England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BANKRUPTCY COURT

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		06/04/2017

Mr Registrar Briggs:

Introduction

1. By a Part 7 claim, the Respondent to a bankruptcy petition presented by Her Majesty's Revenue & Customs ("HMRC"), Emma Hope, seeks to set aside a previous judgment of the High Court, on the ground that the it was obtained as a result of fraudulent misrepresentations. The claim also seeks damages for HMRC's "acts of fraud and/or negligence/and or breach of statutory duty". The fate of the petition will depend upon an application now made by HMRC to strike out the Part 7 claim or obtain summary judgment.

The factual background

2. Miss Hope is a specialist designer of bags and shoes with a national and international reputation for quality and design. In a judgment of Mr John Male QC, which I shall return to later, given in October 2014 he explained:

"Since 1985 Miss Hope has made her living as a shoe designer, based in the UK. For over 25 years, the shoes have been made in factories outside the UK (usually located in Italy) which then ship direct to her customers around the world. For the last 20 years the same factories have shipped shoes to her retail stores in London. So, there were and are both wholesale and retail businesses. Until November 2007, Miss Hope operated as a sole trader. On 30^th November 2007 she transferred her business as a going concern to Emma Hope Shoes Limited. This company went into liquidation in April 2009. Since then the business has operated through a company called Emma Hope Limited"

"On the 8^th January 2007 an officer of HMRC, Surinder Aulak, visited Miss Hope to carry out a VAT audit…..After that visit and audit, correspondence ensued between HMRC and Miss Hope and her advisers. Requests for information were made by HMRC, information was provided and the correspondence carried on throughout 2007…."

3. In December 2007 HMRC made an assessment against Miss Hope of £120,725.54 in respect of VAT. This has become known as the '2007 Assessment'. HMRC issued a statutory demand based on the 2007 Assessment and a petition was subsequently presented in October 2008. This led to an application for an interim order pursuant to s. 252 of the Insolvency Act. HMRC submitted a proxy at the meeting of creditors in the sum of £722,326.67. The sum was calculated on the basis of unpaid direct taxes, surcharges, interest, the 2007 Assessment, and an estimated VAT claim in respect of post-November 2007 trading. The chairman of the meeting admitted the proxy despite Miss Hope raising objections with the result that the proposal to creditors was rejected.
4. Miss Hope applied to court appealing the decision of the chairman (the "IVA Appeal"). Before the IVA appeal was heard HMRC raised what has become known as the '2010 Assessment'. The 2010 Assessment related to post-November 2007 trading and calculated that £320,566.00 was due and owing. In early 2010 the IVA Appeal against the chairman's decision was adjourned to permit Miss Hope to appeal the 2007 and 2010 Assessments to the Tax Tribunal. As the adjournment was caused by Miss Hope she was ordered to pay HMRC's costs.
5. Subsequently, Mr Neal of HMRC and Mr Welby of BDO Stoy Hayward (acting for Miss Hope) met to discuss the situation. The outcome was that HMRC agreed to withdraw the 2007 Assessment. I shall deal with this in greater detail below. As regards the 2010 Assessment, Mr Welby was informed by Mr Neal that a declaration in lieu of a return would be accepted to replace the 2010 Assessment as a result of bad debt relief. Miss Hope duly submitted the declaration in lieu, and the 2010 Assessment was withdrawn.
6. The IVA Appeal came before Registrar Derrett in May 2013. She dismissed the appeal concluding that the 2007 Assessment created a statutory debt due at the date of the creditors' meeting. Miss Hope was granted permission to appeal the decision of Registrar Derrett but the appeal was dismissed by John Male QC on 3 December 2014. A paper application for permission to appeal to the Court of Appeal was made but also dismissed. The application to appeal was renewed at an oral application in July 2015. Vos LJ refused the application for permission to appeal. Vos LJ considered that the appeal stood no reasonable prospects of success, but added that if there had been fraud he would have decided otherwise. This led to an application by Miss Hope to re-open her appeal, alleging fraud on the part of HMRC. That hearing was heard by Morgan J who dismissed the application in December 2015. Giving reasons for dismissing the application Mr Justice Morgan commented:

"On 5 October 2015 the Claimant was notified by the Court of Appeal that her application to re-open her appeal could not be made under CPR 52.17. The Court of Appeal informed the Claimant that she may have an alternative remedy namely to bring fresh proceedings to set aside the earlier judgment or judgments on the basis that they had been obtained by fraud."

7. The Part 7 claim issued in February 2016 claims HMRC had acted fraudulently. The court adjourned the hearing of HMRC's petition for bankruptcy, but upon being given an indication that HMRC would seek to strike out the claims made, directed that HMRC should not file a defence until after this hearing. In May 2016 Miss Hope applied to join Emma Hope Limited ("EHL") and amend the Particulars of Claim but the application was dismissed. EHL was subsequently wound up.

The Part 7 Claim

8. The particulars of claim are repetitive, confusing and fail to particularise. I seek, therefore, to summarise the claim against HMRC. Paragraph 1 of the Part 7 claim explains:

"This case turns on a decision of Registrar Derrett on 13 May 2013 which I now seek to have set aside on the basis that it was obtained by fraud on the part of the Defendant."

9. The fraud is said to fall into three categories: withholding evidence; deliberate misrepresentation to the court and abuse of public office. I cite paragraph 5.17 and 6 of the particulars as they summarise the factual issue. Paragraph 5.17 and 6 are themselves quotes from the judgment of John Male QC's judgment:

"Registrar Derrett concluded that the attempt by Miss Hope to challenge HMRC's debt in the manner in which she did by the application to the Court and then to appeal the assessments was in some respects misconceived: [25]. The Registrar also concluded that the appeal in relation to the amount of the tax due was entirely a separate matter ([25]) and that the two alternatives had been brought together in a manner that was not appropriate: [25]. Registrar Derrett also relied upon Miss Hope's failure to appeal the 2007 Assessment until 2010 and the time it took her advisers to establish what the case was as to why VAT was not due and that the responsibility for this fell at her door: [27]. Registrar Derrett ordered Miss Hope to pay HMRC's costs…"

"The rights and wrongs of the 2007 Assessment and the 2010 Assessment are hotly contested by Miss Hope and HMRC. Miss Hope says that she has been vindicated because the two Assessments were withdrawn. I can see that, as a result, she no doubt feels that she has suffered a serious injustice at the hands of HMRC because it was the 2007 Assessment which led to, or more accurately contributed to, the defeat of the IVA proposals. In contrast HMRC says that both Assessments were properly made and that Miss Hope (and her advisors) brought everything on herself (and their client) by providing inadequate information and not appealing the Assessments in a timely fashion."

10. Paragraph 7 of the particulars of claim draw on these paragraphs of the judgment to support the claim that "HMRC by its fraudulent conduct has misrepresented to the court that these Assessments were properly made when in fact they were not."
11. One of the misrepresentations claimed is HMRC informed the Court that the 2007 Assessment was not under appeal at the time of the hearing, when in fact it was under appeal. Another relates to the 2010 Assessment. New evidence is said to have come to light since the IVA Appeal which reveals the state of HMRC's knowledge. That evidence comes in the form of a VAT Audit Report (the "Audit Report") produced by Officer Aulak after he made his initial inspection of the business in January 2007. The Audit Report is said to contain critical information about the business at that time and demonstrates that HMRC simply got it wrong from the start and then covered up mistakes (negligence has also been claimed). The Audit Report was not provided to Miss Hope until 2014 but it was in her hands prior to the appeal from Registrar Derrett. I also note that the Audit Report had been included in the list of documents disclosed in the Tax Tribunal proceedings.
12. The Audit Report records, says Miss Hope, that Officer Aulak spent 7 hours at the business premises, inspected four quarters of documents which disclosed detailed evidence of 'outside the scope trading' (trading which did not attract VAT) and he was satisfied the records were accurate. Mr Timothy Brown and Mr Mark Watson-Gandy acting on behalf of Miss Hope submit that the 2007 Assessment was produced in breach of statutory duty and negligent as HMRC knew about the "outside the scope trading" from the very first audit visit, and failed in their duty to make proper investigations or further investigations to protect Miss Hope, and unnecessarily asked for further information which could not be readily obtained.
13. In addition, it is claimed that HMRC's failure to act promptly to withdraw or notify Miss Hope of the withdrawal of the 2007 and 2010 assessments between November 2010 and August 2011 was negligent.
14. Returning to the meeting of creditors convened to vote on proposals for an Individual Voluntary Arrangement, it is submitted that HMRC acted in bad faith or abused the process:

"In its conduct leading up to the creditors meeting, HMRC stated by its representative Dick Ivory that it would use the full vote available to it to enforce its claims under the 2007 and 2010 Assessments against me regardless of whatever evidence was presented to them to the contrary. This demonstrates an irrational and/or vindictive determination by HMRC to bring about my bankruptcy, regardless of the merits of their claims. This constituted bad faith of HMRC's office tantamount to fraud."

