeding towards trial. The second group of assessments were also based upon HMRC’s view that the relevant transactions related to MTIC frauds. The third group of assessments related to non-MTIC related matters.

On 7 June 2013, HMRC presented a winding up petition against the Company, based upon the non-payment of the second and third groups of assessments. The Company had by this stage made an application to the tax tribunal to appeal these assessments out of time (Application), however the Application had not yet been heard by the tax tribunal. On 21 June 2013 the Company applied for an injunction restraining advertisement of the winding up petition and sought its dismissal. The petition was adjourned pending determination of the Application by the tax tribunal.

The Application was heard on 20 August 2013 and the tax tribunal judge granted the extension and stated “I am not persuaded that the appeals are hopeless”.

Decision

The High Court held that the winding up petition should be dismissed as an abuse of process and/or as a matter of discretion and the advertisement restrained.

Within his judgment, David Donaldson QC noted the following:

• It is well established that the winding up jurisdiction should not be used to resolve genuine and real disputes as to the existence of a debt, and that accordingly a petition should be dismissed as an abuse of process. The advertisement should be restrained by injunction if the debt relied on by the petitioner is bona fide disputed on substantial grounds;
• In tax cases, the existence of an assessment creates a statutory debt that remains extant and is incapable of dispute unless and until any appeal to the tax tribunal is successful and the assessment is cancelled or amended. Since April 2009, by virtue of the rule 8(3)(c) of the Tribunal Procedure (First- tier Tribunal) (Tax Chamber) Rules 2009, the tax tribunal may strike out the whole or part of proceedings before it if: “the Tribunal considers there is no reasonable prospect of the appellant’s case, or any part of it succeeding”. The tax tribunal was the appropriate forum to determine whether an appeal has real prospects of success. David Donaldson QC stated “In such circumstances, the winding-up court should in my view, post-2009, refuse itself to adjudicate on the prospective merits of the appeal and leave that question to be dealt with by the tribunal, whether by dismissing the petition or staying it in the meantime.”

It therefore seems that HMRC should not attempt to present a winding up petition against a company, in circumstances where an appeal to the tax tribunal is outstanding, without first applying to the tax tribunal to strike out the appeal under rule 8(3)(c) and any such attempts should be resisted.

For more information, help or advice please contact Claire Seddon on 0191 211 7991.