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Can an appeal against a VAT assessment pending in the First-tier Tribunal prevent the Companies Court from determining a winding-up petition presented by HMRC against the taxpayer? Timothy Jarvis, a partner at Squire Patton Boggs, advises that the judgment in Changtel Solutions v HMRC is of wide-ranging application to all creditors, not just VAT and tax creditors.
Changtel Solutions UK Ltd (formerly Enta Technologies Ltd) v Revenue and Customs Comrs  EWCA Civ 29,  All ER (D) 211 (Jan)
The appeal concerned the question whether, when there was both an appeal against a VAT assessment pending in the First-tier Tribunal (Tax Chamber) and a winding-up petition pending in the Companies Court, the tribunal or the Companies Court was the appropriate forum to determine whether the petition debt was disputed in good faith on substantial grounds. The Court of Appeal, Civil Division, held that, when the tribunal had reached a conclusion on such an issue, that decision was normally likely to be a compelling factor in the Companies Court's exercise of discretion. That discretion was not, however, completely abrogated by the jurisdiction of the tribunal. It need not defer to the tribunal in every case, though it might often choose to do so.
HMRC had raised VAT assessments against Changtel Solutions UK Limited (Changtel) on 25 March 2013. Changtel had submitted its VAT returns on the basis that it was due substantial VAT refunds from HMRC. Changtel's position was that it was entitled to VAT refunds because it had exported goods intra EU to business customers thereby crystallising a refund of VAT input tax with no consequential obligation to account for VAT output tax. HMRC's position was that there had been no export of goods to EU business customers with the result that Changtel had no entitlement to a VAT refund. Therefore HMRC issued VAT assessments to recover the VAT which it perceived had been incorrectly refunded to Changtel.
Changtel made an application to the Tax Tribunal to make an out of time appeal against the VAT assessments. On 20 August 2013, the Tribunal Chair, Judge Kevin Poole gave Changtel permission to bring an out of time appeal because, on the evidence available to him, he held: 'I am not persuaded the appeals are hopeless'.
HMRC lodged a winding-up petition against Changtel in the Companies Court. On 21 March 2014 the High Court dismissed the winding-up petition. Two alternative reasons were given for the decision.
First, there was the jurisdiction issue. The High Court held that because the VAT assessments were under appeal before the Tax Tribunal (on account of Judge Kevin Poole's decision to allow the appeals against the assessments out of time) then it was automatically the case that the Companies Court had no jurisdiction over the matter until the Tax Tribunal had heard the appeal. The High Court based this aspect of its decision on two reasons.
The Tax Tribunal was self-evidently a specialist tribunal and, relying on the Supreme Court's decision in Autologic Holdings plc v IRC  UKHL 54,  4 All ER 1141, the court should defer to a specialist tribunal. The High Court noted that the legal issue which was being considered in relation to the VAT assessments raised against Changtel was whether such assessments were being disputed in good faith on substantial grounds. The High Court noted that there had been changes in the procedural rules for the Tax Tribunal and the Tax Tribunal now had the power to strike out an appeal where it considers '...there is no reasonable prospect of the appellant's case...succeeding'. The High Court's judgment was that this change to the procedural rules gave the Tax Tribunal, in substance, the power to determine if the VAT assessments were being disputed in good faith on substantial grounds. And therefore the Tax Tribunal had exclusive jurisdiction over the matter because it had the ability to answer the question which would otherwise be heard by the Companies Court.
Second, and in the alternative, the High Court held that there was sufficient evidence available to it to conclude that the circumstances giving rise to the winding-up petition were being disputed in good faith on substantial grounds. Therefore the High Court concluded that there was sufficient evidence available for the petition to be dismissed in its own right, even if it was incorrect in its judgment that the Tax Tribunal had exclusive jurisdiction over the matter.
The Court of Appeal had to answer two questions:
The Court of Appeal held that the High Court '...was wrong to say that the Companies Court must defer to the Tax Tribunal in a case of this type'. In other words, it was not automatic that the Companies Court must subordinate its jurisdiction to the Tax Tribunal. The Court of Appeal went on to hold that the Companies Court '...Need not defer to the tax tribunal in every case, though it may often choose to do so'. (In other words, the Companies Court had a wide discretion as to what to do.) Therefore the High Court's judgment was to be overturned because it did not exercise its discretion as to whether or not it was appropriate for the matter to be resolved by the Tax Tribunal; it had instead automatically deferred to the Tax Tribunal. There were two building blocks which underpinned the Court of Appeal's judgment.
The questions which the Companies Court and the Tax Tribunal were being asked to consider were not identical. The Companies Court was being asked to consider if there was sufficient evidence available to conclude that the circumstances giving rise to the winding-up petition were being disputed in good faith. The Tax Tribunal was, however, being asked to consider if an appeal against a VAT assessment could be made successfully. The outcome of one appeal did not necessarily determine the outcome of the other. For example, if a company is placed into liquidation, its right to bring an appeal to the Tax Tribunal is not abrogated: the right simply vests in the liquidator. Therefore the Court of Appeal held that as the Companies Court and the Tax Tribunal were considering questions which, although similar, were not identical, it was inappropriate for the Companies Court to abrogate its jurisdiction in favour of the Tax Tribunal.
The Court of Appeal also found the reasoning in the earlier Court of Appeal decision Altomart Ltd v Salford Estates (No 2) Ltd  EWCA Civ 1575,  All ER (D) 102 (Dec) highly persuasive (see our blog post on this case in Can winding-up proceedings be stayed under the Arbitration Act 1996?). In Salford the Court of Appeal had considered if a winding-up petition should be stayed pending the outcome of arbitration proceedings. The Court of Appeal held in Salford that it was correct to do so because the Companies Court had reached its judgment based on the exercise of its discretion: the Companies Court had not automatically abrogated its jurisdiction. Therefore the Court of Appeal concluded in Changtel that the High Court had applied the wrong test because it had not exercised its discretion and had automatically subordinated its jurisdiction to the Tax Tribunal.
The Court of Appeal held that in the context of a winding-up petition, the Companies Court had a wide discretion as to what to do. Therefore, and in consequence of its erroneous conclusion that the Companies Court must abrogate its jurisdiction to the Tax Tribunal, the High Court had not focussed on the evidence with the necessary detail which was required. The Court of Appeal reconsidered the evidence as to whether Changtel had genuinely made exports out of the UK. The Court of Appeal also heard new evidence. The Court of Appeal held that the winding-up petition was not disputed in good faith on substantial grounds. In effect, there was not sufficient evidence to support Changtel's assertion that the goods had been exported from the UK.
The Court of Appeal's judgment should be considered alongside its earlier decision in Salford. In summary, the Companies Court will not fetter its discretion as to what to do or not to do in the context of a winding up behind a specialist tribunal.
The judgment is of wide-ranging application to all creditors, not just VAT and tax creditors. This is because the judgment makes it clear that the Companies Court's discretion as to what to do is a wide one, and that this jurisdiction will not automatically be subordinated to a specialist tribunal.
Interviewed by Kate Beaumont.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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