15. The particulars of claim assert that HMRC's unwavering assertion of the 2007 Assessment (when they knew or should have known that it was incorrect), and the continued stance that there was a debt underlying the 2010 Assessment, was used to block the passing of a resolution to approve proposals for an arrangement. Miss Hope's position is, but for the failures of HMRC, whether deliberate or otherwise, creditors would have voted by majority for the proposals at the meeting of creditors. A vote for an individual voluntary arrangement would have provided her and her business financial and reputational advantages.
16. Further it is claimed that HMRC made a misrepresentation to Miss Hope in August 2011 that if she were to sign a "nil return" declaration, HMRC would withdraw the 2010 Assessment. This was not only wrong and misleading but Miss Hope claims that this constitutes an act of fraud as HMRC knew that the 2010 Assessment had already been withdrawn in about November 2010.
17. In the IVA Appeal Registrar Derrett found Miss Hope and her advisors had "largely brought about the delay" in resolving the 2007 Assessment by failing to give the correct explanation for the discrepancies and then taking some two years to produce the supporting documents. She found Miss Hope had delayed in issuing appeals and pursuing them with due diligence: the 2007 Assessment had not been appealed until 2010. Miss Hope contends that HMRC knew that the 2007 Assessment was under appeal at the time of the 2009 creditors' meeting. If Registrar Derrett had known of this, it is said, she is likely to have reached a different conclusion and these proceedings would have taken a different course.
18. The relief pleaded is (i) the order of Registrar Derrett be set aside (ii) HMRC pay "compensation for the loss I have suffered" as a result of the "Defendant's acts of fraud and/or negligence and/or breach of statutory duty and (iii) costs of the proceedings. The loss pleaded is "at least £500,000" and loss of reputation, pain suffering and costs.

The issues

19. As the particulars of claim suffer from some inadequacies I have asked counsel acting for HMRC and Miss Hope to agree a list of issues. The agreed issues are:

19.1 Whether Miss Hope has a real prospect of showing that the Registrar Derrett was misled by conscious and deliberate dishonesty; and such conscious and deliberate dishonesty was material to the Court's decisions (the "Fraud Claim");

19.2 Whether the claim is an abuse of process on the grounds of issue estoppel, either on the basis of res judicata or the extended principle in Henderson v Henderson.

19.3 Whether HMRC is in breach of a statutory or common law duty to Miss Hope or liable for misfeasance in public office so as to found a claim for damages ('the Tort Claim').

19.4 Whether HMRC are estopped from denying that the assessments were issued negligently and/or without meeting the required standard of best judgment.

19.5 Whether the loss claimed by Miss Hope, or any part of it, is merely the reflective loss of her company.

19.6 Whether Miss Hope's claim is sufficient to extinguish the petition debt.

19.7 Whether the Fraud Claim and/or the Tort Claim are time-barred.

19.8 And whether, to the extent that the claim as a whole is not struck out or disposed of by way of summary judgment, the particulars of claim in any event obstruct the just disposal of the claim by reason of incoherence and/or failure properly to particularise Miss Hope's case.

20. I shall use the list of agreed issues as a guide to the arguments raised but the focus is on the particulars of claim. I shall therefore not slavishly follow the list of issues.

Strike-out/Summary Judgment

21. The Court's powers to strike out a statement of case are contained in CPR 3.4(2). The court may strike out a statement of case if it appears to the court –

"that the statement of case discloses no reasonable grounds for bringing or defending the claim;

that the statement of case is an abuse of the court's process or is otherwise likely to obstruct the just disposal of the proceedings; or

that there has been a failure to comply with a rule, practice direction or court order.

When the court strikes out a statement of case it may make any consequential order it considers appropriate."

22. The courts have found that it is not generally appropriate to strike out a claim in an area of developing jurisprudence. Further a statement of case is not suitable for striking out if it raises a serious live issue of fact which can only be properly determined by hearing oral evidence. An application for summary judgment should not be allowed to develop into a mini-trial of disputed issues of fact. On the other hand:

" …that does not mean that the court has to accept without analysis everything said by a party in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporary documents. If so, issues which are dependent upon those factual assertions may be susceptible of disposal at an early stage so as to save the cost and delay of trying an issue the outcome of which is inevitable" see ED&F Man Liquid Products Ltd v Patel and another [2003] EWCA Civ 472 at paragraph 10

23. As regards summary judgment, this procedure is generally designed for obvious cases that are not suitable for trial: Three Rivers DC v Bank of England (No 3) [2001] UKHL 16, [2001] 2 All ER 513, [2001] Lloyd's Rep Bank 125, per Lord Hope at 95. That consideration weighs all the more heavily when the case involves allegations of serious fraud or dishonesty; generally, conclusions on such issues ought to be reached at trial, so that obvious caution ought to be exercised before giving summary judgment in a case of that nature: Wrexham Associated Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237, [2008] 1 BCLC 508, [2007] BCC 139, esp, at 49 – 59. Nevertheless where it can be shown that there is no realistic prospect of success then summary judgment will or may be appropriate and the court should not be deterred from granting such relief simply because of a difficulty arising from the pleadings, the volume of documents or the allegations made. The court has before it skeleton arguments running to over 30 pages each, five bundles of authorities and six bundles of documents. In most circumstances this would lead the court to inquire whether the case is appropriate for summary judgment. But I remind myself if there is no real prospect of Miss Hope successfully pursuing her claims then, even though good faith, fraud and integrity are in issue, there is no bar to giving summary judgment: Wrexham Associated Football Club, supra.
24. In Apvodedo NV v Terry Collins [2008] EWHC 775, Henderson J (as he was) said at 32:

"It is well established that in order to defeat an application for summary judgment it is enough for the Defendant to show a prospect of success which is real in the sense of not being false, fanciful or imaginary. However, the burden on the Defendant is at most an evidential one. The overall burden of proof rests on the Claimant to establish, if it can, the negative proposition that the Defendant has no real prospect of success. . . . and that there is no other reason for a trial. Regard must also be had to the overriding objective of dealing with the case justly. The court should not hesitate to give summary judgment in a plain case, and if the case turns on a pure point of law, it may determine that point. However, the court has often been enjoined not to conduct a mini-trial on the documents, without discovery and oral evidence . . . ."

25. I have in mind this jurisprudence when dealing with the issues I have set out above. It is Mr Mullen's case that the particulars of claim disclose no real prospect of succeeding on the claim and there is no other compelling reason why the case should be disposed of at trial.

The judgments, the Audit Report and post report events.

