UT/2023/000049 - [2024] UKUT 00233 (TCC)

Causation

As we have mentioned, Mr Firth argued that HMRC had failed adequately to plead its position on the causation issue. He also argued under Ground 5 that the FTT had erred in law in finding that Mainpay’s failure to take reasonable care had brought about the loss of tax. Both of these arguments relate to what is necessary for HMRC to meet the burden of proof that the relevant failure to take reasonable care has “brought about” the loss of tax.

The FTT set out its conclusions in relation to the causation issue at FTT[212]-[213]:

Mr Firth argued in this appeal that HMRC failed to explain at all or in sufficient detail:

Mr Firth said that the FTT “had to create its own case” on these questions, and HMRC’s pleading on the issues was wholly inadequate. He said that the FTT’s decision that Mainpay’s carelessness brought about the loss of tax also contained the following errors of law:

Ms Choudhury challenged all of these arguments, and advanced an additional “knockout” argument. This was that because section 118(5) TMA provides that “a loss of tax or a situation is brought about carelessly by a person if the person fails to take reasonable care to avoid bringing about that loss or situation”; thus, once a failure to take reasonable care is established, it inevitably follows that the taxpayer brought about the loss or situation. Ms Choudhury relied in this respect on the Upper Tribunal’s decision in Atherton v HMRC [2019] UKUT 41 (TCC) (“Atherton”). As she put it in her skeleton argument, given section 118(5) “there is no need to establish a separate causal link between the alleged carelessness and the loss of tax”. In her oral submissions, Ms Choudhury argued that there was support for this interpretation in the changes made to the relevant statutory provisions in 2008. She said that as result of these changes, causation could not be approached as a “but for” test.

In Atherton, one of the issues was whether the insufficiency in Mr Atherton’s tax return was brought about by the carelessness of Mr Atherton or a person acting on his behalf. Mr Atherton argued that the insufficiency in his return was attributable only to the relevant numerical entry in a box on the form, and that the lack of explanation of that entry had no causal effect, because even if a full explanation of the use of the relevant box had been provided in the white space on the tax return, the insufficiency would still have arisen by virtue of the presence of the figure in that box: Atherton at [57]. The Upper Tribunal considered that “as a matter of legal causation…there appears to be force in Mr Atherton’s argument”, but that section 118(5), which had not been referred to by the FTT, had made specific provision for this issue. The Upper Tribunal then said this:

Bella Figura was concerned with a pension scheme which had made a loan to a company called Falken Ltd. HMRC had decided that the loan was an “unauthorised payment” for pension scheme purposes and a “scheme chargeable payment” and assessed Bella Figura to a scheme sanction charge, an unauthorised payments charge and an unauthorised payments surcharge. Bella Figura's response was that it was not careless since it had been advised by a firm of pension administrators (PPCL) that the loan was not an unauthorised employer payment or a scheme chargeable payment. The FTT held that HMRC could use its extended time limits since Bella Figura had not discharged its burden of showing that supportive advice had actually been received from PPCL. The Upper Tribunal stated, at [61(2)]:

  After considering another issue, the Upper Tribunal went on to allow the appeal, in part because, as explained at [85(4)]:

There is no escaping the fact that Atherton and Bella Figura are very difficult to reconcile in their approach to the causation issue. Bella Figura was decided over a year after Atherton, but does not refer to that decision. We note that in Strachan v HMRC [2023] UKFTT 617 (TC), the FTT directly addressed the two conflicting decisions, and decided that because the burden of proof did lie on HMRC to establish causation^, this meant that HMRC effectively needed to show what the taxpayer’s advice would have been if reasonable care had been taken (Footnote: ⁷). Contrastingly, in Delphi Derivatives Ltd v HMRC [2023] UKFTT 722 (TC), the FTT addressed the need for a “causal link”, and the difference which a second opinion to the taxpayer would have made in this context. The FTT decided that a “but for” test was inappropriate, and refused to make a finding as to what such an opinion might have said, as that would have been “pure speculation”: [248] of that decision.

In determining the position, and addressing these conflicting decisions, we start from the proposition that HMRC bear the burden of proof in relation to establishing that the careless behaviour brought about the loss of tax. That much is clear from Burgess, and the decision in HMRC v Household Agents [2007] EWHC 1684 (Ch) which was relied on in Burgess. For our part, we do not read Atherton as disputing that proposition; when the Upper Tribunal said at [12] of that decision that “the burden of proof is on HMRC to establish on the balance of probabilities that the discovery assessment was validly made”, it was doing so by reference to its citation in the preceding paragraph of the statement in Burgess regarding the “relevant conditions” for assessments outside the normal time limits.

