Mercy Global Consult Ltd employed healthcare professionals whose services were seconded to recruitment agencies which in turn sub-seconded their services to end users, in most cases an NHS trust. The arrangements were subject to elaborate charging methods and gave rise to complex tax considerations. HMRC carried out an investigation into the company’s activities which resulted in its raising assessments for under-declared VAT totalling some £21 million. The company was wound up by the court in 2021, and liquidators were appointed.
Acting by its liquidators, the company brought proceedings against 15 defendants, alleging that the under-declared VAT had been the result of a significant VAT fraud perpetrated by not accounting to HMRC for VAT that had been payable. The allegations against the defendants in the main proceedings are broad, including claims for equitable compensation for fraudulent breach of duty, proprietary claims, claims for dishonest assistance and claims for unlawful means conspiracy. The defendants argue that the company’s supplies were exempt from VAT so there can have been no fraud.
The judgment of Richards J in Mercy Global Consult Ltd v Adegbuyi-Jackson & Ors [2023] EWHC 749 (Ch) deals with applications by certain of the defendants (a) to amend their defence (under CPR 17.1(b)) by withdrawing a previous admission and pleading that VAT had never been payable on certain supplies the company had made and (b) for trial of that issue as a preliminary issue.
Among the factors relevant to the exercise of the discretion to allow amendment in this case was whether the proposed amendments introduced a new defence or merely provided amplification of an existing line of defence or further particulars of an existing pleaded defence (see Scott v Singh). If the amendments amounted to a new defence, the court was obliged to consider whether the new defence pleaded had a reasonable prospect of success. A related consideration was that the proposed amendments involved the withdrawal of an admission. (CPR 14.1(5) provides that the permission of the court is needed to amend or withdraw an admission.)
Richards J held that in this case the proposed withdrawal of the earlier admission on the part of the relevant defendants was a significant indicator of their wishing to introduce a new defence:
“As I have explained…the Applicants admitted that Mercy’s supplies were subject to VAT to the extent that they were not covered by the Nursing Agency Concession. That admission was withdrawn in the Amended Defence, and replaced with a denial that any VAT was chargeable on its supplies. That in itself provides a clear suggestion that the Amended Defence is a new defence rather than an amplification of an existing defence.”
He was not persuaded that specific denials in the existing pleadings (e.g. that VAT was chargeable on the supplies made by the company or of the company’s participation in any “labour supply fraud”) were simply being extended by what was now proposed. Having concluded that the proposed amendments did involve the pleading of a new defence rather than simply an amplification of an existing line of defence, it became necessary to consider the prospects of success of the proposed amended defence.
As to the prospects of success, Richards J held that the correct approach was to proceed by analogy with the test applicable on an application for summary judgment (see Kawasaki Kisen Kaisha Ltd v James Kemball Ltd). If, as the company submitted, there was in this case no realistic prospect of the new defence succeeding as a matter of law in the light of the judgment of the Court of Appeal in Mainpay Ltd v HMRC, he would be under a duty to refuse to allow the amendments. (In Mainpay the Court of Appeal held that agency services of the kind provided by the company to the NHS trust were liable to VAT and not exempt as supplies of medical care within the meaning of Directive 2006/112 art.132(1)(c) and the Value Added Tax Act 1994). On this issue too he held against the defendants:
“I mean no disrespect to [counsel for the applicants’] skilful and engaging submissions by not dealing with all of the points that he raised. Rather…I have come to the clear conclusion that Mainpay does determine that the VAT Defence has no realistic prospect of success…”
Whilst noting that in those circumstances it was unnecessary to determine the preliminary issue application, he went on to say that, had it been necessary, he would have refused that application as well.
Accordingly, subject to minor amendments that were allowed, the case proceeds to trial largely on the basis of the defendants’ current pleadings.