26. It is worth returning to the judgment in the IVA Appeal and the appellate judgment before dealing with the detail of the pleaded case. Miss Hope was represented by specialist insolvency counsel. The Registrar recorded that it was argued that the claim of HMRC should have been admitted at the sum of £222,087.08 for voting purposes and not £722,326.67. As can be gleaned from the chronology above, at the time of the hearing the 2007 Assessment was no longer extant. The Registrar found that reliance was no longer made on the 2007 Assessment "as a result of Miss Hope belatedly providing information as to the nature of the underlying trading which gave rise to it." The Registrar found that the 2010 Assessment had been replaced due to bad debt relief by a declaration in lieu. The use of the word "replaced" was deliberate and used by counsel acting for Miss Hope. HMRC informed the Court that the tax affairs of Miss Hope had been regularised and that if she wanted to submit a new proposal to creditors, HMRC would adjourn the hearing of the bankruptcy petition to await the outcome of the meeting of creditors.
27. In her judgment Registrar Derrett said:

"The assessments which formed the subject matter of the claims brought by HMRC merit some consideration albeit, in my view limited consideration. It is right to say that the 2007 Assessment arose following visits to Miss Hope's premises by the tax inspector in 2007. He identified certain discrepancies between the accounts and the VAT returns. The discrepancy was initially explained by Miss Hope's advisors as arising from 'exports' to non-European countries or to European countries where no VAT number was available. I have been taken to the correspondence passing between HMRC and Miss Hope's advisers of which there was a considerable amount, from which it is apparent that this 'exports' explanation was pursued in that correspondence to explain the discrepancy but no supporting information or documentation was provided to show that these transactions were zero-rated, despite requests in 2007 and thereafter. It has been suggested by counsel for Miss Hope that the officer who attended the premises should have realised that there was an explanation for these discrepancies from an analysis of the supporting documents. I do not accept that as being a realistic proposition. The officer identified discrepancies and he asked for an explanation. The reason that no supporting information was provided became apparent from the fact that in about 2009 Miss Hope's advisors appear to have realised that this explanation was wrong….. in my judgment Miss Hope and her advisers have largely brought about the delay by failing to give the correct explanation for the discrepancies and then taking some two years to produce the documentary evidence to support the alternative explanation."

28. On the appeal from Registrar Derrett ([2014] EWHC 3854), John Male QC summarised the position regarding bad debt relief "Irrespective of whether Miss Hope was trading personally, bad debt relief meant that no VAT was payable by her in any event. This led to the 2010 Assessment also being withdrawn".
29. Mr Male QC found (paragraph 67) that "there was evidence to support" the conclusion made by Registrar Derrett that the delay in resolving the 2007 Assessment was "largely brought about" by Miss Hope. The Deputy Judge said he would make the same finding. The appellant Judge also found that it was Miss Hope's "own accountant" who "set the hare running which caused much of the delay." To write to HMRC explaining that the sales related to "export" was "to say the least most unfortunate, and also inappropriate." As regards the finding of Registrar Derrett that Miss Hope had failed to pursue the appeals with due diligence, the Deputy Judge opined that the challenges to this finding were "untenable". Similarly, the Deputy Judge dismissed the challenge concerning the Registrar's finding that the 2010 Assessment arose as a result of Miss Hope's continued trading (in her personal capacity). The Deputy Judge said he was "satisfied that there was evidence to support" the finding.
30. Those findings of fact are now established. They have been appealed unsuccessfully and all appeal routes have been exhausted. Miss Hope now seeks to claim that Registrar Derrett made the findings upheld on appeal, as a result of fraudulent misrepresentations.
31. The Audit Report became the centre of a submission before the Deputy Judge on appeal. It was deployed by counsel acting for Miss Hope to argue that HMRC had failed in their duty to exercise best judgment. This is a very similar argument to what is pleaded by Miss Hope in the particulars of claim. The skeleton argument produced by Mr Brown acting for Miss Hope summarises the submission made:

"HMRC did not raise and/or maintain the VAT assessments to the best of their judgment because:

"The 2007 Assessment was raised solely upon the difference in the turnover between management accounts (described as exports) and submitted VAT returns. HMRC Officer Aulak who issued the assessment noted during his visit to Emma Hope on 8 January 2007 that the SAGE report for VAT Periods 04/07 and 07/07 included sales which were outside the scope of VAT….He then noted for VAT Periods 07/05 and 10/05 wholesale supplies had been purchased from Italian suppliers and sold to non-UK customers without entering the UK and therefore outside the scope of VAT (VAT is charged on the supply of goods or services made in the UK- s 1 VAT Act 1994; goods not removed from or to the UK and not in the UK at the time of supply are treated as supplied outside the UK- s7(2) VAT Act 1994"

32. Miss Hope contends that the Audit Report demonstrates Mr Aulak's knowledge of trade that did not attract VAT. Knowledge of outside the scope trading as recorded in the report is relevant to the fraud claim. It is perhaps important to focus meticulously on the facts that are said to have been misrepresented to the Court by HMRC and how the case is put. To this extent some of what appears below has been touched upon above. This will unfortunately lead to a slightly longer judgment that I would have liked, but it is justified to provide a contextual analysis by reference to the contemporaneous documents. I start with the Audit Report and the events that followed.

The Audit Report

33. The report is divided into two parts. The first deals with the checks that had been made by the officer. The second sets out identified risks arising from the audit. In respect of the first part one passage is relied upon:

"Basic checks P04/04 & P07/04. Checked D print to VAT return & back to VAT detailed listings (for O/T I/T, Net outputs & net inputs)

Various adjustments made to SAGE VAT summary figure as the SAGE report is picking up all the sales/purchases (including outside the scope sales/purchases) and trader is adjusting the VAT return figures to exclude these. Trader explained the I/T figures and these were traced back to the VAT return amounts. Traced back as far as possible to the net inputs/outputs figures. Also traced the EC acquisitions figures back to the intrastate figures- satisfied.

P07/04 trader to explain why O/T increased by £1103.09, I/T decreased by £1,376.11 & where they got the figures for the import VAT of £998.09 – no explanation received but now out of time therefore no further action taken."

34. Mr Brown contends that that HMRC received all the necessary information from Miss Hope's accountant, Mr Hancox, in June 2009. The evidence is repeated in Miss Hope's witness statement. However, the evidence of HMRC is that a "package of paperwork was received from Mr Hancock. Within this bundle were several 'deal sets' showing purchase invoices from Italian suppliers to Emma Hope and sales invoices, from Emma Hope to several customers……there was no evidence of export to non-EC customers….the invoices were not accompanied by any schedule and they did not match the listings on the Excel spreadsheet."(sic) Mr Brown submits that HMRC should have read the documents and understood from that point, the trading arrangements of the business and assessed the tax accordingly. The provision of documentation in June 2009 was made in the context of an explanation from Mr Hancox about the difference in turnover. The documentation provided was unlikely to have assisted HMRC as naturally, it would have focussed on the explanation that the turnover related to exports that were zero rated.
35. The Audit Report is said to be the ticking bomb as it was produced in or soon after January 2007 and is evidence that HMRC knew that the true explanation for the difference in turnover was out of the scope trading. In my judgment the Audit Report provides no such evidence. There is nothing inconsistent with noting in the Audit Report that basic checks had been made (including outside the scope sales) in two quarters (April and July 2004), and that an explanation was required for the differences of £1,005,191 for the year ending 30 April 2005 and £1,799,667 for the year ending 30 April 2004. The Audit Report states under heading "Risk 9" that "VAT is due on this potential under declaration". It did not state that there was an under declaration. HMRC wanted to know more before it made a decision. That is why HMRC wrote to Miss Hope asking for an explanation. Mr Brown accepts that HMRC were entitled to ask for an explanation. I do not accept the submission made by Mr Brown and Mr Watson-Gandy that the Audit Report is evidence that Mr Aulak "made a finding" that all the discrepancy identified was explained by 'out of the scope' trading. The Audit Report does not bear such an reading. The genesis of the confusion and problem for Miss Hope arose, as previous Courts have found, out of the response to the request for the explanation about the difference in turnover.