The more difficult question is what HMRC need to do to discharge that burden, and whether they did enough in this case.

We accept that it is possible to read the passages we have referred to in Atherton as meaning that once HMRC have established careless behaviour and a loss of tax, they need do nothing more to establish causation, simply because of the wording of section 118(5). If that is what was being said, then we respectfully disagree. Nor do we accept Ms Choudhury’s argument that section 118(5) can be said to have such an effect by reference to the changes in statutory terminology in 2008. Such a reading would have the result that in practice there was no additional burden of proof on HMRC in relation to causation, and that cannot in our opinion be right.

What the Upper Tribunal was pointing out in Atherton was that the important word to focus on in section 118(5) was “avoid”. If a taxpayer failed to take reasonable care to avoid the loss or situation, then they would have brought about the loss of tax. The point being emphasised was that that was not the same as a common law test of causation. However, the Upper Tribunal was not, in our view, saying that HMRC did not bear the burden of establishing that different test of causation. As we have said, if it was, then we would disagree.

As to what precisely HMRC must show in order to establish that a taxpayer has failed to take reasonable care to avoid the loss of tax, that depends entirely on the facts. To the extent that the carelessness which has been found relates to a deficiency in advice taken by a taxpayer, we consider that HMRC do need to establish that the relevant deficiency could have been avoided by the taxpayer. How it could have been avoided will depend on the facts and on the nature of the deficiency. If, for instance, no advice was taken on a material issue, then the carelessness could have been avoided by taking advice on that issue. If the advice was from an adviser on whom it was unreasonable for that taxpayer to rely, then it could have been avoided by taking advice from a qualified adviser. If the relevant advice did relate to a material issue but was given on the basis of incomplete information or documentation, or of assumptions found not to be applicable in practice, then it could have been avoided by supplying the information or documentation or clarifying the position in relation to the assumptions.

To that extent, HMRC does in our view need to show what the taxpayer “should have done differently”. Insofar as Bella Figura endorses the position we have just set out, we agree with its approach.

However, we do not consider that the burden on HMRC carries with it an obligation to prove a particular counter-factual outcome. In particular, in relation to carelessness said to result from deficient advice, it does not require HMRC to establish to the balance of probabilities what the result of remedying the deficiency would have been. For example, it does not require HMRC to establish that if the deficiency had been remedied, a failure in the arrangement to achieve its intended tax purpose, which led to the loss of tax, would have been remedied. Not all problems (or arrangements or schemes) can be “fixed”, and the FTT should not be placed in the position of having to speculate as to a taxpayer’s precise response to advice to a standard of reasonable care. If the Upper Tribunal in Bella Figura was indicating to the contrary, then we respectfully disagree.

We should make clear that nothing in section 118(5) removes the need for a connection (to use a more neutral term) between the carelessness and the loss of tax. It is not enough for HMRC to show that the taxpayer was careless; that carelessness must have been a failure to avoid bringing about the loss of tax. So, for instance, a general lack of reasonable care by a taxpayer in completing a tax return or in keeping records which did not contribute to the loss of tax is not enough.

In this case, we consider that the FTT was entitled to find as it did at FTT[212]-[213] in relation to the causation issue. Some of Mr Firth’s specific criticisms are adequately dealt with by the FTT at FTT[213]-[215]. More generally, the FTT was entitled to conclude that it was Mainpay’s failure to take reasonable care in ensuring that the 2010 Contract was an overarching contract of employment which caused the loss of tax. On the facts found, what Mainpay “should have done differently” was to have asked an appropriately qualified adviser whether the 2010 Contract as drafted (including a provision stating that it was not a contract of employment) was an overarching contract of employment, or otherwise effective to achieve the aim of the arrangements in relation to reimbursed expenses. In our view, the FTT was not required, by Bella Figura or otherwise, to put HMRC to proof of establishing what course of action Mainpay would have taken if that had been done, namely whether it would have amended the contract, introduced a retainer in an effort to create mutuality in the gaps, or decided not to claim the deductions which gave rise to the loss of tax.

It follows from what we have said that we do not accept Mr Firth’s argument that HMRC’s pleading was inadequate. The FTT’s conclusion at FTT[212] on this issue was reasonably open to it.