The Commissioners for Her Majesty’s Revenue & Customs v Charles trading as Boston Computer Group Europe [2019] EWCA Civ 2176

**The Commissioners for Her Majesty’s Revenue & Customs v Charles trading as Boston Computer Group Europe [2019] EWCA Civ 2176** was an appeal heard by Lady Justice Asplin, Lord Justice Newey and Lord Justice Lewison in the Court of Appeal (Civil Division). The Court allowed HMRC’s appeal against a decision refusing to strike out a negligence claim, holding that no duty of care was owed by a party to its opponent in litigation to verify evidence relied upon by that opponent.

Mr Ian Charles traded as Boston Computer Group Europe. In 2006 HMRC investigated VAT Missing Trader Intra-Community (MTIC) fraud involving electronic goods. Two HMRC officers made a 15-minute unannounced visit to Tech Freight Limited, a freight forwarder, and later produced a Visit Report identifying six supply chains in electronic goods or components. E-Management Solution Europe Ltd (EMS) was named in all but one of the chains. The exception concerned the sale of 3000 Apple iPod Nanos 4GB. EMS was subsequently identified as a fraudulent trader for VAT purposes. It is now accepted that the omission of EMS from the iPod supply chain was an error.

HMRC disallowed input tax on seven purchases in Mr Charles’ VAT return for the quarter ending 30 September 2006, including the iPod transaction. Mr Charles appealed to the First-tier Tribunal (Tax Chamber). HMRC’s case was that the purchases were connected with fraudulent VAT evasion, either in the same chain or a parallel one, and that Mr Charles knew or ought to have known of the connection. The onus was on HMRC to prove both the connection to fraud and Mr Charles’ requisite knowledge. Before the FTT Mr Charles relied on the Visit Report, which he exhibited to a witness statement, to argue that HMRC had produced no transaction documentation to support a purchase or sale by EMS in the iPod chain. He contended that HMRC had therefore failed to prove the connection to fraud and consequently could not prove that he had the requisite knowledge.

The FTT heard evidence over ten days with 25 volumes of witness statements and documents, oral testimony from Mr Charles and several HMRC officers (including those involved with EMS-linked transactions), and eight volumes of authorities. Further written evidence relating to EMS, which was identified as a defaulter, went unchallenged. In its decision dated 12 June 2012, the FTT found that the iPods had been imported and sold through a chain of substantially contemporaneous transactions ending with Mr Charles’ purchase from Sceptre Services Limited and his export; that EMS was part of that chain; that EMS had fraudulently evaded VAT at its stage; and that Mr Charles should have known his purchase was connected with VAT fraud. The FTT dismissed his appeal, expressly relying on all oral and documentary evidence and putting only secondary weight on findings in other appeals such as the Sceptre case. The FTT found EMS was in the supply chain based on documentation revealing back-to-back transactions on 8 August 2006 whilst goods remained with freight forwarders. The documentation showed release of the iPods to and by EMS, Connect Communications Ltd (which was named in the Visit Report for the iPods) and Sceptre, amongst others.

Mr Charles appealed to the Upper Tribunal (Tax and Chancery Chamber) on limited grounds. He challenged the finding of a connection between his purchase and fraudulent evasion elsewhere in the chain and, based on that connection, the finding that he should have known of it. He argued that the facts found by the FTT were unsupported by the evidence, relying on the Visit Report, and that the application of the principles in Kittel v Belgium (Case C-439/04) was unwarranted. In its decision dated 24 July 2014, the UT re-examined the evidence in detail and held that the FTT was entitled to find as it did, although it criticised the FTT for failing to explain more particularly why it preferred the supply chain explanation including EMS and described its failure to mention the Visit Report as “the most serious failing” in its approach. The UT was satisfied that the evidence, leaving the Visit Report aside, was sufficient for the FTT properly to conclude that the supply chain included EMS, that the Visit Report did not undermine that conclusion, and that it was more probable than not that the Visit Report was inaccurate about the participation of EMS.

Permission to appeal to the Court of Appeal was refused by Briggs LJ (as he then was) on 15 July 2015. Briggs LJ noted that the analysis of the Sceptre transaction had formed part of a trial lasting more than two weeks before the FTT, that the evidence included surviving documents, written reports and oral testimony from Revenue officers, very lengthy cross-examination of Mr Charles, and also (but only by way of corroboration) the earlier written decisions of the FTT in the Sceptre and Coracle cases, and that the UT had conducted a very detailed re-examination of the evidence about Sceptre. He observed that as the UT itself had acknowledged, the evidence taken as a whole could be said to have elements supporting both sides’ cases, but it could not be said that there was no evidence from which the FTT’s conclusion about the link with EMS could properly be based.