Events following the audit report

36. In his witness statement, Richard Wilkin of HMRC explains what happened after the inspection:

"on 23 January 2007 Mr Aulak wrote to Marilyn Sugden, who I understand (based on the VAT Audit Report) to have been the Finance Manager for Emma Hope Shoes. Mr Aulak set out a number of outstanding points…..[and] requested an explanation"

37. The outstanding points related to the difference in turnover and potential under declaration of VAT. Mr Wilkin continues:

"On 1 March 2007, Mark Hancox (who identifies himself within the correspondence as the Finance Manager of Emma Hope Shoes) responded to Mr Aulak. No explanation was provided by Mr Hancox in respect of the discrepancies identified. Mr Aulak responded on 2 April 2007, but did not received a response and so sent a chasing letter on 3 July 2007 Mr Aulak did not receive a response and so sent a further letter on 21 September 2007 indicating that he would be issuing a VAT assessment in respect of (amongst other matters) the discrepancies identified. On 11 December 2007, a VAT assessment was issued to Ms Hope in the amount of £120,725.54 (being the 2007 Assessment). The notification of assessment was sent on 27 November 2007.

On 29 May 2008, Richard Anthony & Company ("Richard Antony") wrote to HMRC on behalf of Ms Hope in respect of the 2007 Assessment. Their explanation of the discrepancies was as follows:

"We understand that the figure disclosed as turnover on the VAT Returns only related to UK sales turnover and that the difference relates to export sales, either to non European countries or European countries where VAT numbers were available".

38. Mr Watson-Gandy submits that Richard Anthony had appealed the assessment in May 2008. He says the evidence of the appeal is contained in an electronic file provided by HMRC in January 2016 and is attached to 3 letters from Richard Anthony. It should be noted that this argument has already been run and lost. However, he submits that HMRC acknowledged the existence of the appeal. On 8 May 2008 Richard Anthony wrote stating "our initial research seems to indicate that this discrepancy has arisen from exports which were not subject to VAT during the period and we will of course investigate this and revert to you." On the same day, a second letter was written "It would appear that a substantial amount of the assessment is incorrect as the VAT has been incorrectly charged on this export. We will be lodging the appropriate appeal and will supply Customs with all information they require so that this can be agreed at a reduced level". There are several things to note. First the letter expresses a future intent to lodge an appeal. It does not state an appeal had been lodged. Secondly the undetailed dispute relates to a 'substantial' part of the assessment not all the assessment. The electronic filings of June 2008 evince an internal appeal against surcharges and penalties only. Lastly HMRC were being informed that the discrepancy arose as a result of exports. The focus from HMRC's perspective was correctly on the representations made by Richard Anthony who were Miss Hope's agent for the purpose of dealing with her tax affairs and providing the explanation that had been asked for by the investigating officers.
39. To end the correspondence in May 2008 Richard Anthony's letter dated 29 May 2008 stated:

"We understand that the figure disclosed as turnover on the VAT Returns only related to UK sales turnover and that the difference relates to export sales. Either to non European countries or to European countries where VAT numbers were available".

40. A second letter stated that an appeal against the assessment had been made. It was conceded in oral argument before me that the term appeal in the letter did not mean an appeal to the Tribunal. It meant that the tax payer had asked HMRC to review the assessment. The assessment included surcharges and penalties. The nature of the review is evidenced by the response from HMRC soon after on 5 June 2008:

"You have stated that you understand the differences between the declared turnover on the VAT returns and the turnover declared on the annual accounts relate to export sales either to non European countries or to European countries where VAT numbers were available. Please now forward a reconciliation/breakdown of these amounts so that I can check and confirm these figures. On receipt of this information I will be in a position to review my assessment. If the assessment is subsequently reduced any further interest charged in respect of the VAT assessment will be reviewed at that stage. Please note that in future your client must ensure that all export sales to both European and non European countries are included in box 6 of the VAT return. I have forward your appeal against the penalties and surcharge to my colleagues in the Default Surcharge Appeals team and they will liaise directly with you regarding this matter."

41. This contemporaneous document is evidence of an appeal being lodged against surcharges and penalties, and a review had been requested in relation to the principal VAT sum contained in the 2007 Assessment.
42. It took until 15 September 2008 for the response from Richard Anthony. A short letter enclosed two schedules. The first schedule tracked the original VAT returns and the second recalculated VAT returns. It appears that there was a failure to provide a reconciliation/breakdown of the turnover declared on the annual accounts relating to export sales to non European countries or to European countries where VAT numbers were available. A second letter accepted that part of the assessment remained good even if all the new information was accepted at face value and "…..our client does recognise that she owes substantial sums to HMRC for both VAT liabilities".
43. HMRC responded on 16 October 2008 accepting the challenge made to the assessment and removed the disputed part of the debt from the debt break down. HMRC made clear that it would proceed in respect of the balance that remained outstanding. The outstanding sum was £273,557. On 30th October 2008, HMRC presented a bankruptcy petition based on the revised amount which it believed to be undisputed in petition no 10556 of 2008 against Miss Hope. Richard Anthony sought to agree a payment plan but HMRC rejected it on the ground that the timescale for payment was excessive. Tenon Recovery wrote to HMRC on 20 January 2009 seeking to agree an adjournment of the petition to enable a proposal to be put to creditors.
44. The papers reveal that between September 2008 and February 2009 Mr Aulak had taken a different post and Mr Neal taken his position. In February 2009 Mr Neal wrote to Richard Anthony informing the accountants that he had now reviewed the schedule submitted and stated that he was "concerned that you have not explained the reason why the returns were so much in error with the figures used to produce the annual returns, the basis of the significant elements of Mr Aulak's assessment". He noted the representations by Richard Anthony, that the difference related to "export sales, either to non European countries or to European countries where VAT numbers were available". He went on to set out all the matters he wanted to see to support the explanation and ended stating "I will await your reply on this matter before taking any further action in connection with adjustment or enforcement of the disputed assessment." Nothing was heard from Richard Anthony which caused Mr Neal to write again on 14 May 2009 "I am aware of the current position regarding this registration and the associated business and your negotiations with the Debt Management Unit of this Department. Accordingly, it is important that these issues are resolved in order that the full outstanding liability is addressed during these negotiations." Mr Neal enclosed his previous letter which set out the matters that required answering and finished "I request that this information be sent to me within 30 days of this letter, otherwise I will consider the matter closed and the original assessment will stand."
45. On 15 May 2009 Amanda Ireland wrote as nominee to creditors convening a meeting for the purpose of proposing a voluntary arrangement and asking for proxy votes. The meeting was held on 8 June 2009. The proposal explained that HMRC had presented a petition for Miss Hope's bankruptcy on 30 October 2008 and the High Court had adjourned the hearing until 24 June 2009. The proposal was signed on 29 May 2009 by Miss Hope stating that the information contained in the proposal was true. It stated:

"Up until September 2007, and for the previous 22 years, I had always paid creditors as and when they fell due. Despite difficult trading in certain years after the London bombings in July 2005 and the extension of the congestion charge in West London in 2007, the business traded profitably and had built up a customer base and a business with a turnover of between £4-5 million on very little outside investment. In order to be able to bring in a small amount of outside investment through offering shares, Emma Hope Shoes Ltd started trading in November 2007. The assets of stock from me trading as Emma Hope Shoes were transferred to the new company Emma Hope Shoes Ltd. However the outstanding debts to HMR Revenue and Customs of approximately £180,000 remained with me as well as the trade creditors."

46. On 22 May 2009 Mr Neal spoke with Mr Hancox over the telephone. An attendance note records that Mr Hancox was to approach Italian suppliers to re-issue certain invoices. In the meantime, Amanda Ireland wrote to creditors seeking to postpone the meeting of creditors as "some creditors addresses were incorrectly notified to me." A new date was set of 25 June 2009. At the end of May Mr Hancox wrote to David Neal by e-mail informing him that he was preparing "full details ….for….documents details overseas wholesale revenue not originally included in the vat return…" adding "we hope this will be sufficient evidence to withdraw the £120,000 assessment" as "we would obviously be keen to resolve the assessment prior to a meeting of creditors for Emma Hope's IVA..." Documents were then provided and Mr Neal responded promptly on 19 June 2009 "thank you very much for the documents you have provided. However, these do not provide sufficient evidence to prove that the supplies were by the business were appropriate for zero rating for Value Added Tax purposes" (sic). He referred to his letter of 25 February 2009 for the evidence that was required.
47. HMRC duly submitted a proxy which included (i) self assessments (ii) PAYE/NIC1 (iii) a penalty of £100 (iv) interest and surcharges and (iv) a VAT claim of £332,538.52. Two weeks before the meeting Mr Neal spoke with Mr Hancox. The attendance note of the meeting records:

"Mr Hancock (sic) stated he was still working on providing the information requested and has established that the goods went into a bonded warehouse. I asked why they needed to go into a bonded warehouse. He stated he was unsure whether they were under bond or not, but they went into a warehouse. I stated that this did not change the fact that they still required the evidence of export in order to zero rate the sales. He stated that it was the warehouses (sic) responsibility and that we should be requesting information from them. I stated that the warehouse would not do anything other than store the goods unless directed and paid to do so….I stated that in order to qualify for zero rating they would still need to obtain evidence that the goods were being removed from the warehouse for export…"

48. It is self-evident from this attendance note that Miss Hope's agent was informing HMRC that zero rating should be applied not because the turnover thought to attract VAT was 'outside the scope' but because of an export exemption.
49. Miss Hope was present at the meeting convened on 25 June 2009. She was questioned by Richard Ivory from the Voluntary Arrangement Service about several matters. She said that she disputed amounts claimed by the Inland Revenue but acknowledged that further information needed to be provided in order to reach an agreement on the VAT claim. It appeared that the details of Miss Hope's income and expenditure were in question making a return to creditors of 11p in the £ unachievable. She was asked to recalculate her figures. The meeting was adjourned until 9 July 2009. Responding to a letter from Amanda Ireland dated 2 July 2009 which informed HMRC that the time for the meeting had changed, Mrs Heffer of HMRC wrote:

"It is now apparent that the debts to the Italian suppliers are deemed legally due from the debtor personally. As such the debtor must also be deemed to have continued trading for the VAT registration used to be valid. Correspondence from Mr Hancock (sic) to the VAT office confirms that the debtor knows that VAT was incorrectly attributed to the Company and that records need to be amended to attribute these liabilities to her personally and has requested to re-register her de registered VAT number…..Once these records are corrected the VAT liability due from the debtor will be significantly increased as such in the interim the VAT liability due has now been recalculated and is included in HMRC's voting claim."

50. Isadore Goldman solicitors were instructed by Miss Hope. They wrote to HMRC on 7 July 2009 explaining that the 2007/2008 return was incorrect as there had been double counting of assets. As regards VAT:

"The VAT claim of £332,538.52 is disputed in part to the amount of £120,725.54. This represents a mistake on the completion of the VAT returns, details of which HMR&C are well aware. HMR&C maintains that insufficient evidence has been produced by Emma to support her contention that goods supplied from abroad were all EU sourced. We are trying to get all the papers which are present in archive available but Emma's position is that if the form had been correctly completed by her accounts department no VAT was payable and that sum is therefore no due from her." (sic)

51. On the same day that HMRC submitted its proxy to the nominee, Mr Hancox had sent shipping documents in relation to the period 2004/2005. Correspondence ensued between a newly appointed tax advisor to Miss Hope, Mr Welby and HMRC. The correspondence mostly related to the tax treatment in respect of Miss Hope's different trading vehicles.
52. In a letter dated 7 December 2009 Mr Neal wrote to Miss Hope setting out the issues that required resolving and summing up the period leading up to the meeting of creditors:

"On 2 July, a series of e-mails were received from Mr Hancox. Attached to these e-mails were scanned bills of lading and consignment notes obtained from the Italian warehouse. Examination of the attachments showed that there were insufficient details on the documentation to support the zero-rating of the supply. Nor were there sufficient examples to support all the transactions on the spreadsheet submitted. Also included in the documents were consignment notes to addresses within the UK. There appeared to be evidence of a tri-angulation of some of the supplies, between Miss Hope, her customer and the Italian suppliers. However, the EC Article 28 Simplification Invoice statement did not feature on any of the invoices provided and, as stated previously, no EC VAT registration number was provided for the customers, as required. Subsequently conversations with Mr Welby of BDO Stoy Hayward, suggested that he had been informed that ALL of the transactions were outside the scope of UK VAT. Being supplies made directly from the Italian suppliers to Miss Hope's customers in other EC member states or outside the EC. Mr Welby was advised that the Commissioners did not dispute that supplies wholly outside of the UK were not subject to UK Value Added Tax, however, the volume and value of these supplies, together with suitable evidence had not been provided."

53. Considering Mr. Welby's intervention further Mr Neal explained:

"Accepting, Mr Welby's statement that this listing contains "all the sales outside the UK" this then leaves the UK sales, included on Mr Hancox's schedule and described as "not originally included in the VAT returns. No explanation of what has happened with these transactions has yet been received…..The in-house accountant Mr Hancox, produced a schedule of transactions, which did not form part of the original VAT returns that significantly exceeded the original differences between the two declarations submitted by Emma Hope Shoes to the relevant sections of HMRC based on the same business records. Finally Mr Welby has put forward a third scenario, which may well be valid, but only addresses a portion of the transactions provided by Mr Hancox. The Commissioners have maintained the original assessment on the ledger as being due as to date no full and final explanation of the anomalies has been provided upon which to justify withdrawal/amendment or replacement of this assessment."

54. These documents have some significance in explaining how the parties were viewing events at the time leading up to the meeting of creditors and shortly after. I have been taken to no other documents relevant to the period. The outcome of the meeting with HMRC voting against an arrangement was the proposals were rejected. The chairman admitted HMRC's full claim which comprised 39.83% of the votes. On 21 July 2009 Miss Hope made an application to appeal the conduct of the meeting seeking a declaration under rule 5.22 of the Insolvency Rules that the votes cast at the meeting in respect of HMRC and one other creditor were invalid, and seeking that the meeting be deemed to have approved the proposals. At the first hearing of the appeal an adjournment was sought by Miss Hope for the purpose of appealing the 2007 Assessment out of time. The adjournment application was granted. The debt manager, Patricia Heffer, explains in her witness statement what happened next:

"Miss Hope in due course appealed the two assessments….As a result of evidence provided by Miss Hope's representatives during the course of the appeal and at a meeting between Mr Neal of HMRC and Mr Welby of BDO Stoy Hayward LLP on 2 August 2011, the 2007 Assessment was withdrawn…..This evidence was sufficient to demonstrate that the supplies in respect of which the 2007 Assessment had been raised had been conducted outside of the United Kingdom."

55. The 2010 Assessment was replaced in April 2012 by a declaration in lieu of a return, showing Miss Hope's VAT liability to be nil. Miss Hope's liability was extinguished by bad debt relief, as has been found by previous Courts.
56. This forms the factual background upon which Miss Hope now seeks to make a claim against HMRC for fraud. In oral submissions Mr Watson-Gandy and Mr Brown accepted that the pleaded claim was not helpfully crafted and asked for permission to amend the particulars of claim if the claims are not struck out or summary judgment not given. Mr Watson-Gandy has most helpfully summarised the claim for fraud in oral submissions and in his skeleton argument. He says Miss Hope's case is that HMRC 'deliberately sought to conceal (and in fact did conceal) from the court and from me that the 2007 Assessment was not properly made and was in fact negligently raised by Officer Aulak and negligently maintained by Officer Neil in the run up to the 2009 IVA creditors meeting', in that:

56.1 HMRC withheld a VAT Audit Report which 'shows that I had provided in January 2007 the information which HMRC said was not furnished by me until August 2011' and HMRC 'deliberately lied to the court (by Dave Neil's 2nd witness statement of 29 April 2013) in stating "at no point prior to [2 August 2011] was this evidence provided"';

56.2 HMRC 'deliberately misrepresented to the court and to me that the 2007 Assessment was not under appeal at the time of the 2009 IVA creditors meeting'; and

56.3 HMRC 'deliberately misrepresented to the court and to me that the 2010 Assessment was not withdrawn when in fact it was'.