Mr Charles subsequently made a complaint to HMRC about the omission of EMS in the Visit Report. HMRC conducted an internal investigation and released an internal governance civil investigation report dated 11 October 2016. That report focused on the conduct of the HMRC officers and whether they had perverted the course of justice or lied on oath; it concluded they had not. The report recorded that one of the HMRC officers who had made the visit in 2006 had checked HMRC’s electronic folder and noted release notes showing a consignment of 3000 iPods dated 8 August 2006 released from a company named Papoose to EMS and from EMS to Connect. On reviewing her notebook and the Visit Report, the officer noted that there appeared to be an error in recording the supply chain. The report concluded that the Visit Report should have been reviewed internally when the discrepancy was highlighted in 2010 whilst the FTT appeal was proceeding. It further concluded that had the visiting officers been approached at that time, it could have been established whether the Visit Report contained the error and a witness statement could have been obtained and put before the FTT. Under the heading “Learning issues” the report stated that once it was established that there was a Visit Report concerning the iPod sale, HMRC should have made enquiries with the officers who undertook the visit to Tech Freight to establish the veracity of the chain as recorded, and that had this been undertaken earlier Mr Charles may have been more fully informed.

On 10 June 2018 Mr Charles commenced a claim for damages against HMRC arising out of the matters to which I have referred. He advanced claims in breach of contract, breach of statutory duty and negligence. All were based on the omission of EMS from the chain of transactions in the Visit Report. The Particulars of Claim pleaded that as a consequence of the omission Mr Charles pursued the line of argument in the tribunal proceedings that HMRC could not prove that the iPods were from a supply chain originating with EMS; that in the run-up to the appeals in the FTT and UT he had made clear to HMRC that he was relying on EMS not being mentioned in the iPod supply chain in the Visit Report to support his case that HMRC could not prove connectivity; that HMRC had acknowledged in its response to the notice of appeal to the UT dated 8 February 2013 that the overwhelming likelihood was that the omission was a mistake; that no one made any effort to verify the Visit Report; and that the internal governance report concluded that the omission had been made in error, that no verification had taken place, and that Mr Charles had been led to believe for six years that he was right regarding his “connection” argument.

Under the heading “Duty” it was pleaded that HMRC was vicariously liable for the negligence of its officers where an act was undertaken voluntarily and went beyond a mere mistake, relying on Neil Martin Ltd v Revenue and Customs Commissioners [2007] EWCA Civ 1041, and that the exercise of statutory powers does not preclude the existence of a common law duty of care. The alleged duty of care was pleaded as follows: “The Defendant, in exercising its statutory function, had a duty to verify the factual accuracy of its evidence and disclose this matter to the Claimant. By not doing so it negligently breached its common law duty of care owed to a taxpayer, particularly one engaged in a Tribunal appeal against the Defendant, or there was a breach of statutory duty.” It was alleged that the three-stage test in Caparo Industries Ltd v Dickman [1990] 1 AC 605 was met. The breach pleaded was that HMRC knew that Mr Charles relied upon and was going to rely on the Visit Report as evidence that there was no connection between the iPods he had purchased and a sale by EMS, and took no action. Had appropriate action been taken, it was pleaded that Mr Charles would not have appealed the decision in relation to the Sceptre transaction or pursued onward appeals to the UT and Court of Appeal, nor made complaints to HMRC’s Complaints Division, the police, the IPCC or instigated the investigation which led to the internal governance report. Loss and damage was alleged comprising fees and expenses and £273,961 by way of compensation for Mr Charles’ time at £19 per hour as a litigant in person.