57 HMRC's position is that the facts presented to the court now are the same as those known at the time of the hearing before Registrar Derrett. The Registrar was entitled to make the findings she made in the conduct of her judicial office, the findings arose from the correspondence and documents presented to the court which were unanswerable and the appellate court found the findings were safe. There was a failure to raise any allegations of fraud at the hearing or at the subsequent appeal. To do so now amounts to an abuse of process. In addition, Mr Mullen submits that the particulars disclose no reasonable cause of action in that they do not demonstrate any duty owed to Miss Hope, or breach of duty causing loss to her. It is also said that from December 2007 Miss Hope conducted the business, which she had carried on as a sole trader, through a limited company. Any losses relating to events from December 2007 would have been sustained by the corporate vehicle, not Miss Hope personally.

The claim of fraud

58. The parties agree that Miss Hope must demonstrate that there was 'conscious and deliberate dishonesty' on the part of HMRC, and that the dishonesty was material to the Court's decision in the IVA proceedings: Royal Bank of Scotland v Highland Financial Partners LP [2013] EWCA Civ 328.
59. In this respect Mr Brown in his oral submissions said the fraud claim and breach of duty claim hang on the actions or inactions of Mr Neal. He says that Mr Neal should have read the audit report, read the correspondence that was in play at the time, read and understood the documents sent by Miss Hope and concluded that the 2007 Assessment was wrong. Mr Watson-Gandy did not articulate the argument in quite the same way. The arguments became a little fluid, but overall I did not discern a great deal of difference between Mr Brown and Mr Watson-Gandy. Mr Watson-Gandy submits that the circumstances leading to the hearing before Registrar Derrett are now sufficiently clear and demonstrate that HMRC deliberately made representations to the court knowing them to be false. I shall take them one at a time.
60. First he submits that the submission made to Registrar Derrett that the "discrepancy" was identified during the visit was falsely made to the knowledge of HMRC. In fact, it is said, the discrepancy was not identified at the visit but 2 weeks later. It is submitted that proof of the post-visit identification can only be shown by new evidence, namely the Audit Report disclosed by HMRC. In my judgment there is nothing in this point. The Audit Report as I have set out above, demonstrates the opposite. HMRC were justified in making the submission.
61. Next it is said that in fact there was no discrepancy at all. Mr Aulak ignored or overlooked what he had seen during his visit, reviewed the annual accounts he had taken away with him and (making a straight comparison with the VAT returns and ignoring any and all of the outside the scope transactions he had noted in his own report as being excluded from those returns) assumed that the difference between the amount shown in the annual accounts and those declared on the VAT Returns represented UK standard-rated supplies. There was no misrepresentation in respect of this fraudulent or otherwise. The report shows Mr Aulak to be asking questions which has already been accepted as a reasonable course to adopt. The authorities show that it is not for HMRC to do the work for the tax payer and the primary obligation is for the tax-payer to make proper returns. In Van Boeckel v Customs & Excise Commissioners [1981] STC 290 Woolf J explained:

"The contentions on behalf of the taxpayer in this case can be summarised by saying that on the facts before the tribunal it is clear, so it is contended, that the assessment in question was not valid because the commissioners had taken insufficient steps to ascertain the amount of tax due before making the assessment…..[I]t should be recognised, particularly bearing in mind the primary obligation to which I have made reference, of the taxpayer to make a return himself, that the commissioners should not be required to do the work for the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due…"

62. It is axiomatic that the commissioners are not required to carry out exhaustive investigations and that it is the tax payer who should have the relevant information readily available. In view of the facts I have set out in detail above, there is no reasonable prospect of succeeding on a claim based on a misrepresentation whether false, fraudulent or otherwise. The events following the visit demonstrate HMRC responding to answers provided (and sometimes chasing responses) by Miss Hope and her agents. The burden was on Miss Hope to satisfy HMRC that the difference in the turnover was not subject to VAT. The answers provided to HMRC were misleading and caused, in my view, many years of uncertainty. It was the false, or to use neutral language, incorrect answers to the questions asked, and the failure to answer the Commissioners' questions in a timely manner that led to the 2007 Assessment. It is no answer that Mr Aulak had identified two quarters where evidence of outside the scope trading had taken place. The identification of outside the scope trading was never the whole picture.
63. Miss Hope relies on the information provided to HMRC to claim that HMRC knew of outside the scope trading prior to the meeting of creditors. I have set out in detail the confused history of correspondence and continued failures to provide an explanation until Mr. Welby rescued the position much later. There is no reasonable prospect of successfully succeeding in a claim for fraudulent misrepresentation on the basis that HMRC knew or should have known from the documents it had received that the discrepancy identified could be explained on the basis of outside the scope trading. Registrar Derrett considered the correspondence at the IVA Appeal and found Miss Hope and her advisors "have largely brought about the delay by failing to give the correct explanation for the discrepancies and then taking some two years to produce the documentary evidence to support the alternative explanation." There is no evidence of a 'cover-up' and no evidence to support a factual analysis to meet the test of fraud.
64. I find that there are no reasonable prospects of success in respect of the claim that Mr Neal should have known that Mr Aulak had identified outside the scope trading. Although Mr Aulak had made the identification it was of a limited trading period. The risk identified was in respect of the difference in turnover. The explanation received from Miss Hope and her agents was misleading. Similarly, there are no reasonable prospects of success that HMRC made a conscious and deliberate representation to Registrar Derrett as to when it first saw evidence of the explanation that led to the 2007 Assessment being withdrawn. There is no evidence to support the contention that HMRC should have withdrawn the 2007 Assessment in 2007. The submission runs contrary to the documentary evidence. The reason for the 2007 Assessment was that there had been no satisfactory answer regarding the assessment from the tax-payer. Registrar Derrett's decision was based on the information provided to the meeting of creditors. At the date of the meeting, the 2007 Assessment had not been withdrawn and admissions of debt by Miss Hope's advisors and agents had been made. There is nothing in these points that raise or come near to raising a claim that HMRC made a conscious and deliberate dishonest misrepresentation or that the judgment should be set aside on grounds that the misrepresentation was material to the Court's decision. Further there is a complete failure to identify on the facts or satisfy the test of dishonesty: Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 at 389, Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2005] UKPC 37.
65. It is alleged that HMRC misrepresented that the 2007 Assessment was not under appeal when it was under appeal. There is no reasonable prospect of succeeding on a claim based on this allegation. The documentary evidence is that Miss Hope had asked for an internal review of the 2007 Assessment and HMRC had agreed to look at it upon the provision of supporting evidence. Part of the debt was taken out of account. An appeal to the Tribunal was only made after the meeting of creditors on 6 May 2010. There may be some confusion in the language used but it was pointed out by Mr Mullen that it was always open for Miss Hope to make an appeal to the Tribunal at any time. In fact, the court permitted an adjournment to allow an appeal to be made, out of time. In any event the fact of an appeal progressing, whether to the Tribunal or otherwise, does not affect the debt in an assessment. The fact of an appeal was not material to the outcome of the judgment given by Registrar Derrett or the Deputy Judge hearing the appeal. No doubt the Registrar had in mind Lam v. The Inland Revenue [2005] EWHC 592 (Ch) where Blackburne J explained:

"12 .....I have to remind myself (as Miss Markham has submitted) that authority clearly establishes that, where assessments to tax are concerned, Parliament has provided a clear and exclusive machinery for considering appeals against them. The statutory machinery does provide for appeals to court. That machinery, as Miss Markham correctly submits, is an exclusive machinery and an assessment, when made, is final and binding if it is not appealed. If it is appealed, the determination of an appeal is likewise final and binding, subject to any application there may be, in appropriate circumstances, to the court. In particular, she submits, it is not for the Bankruptcy Court to go behind those matters. As Miss Markham also submits, there is a wealth of authority to that effect, stretching back (in relation to the predecessors of the current legislation) to the latter part of the 19th century.

13. Miss Markham is correct in that submission. It is not open to the Bankruptcy Court to review the manner in which the assessment has been made, much less to investigate the merits of the assessment. I can see that if there were evidence that the assessments had been made in some fraudulent or collusive way, or there were some other glaring miscarriage of justice, it might be that the Bankruptcy Court could go behind the assessment and not make the Bankruptcy Order based upon the debt created by the unpaid tax resulting from the assessment, but there is no suggestion of that in this case. On the contrary, as I have endeavoured to show, the Revenue have entertained attempts by Mr. Lam, personally and through advisers, to reconsider the amount of the assessments, but have not been persuaded on the information that has been provided that they should do so."

66. There is no evidence to support the contention made by Miss Hope that HMRC withheld the Audit Report. The evidence points in the opposite direction. Mr Brown relied on the report (unsuccessfully) on the appeal to John Male QC. In any event, as I have demonstrated above the Audit Report does not assist Miss Hope.
67. The particulars of claim refer to a misrepresentation, if that is how it is to be categorised, about the 2010 Assessment and how it came to be replaced. The documentary evidence discloses a withdrawal of this assessment after a declaration was made by Miss Hope in lieu. It is said that Miss Hope made the declaration under protest. The evidential support is for a withdrawal based on bad debt relief. In my judgment the focus of Registrar Derrett's decision (which Miss Hope now seeks to set aside) was on the 2007 Assessment and not the 2010 Assessment. The new material (the Audit Report) does not assist Miss Hope in establishing this claim. The finding of fact has already been made. There is no evidence of a conscious and deliberate dishonest misrepresentation or that the judgment should be set aside on grounds that any such representation was material to the Court's decision.
68. In concluding the issue of fraud, I have regard to the decision of Aiken LJ in Royal Bank of Scotland plc v Highland Financial Partners LP and others (supra) where guidance is provided for a principled approach to setting aside judgments for fraud. For each of the allegations made by Miss Hope in the particulars of claim, there is a failure to demonstrate at any level or at least to a satisfactory standard "conscious and deliberate dishonesty" in relation to the statements made or to support any allegation that matters were concealed. Further no causal connection has been shown as to how the alleged misrepresentations (often termed lies in the particulars of claim) or purported concealed matters are relevant in the sense of being material to the outcome of the impugned judgment. The Audit Report does not support the alleged fraud. When the Audit Report is read with the correspondence that flowed from the inspection, the evidence overwhelmingly supports the case of HMRC.
69. There are no reasonable prospects of success and there is no good reason why the Fraud Claim should proceed to trial.

Factual findings

70. The Deputy Judge found that the Registrar was entitled to make the findings she did during her judgment. As the Registrar's judgment cannot be set aside for fraud it stands and the findings remain good. I shall approach the remainder of this judgment on this basis.

Misfeasance in public office

71. The particulars of claim include a cause of action against HMRC for misfeasance in public office. It is common ground that Three Rivers District Council v Bank of England [2003] 3 All ER 1 identifies the following requirements for the cause of action:

71.1 an act, conduct or omission that is done by a public officer

71.2 in the purported discharge of his public duties;

71.3 the act, conduct or omission is unlawful or otherwise unauthorised and will probably injure the claimant (untargeted malice) or the act, conduct or omission is intended to injure the claimant (targeted malice); and

71.4 damage is caused to the claimant as a result of the above

72. Mr Watson-Gandy submits that HMRC holds public office and as a result an officer acting for HMRC is a public officer. This is not denied. He submits that HMRC's purpose is to collect the correct sum of tax or at least use best judgment where that tax needs to be assessed under s 73 VATA 1994. This is not a controversial submission. He submits that HMRC must act within the powers it is given from time to time; as a matter of common sense, it would be unlawful for HMRC to collect sums that it knew were not due to it.
73. The misfeasance is said to arise as a result of purported actions or inactions by HMRC in the period directly before the meeting of creditors. Miss Hope contends that HMRC should have either withdrawn the 2007 Assessment from their proof of debt before the vote and/or not relied on it in the period July 2009 to August 2011. She claims that relying on the sums which were to form the 2010 Assessment in the IVA when they had no lawful power to assert a debt which they ought to have known was not owed and pressuring her to sign a "nil" declaration caused loss and damage. The claim is put on the basis that HMRC intended to harm Miss Hope (targeted malice).
74. The judgment of Registrar Derrett and Deputy Judge Male QC have not been set aside for fraud. The factual analysis required to complete the claim for misfeasance in public office as a cause of action is inconsistent with the findings of the previous Court. Registrar Derrett has found that the discrepancy was initially explained by Miss Hope's advisors as arising from 'exports' to non-European countries or European countries where no VAT number was available. She found that Miss Hope and her advisors failed to provide proper explanations as to why no VAT was chargeable. They failed to provide documentation to support their position and the delay was attributable to these failures. There is no evidence to support a contention, in the face of these factual findings, that HMRC should have withdrawn or not relied on the 2007 Assessment at the IVA meeting of creditors. As for the 2010 Assessment the finding of fact does not assist Miss Hope's position. The particulars of claim in respect of this cause of action disclose no reasonable grounds for bringing the claim as it challenges facts already found. In addition to mount the cause of action in the context of this matter is an abuse of the court's process or is otherwise likely to obstruct the just disposal of the proceedings by reason of the previous decisions.

Breach of statutory duty

75. Mr Watson-Gandy and Mr Brown submit that the there is a statutory duty of care owed by HMRC to Miss Hope and that the particulars of claim stand a reasonable prospect of success. The duty is said to arise from S73 VAT Act 1994 alternatively s16A Commissioners for Revenue and Customs Act 2005. It is submitted that S73 of the 1994 Act fixes HMRC with a duty to exercise "best judgment" and the 2005 Act provides values that an officer must aspire when dealing with tax payers. In X (Minors) v Bedfordshire County Council [1995] 2 AC 633, 731, Lord Browne Wilkinson explained:

'The principles applicable in determining whether such statutory cause of action exists are now well established, although the application of those principles in any particular case remains difficult. The basic proposition is that in the ordinary case a breach of statutory duty does not, by itself, give rise to any private law cause of action. However a private law cause of action will arise if it can be shown, as a matter of construction of the statute, that the statutory duty was imposed for the protection of a limited class of the public and that Parliament intended to confer on members of that class a private right of action for breach of the duty. There is no general rule by reference to which it can be decided whether a statute does create such a right of action but there are a number of indicators. If the statute provides no other remedy for its breach and the Parliamentary intention to protect a limited class is shown, that indicates that there may be a private right of action since otherwise there is no method of securing the protection the statute was intended to confer. If the statute does provide some other means of enforcing the duty that will normally indicate that the statutory right was intended to be enforceable by those means and not by private right of action'

76. I reject the submission that a statutory duty of care arises from these sections. The 2005 Act expressly states that in exercising their functions, the Commissioners act on behalf of the Crown. This negates an intention to secure protection for a limited class of individuals by providing a private cause of action. The term "to the best of their judgment" in section 73(1) of the 1994 Act (and repeated in other sub-sections) does not, on a purposive or literal construction permit an interpretation that Parliament intended to confer on a person who has failed to make any returns required under the 1994 Act or to keep any documents and afford the facilities necessary to verify such returns, a private cause of action. The term relied upon merely acknowledges that the Commissioners' task when making an assessment will be hampered by a lack of records, or co-operation. The officer uses his best judgment. It is a best judgment based on the information provided by the tax payer to the officer responsible for raising the assessment. There is no statutory formulation that provides a mechanism for compensation, but that does not mean that there is no statutory mechanism for challenging the decisions made by an officer of HMRC. There is such a mechanism. Miss Hope knew there was such a mechanism. Miss Hope at all times had a right to appeal to the Tax Tribunal. She did not do so as the information required by HMRC had either not been provided or had been provided in a misleading manner, leading HMRC to believe that the explanation for the discrepancy was different to what was in fact the position.
77. There are fundamental difficulties with the cause of action in any event. The court has already found that HMRC was entitled to raise the 2007 Assessment which formed the basis of the judgment upheld on appeal. There is no evidence, other than withdrawal for bad debt relief, that the 2010 Assessment was not raised using best judgment. The particulars of claim in respect of this cause of action disclose no reasonable grounds for bringing the claim as there is no seriously arguable case that a cause of action exists pursuant to statute as it challenges facts already found by a competent court. The particulars of claim are an abuse of the court's process or are likely to obstruct the just disposal of the proceedings by reason of the previous decisions.