HMRC applied to strike out the claim under CPR rr 3.4 and 24.2 or for summary judgment. His Honour Judge Jarman QC directed himself as to the principles applying to strike-out and summary judgment, including the approach set out by Lewison J (as he then was) in Easyair Ltd (t/a Openair) v Opal Telecom Ltd [2009] EWHC 799 (Ch) at [13] and [14]. By an order dated 27 February 2019, the judge struck out the claims in breach of contract and breach of statutory duty but declined to strike out the negligence claim. The judge set out the three tests used in deciding whether a defendant sued for causing pure economic loss owes a duty of care at common law, as summarised by Lord Bingham in Customs and Excise Commissioners v Barclays Bank plc [2007] 1 AC 181 (the “Barclays Bank case”): whether the defendant assumed responsibility for what he said and did vis-à-vis the claimant or is to be treated by law as having done so; the threefold test of whether the loss was a reasonably foreseeable consequence, whether the relationship was one of sufficient proximity, and whether in all the circumstances it was fair, just and reasonable to impose a duty of care; and the incremental test. He recorded Mr Joshua Carey’s submission that there can be no duty of care by one party to its opponent in litigation, quoting Lord Bingham in the Barclays Bank case to that effect, and Mr Carey’s acceptance that HMRC’s predecessor was found to owe a duty of care to a sub-contractor in processing its application for a certificate in the Neil Martin Ltd case. The judge concluded that there was much force in Mr Carey’s submissions in relation to the investigation in 2006. However, he held that when Mr Charles appealed to the FTT, his reliance on the omission of EMS became clear. The officers who made the visit and compiled the report were not called to give evidence during the appeal and statements were not taken from them. Their supervising officers were called and those officers became aware of the omission because it was referred to in the statement which Mr Charles filed in the FTT proceedings. The judge considered that on the issue of constructive knowledge, such an omission might well be important, notwithstanding that in the event it did not avail Mr Charles because other factors prevailed. The judge emphasised that although the matter arose in the context of adversarial litigation, that was in the context of Mr Charles exercising his statutory right to appeal a decision of a public authority charged with the collection of tax, and that the omission tended to impede rather than to promote the general duties of HMRC in relation to the collection and management of taxes in the public interest. If, as was now clear, the name of EMS should have appeared in the report in respect of the chain, that would further those duties. In those circumstances, the judge found that there was a realistic prospect of establishing a narrow duty on the part of HMRC in the unusual facts of this case, once the reliance of Mr Charles on the omission became clear, to contact the visiting officers and to verify and if appropriate to rectify the omission, particularly when that rectification would assist HMRC to carry out its general duties and would have supported its case against Mr Charles.

HMRC appealed on three grounds: first, that the judge misapplied the test for strike-out and/or summary judgment in that he did not properly consider and apply what was said by the Court of Appeal in the Neil Martin Ltd case, because the error in relation to the iPod supply chain was a mere omission and therefore no such duty could arise; second, that the judge did not properly consider and apply the factors from the Barclays Bank case relevant to whether HMRC had assumed a responsibility to Mr Charles, whether the loss was a reasonably foreseeable consequence, whether the relationship was sufficiently proximate, and whether it was fair, just and reasonable to impose a duty of care (particularly where the Court of Appeal in the Neil Martin Ltd case had refused to do so in circumstances where the error was only an administrative mistake); and third, that the decision was otherwise unreasonable in all the circumstances because no other court acting reasonably could have found a duty of care to exist requiring HMRC to continue to verify the accuracy of evidence that was relied upon, particularly where HMRC exercises a function analogous to law enforcement officers who have been found not to owe a general duty of care, citing Hill v Chief Constable of West Yorkshire [1988] 2 All ER 238 and Brooks v Metropolitan Police Commissioners and others [2005] 2 All ER 489.

In oral submissions before the Court of Appeal, Mr Tim Brown, who appeared for Mr Charles, accepted that on the facts it was not clear that the common law duty as pleaded was breached in the manner set out in the Particulars of Claim. HMRC did not seek to rely upon the Visit Report nor was it disclosed by HMRC in the litigation. Although HMRC had generated the Visit Report, it was not its evidence for the purposes of the litigation. It was Mr Charles who not only relied upon it but introduced the Visit Report into evidence by exhibiting it to his witness statement for the FTT hearing and then went on to rely upon it in his appeal to the UT. Mr Brown sought to reformulate the alleged duty of care and its breach. He conceded that the alleged duty did not arise when the Visit Report was compiled, because at that stage it was merely a document produced in the course of HMRC’s investigations into VAT fraud and Mr Charles was not in HMRC’s contemplation. Mr Brown submitted that the alleged duty of care arose in the context of the litigation, and that in the light of the fact that HMRC is a public body, the issue arose in the

Neil Martin Ltd v Revenue and Customs Commissioners [2007] STC 180
Caparo Industries Ltd v Dickman [1990] 1 AC 605
Excise Commissioners v Barclays Bank Plc [2007] 1 AC 181
Neil Martin Ltd v Revenue and Customs Commissioners [2007] EWCA Civ 1041
Hill v Chief Constable of West Yorkshire [1988] 2 All ER 238
Brooks v Metropolitan Police Commissioners and others [2005] 2 All ER 489
Carty v Croydon London Borough Council [2005] EWCA Civ 19
Digital Equipment Corpn v Darkcrest Ltd [1984] Ch 512
Business Computers International v Registrar of Companies [1988] Ch 229
Al-Kandari v J R Brown & Co [1988] QB 655