Common law duty of care

78. It is submitted that HMRC owed Miss Hope a duty of care at common law in respect of their dealings with her. Reliance is made on R (on the application of Atapattu) v Secretary of State for the Home Department [2011] EWHC 1388 in which Mr Morris QC (sitting as a deputy judge of the High Court) summarised the circumstances where a public authority may be held liable in negligence using entirely conventional legal analysis:

"[98] The circumstances in which a public authority, when exercising statutory functions, may be held liable in negligence are circumscribed and have been the subject of much judicial authority over the last 15 years. …..

[99] A number of principles are established. First, in the case of a statutory duty, if, as a matter of construction, there is no cause of action for the distinct tort of breach of statutory duty, carelessness in the performance of that duty does not of itself give rise to liability in negligence: Stovin v Wise per Lord Hoffmann at 952H-953A and Gorringe per Lord Scott at para 71. Similarly in the case of a statutory power, a common law duty of care cannot be founded simply upon a failure – even a Wednesbury unreasonable failure – to provide some benefit which a public authority has power (or even a public law duty) to provide: Gorringe per Lord Hoffmann at para 32. The Defendant places substantial reliance upon these first two principles (as did Chadwick LJ in Martin at paras 34, 62).

[100] Thirdly, however, the fact that a public authority is exercising a statutory power or duty (statutory function) does not preclude the existence of a common law duty. Whether such a common law duty does arise is determined, in general, by the application of general principles of the law of negligence, but subject to specific considerations arising from the public law dimension and the particular statutory framework (Martin at para 32). These general principles have three strands: (1) the three-stage test in Caparo Industries Ltd v Dickman [1990] 2 AC 605 (foreseeability of damage, proximity and whether the imposition of a duty is "fair, just and reasonable"); (2) voluntary assumption of responsibility; (3) whether a duty can be established "incrementally" by reference to established categories of duty. See Customs and Excise Commissioners v Barclays Bank plc [2007] AC 181 at para 4.

[101] Fourthly, if the relationship between the Claimant and the Defendant is such as to attract, prima facie, a duty of care, it must be further considered whether the particular statutory framework and the fact that Defendant was discharging a statutory function or exercising a statutory power modifies or excludes the common law duty of care. The criteria by which to make such a judgment have been stated in various ways: for example, it has been said that certain types of decision are "non-justiciable" and one test for determining what is justiciable has been to distinguish between "policy" decisions and "operational/administrative implementation" decisions. But this approach has not been uniformly adopted. More recently, these factors have been regarded as part of the analysis under the third "fair just and reasonable" stage of the Caparo test."

79. It is submitted that there was foreseeability of damage, proximity and that the imposition of a duty is "fair, just and reasonable" as the 2007 Assessment arose not out of normal tax collection but of a national assurance programme by HMRC in which they offered advice and assistance in improving the accuracy of business's VAT returns. I do not regard this or the fact that HMRC took part in the IVA meeting as sufficient to give rise to a duty of care. The attendance at a tax payer's trading premises will not lead to a conclusion that damage is foreseeable. Likewise an internal memo providing an assessment of risk does not readily give rise to a conclusion that damage is foreseeable and neither does asking for an explanation from a tax payer who owes a duty to account to HMRC, in relation to a discovered or potential discrepancy. But in any event, none of these factors caused Miss Hope loss and damage. Miss Hope's business had been transferred to her company, Emma Hope Shoes Limited, in November 2007. Emma Hope Shoes Limited went into administration in March 2009, before the date of the creditors' meeting, and it exited administration into a creditors' voluntary liquidation in April 2010. The business was then operated by Emma Hope Limited, which itself was subject to voluntary arrangement and wound up on 17^th May 2016. Perhaps more fundamentally the Court has already found HMRC was justified in raising the 2007 Assessment and Miss Hope failed to appeal. Further the facts do not support a voluntary assumption of responsibility but if they did she would fail as HMRC has not caused her loss. Registrar Derrett has expressly found that Miss Hope's advisors realised that the explanation for the discrepancy was wrong but not until 2009. It then became their task to provide the correct explanation and support the new explanation with evidence. The tax payers charter does not advance the case for Miss Hope. The facts are against her.
80. I do not find that it is not possible for HMRC to owe a duty of care to a tax payer. The finding of a duty of care is fact sensitive. The particulars of claim in this case disclose no reasonable grounds for bringing the claim as there is no seriously arguable case that a common law duty of care arose, and the particulars of claim challenge facts already found by a competent court. Further the particulars of claim are an abuse of the court's process or they are likely to obstruct the just disposal of the proceedings by reason of the previous decisions.

Estoppel

81. Mr Mullen contends that if Miss Hope fails to make good her claim in respect of fraud and set aside the judgments of Registrar Derrett and Mr Male QC, she is estopped from raising the issues I have dealt with above. I agree and if I am wrong about any of my conclusions I find that there is an operative estoppel.
82. In Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2014] AC 160 Lord Sumption JSC explained how estoppel operates in different circumstances and gave guidance:

82.1 once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings.

82.2 where the claimant succeeded in the first action and does not challenge the outcome, he may not bring a second action on the same cause of action.

82.3 The doctrine of merger…treats a cause of action as extinguished once judgment has been given on it, and the claimant's sole right as being a right on the judgment.

82.4 [estoppel arises] even where the cause of action is not the same in the later action as it was in the earlier one, but some issue which is necessarily common to both was decided on the earlier occasion and is binding on the parties.

82.5 The principle first formulated by Wigram V-C in Henderson v Henderson (1843) 3 Hare 100, 115, which precludes a party from raising in subsequent proceedings matters which were not, but could and should have been raised in the earlier ones.

82.6 Finally, there is the more general procedural rule against abusive proceedings, which may be regarded as the policy underlying all of the above principles.

83. Save for the Audit Report (which I have found not to assist Miss Hope) the facts were all known to Miss Hope in readiness for the IVA Appeal which was determined by Registrar Derrett. The parties are the same. A decision was made by a Court of a competent jurisdiction and upheld on appeal. Miss Hope has failed to answer sufficiently or at all why she would be entitled to raise in subsequent proceedings matters which were not, but could and should have been raised in the earlier ones.
84. Mr Watson-Gandy raises an issue of estoppel raised by withdrawal of the assessments. The estoppel issues raised on behalf of Miss Hope, are themselves an abuse of process falling within principle formulated by Wigram V-C in Henderson v Henderson precluding a party from raising in subsequent proceedings matters which were not, but could and should have been raised in the earlier ones.

Conclusion

85. Mr Mullen has advanced, quite properly, issues of limitation and reflective loss. As I have found the particulars of claim should be struck out, alternatively that summary judgment should be given in favour of HMRC in respect of the claim as (i) there are no reasonable prospects of success in respect of the Fraud Claim, (ii) there is no duty of care arising at common law or (iii) statute on the facts of this case, (iv) no loss can be shown to exist in any event (v) the facts demonstrate that there are no reasonable prospect of success and (vi) Miss Hope is estopped from challenging the IVA Proceedings, dealing with limitation and reflective loss would only unnecessarily lengthen this judgment. As I understand it Mr Mullen advanced these issues as alternative arguments and mainly as a defence to the Fraud Claim.
86. I shall turn to the issue of the bankruptcy petition at the handing down of this judgment. I shall also invite counsel acting for Miss Hope to address me at that hearing on whether she is able to pay the petition debt.