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

HMRC’s pleading of carelessness

Before the FTT, this complaint was dealt with at FTT[198]-[200]:

Mr Firth argued in this appeal that HMRC’s pleading was “totally inadequate”. He said that a taxpayer faced with an allegation of carelessness is entitled to know what exactly it is alleged that it should have done and why it is said that it failed to do so, because only in those circumstances can a taxpayer prepare to meet the case against it. That is the whole purpose of a statement of case. He described HMRC’s pleading as “so vague as to be meaningless”. Further, it contains no explanation of the causation issue ie how the careless behaviour brought about the loss of tax. He submitted that, in any event, the FTT’s conclusion on the pleading issue was wholly unreasonable.

Ms Choudhury pointed out that the question of whether HMRC ought to have been permitted to rely on their pleading in relation to carelessness was essentially a case management decision, and, as such, this Tribunal should be very slow to interfere with it. She also noted that at no stage prior to the hearing had Mainpay sought further particulars on this issue. As to the pleading regarding causation, Ms Choudhury said the FTT was correct to hold that it was implicit that it was the failure to take reasonable care to ensure that the 2010 Contract was an overarching contract of employment which caused the loss of tax. That was also clear, she argued, from the wording of section 118(5) TMA.

Consistently with the general principle that a party must be able to understand the case against it, Rule 25(2) of the Tribunal Procedure (First-tier Tribunal ) (Tax Chamber) Rules 2009 provides as follows:

Sub-paragraph (b) of Rule 25(2) means that the statement of case should set out the case which the appellant is expected to meet. In HMRC v Ritchie [2019] UKUT 71 (TCC), the Upper Tribunal said that it should set out HMRC’s arguments “clearly and unequivocally with sufficient detail” (Footnote: ⁶). In relation to the validity of an assessment under section 36 TMA, HMRC bear the burden of proof: Burgess v HMRC [2015] UKUT 578 (TCC) (“Burgess”). The practical effect of this is that HMRC should address the relevant validity issues in their statement of case regardless of whether the appellant has expressly challenged them.

Where, as in this case, the burden was on HMRC to establish that Mainpay had brought about the loss of tax by a failure to take reasonable care, the evaluation of whether or not HMRC should be permitted to rely on their pleadings in relation to carelessness involved an exercise of judicial discretion by the FTT. This Tribunal should be slow to interfere with such a decision unless the FTT applied the wrong principles, took account of the wrong factors, or otherwise reached a decision so plainly wrong that it must be regarded as outside the generous ambit of the discretion available to the FTT.

HMRC’s consolidated Statement of Case relevantly stated as follows:

Mr Firth challenged as contradictory in this passage the reference to the contract reflecting what the workers would be doing. We think that this can readily be understood in context by the earlier statement of HMRC’s position at paragraphs 85 and 86 of the Statement of Case:

In relation to the question of whether HMRC’s pleading identified the relevant carelessness sufficiently for Mainpay to know what case it had to answer, we consider that the FTT reached a decision which was within the range of reasonable decisions available to it. As to the applicable test, the second sentence of paragraph 91 of the Statement of Case summarised in general terms what HMRC would seek to establish, namely looking at what Mainpay did or failed to do and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances. If nothing more had been said, then the pleading would in our view have been deficient. However, paragraph 91 went on to identify ways in which or reasons why HMRC asserted that Mainpay had failed to take reasonable care not to bring about the loss of tax. It stated that Mainpay (1) had failed to take reasonable care to ensure that the 2010 Contract was an overarching contract of employment, (2) had failed to take steps to ensure that the contact was a reflection of what the workers would be doing, and (3) had failed to confirm the tax treatment of the reimbursements with qualified personnel.

Read in the context of the Statement of Case in its entirety, we consider that this did justify the FTT’s decision, set out above, to permit HMRC to rely on its pleading. Mr Firth was critical of the factors identified by HMRC in its Statement of Case and argued that some issues were directly contradictory to others, but that is beside the point. The question for the FTT on this point was whether Mainpay was sufficiently aware of the case which it had to answer, not whether that case was strong or weak.

We agree with the FTT that there was some force in Mr Firth’s criticisms before the FTT. However, we also see some force in Ms Choudhury’s observation that at any stage prior to the hearing Mainpay could have made an application to the FTT for HMRC to be directed to provide further and better particulars, but did not do so.

Mr Firth said that the FTT did not in fact limit the carelessness issue to the overarching contract question, because at FTT[209] it criticised Mr Hugo in relation to information regarding particular expenses and their reimbursement. However, that paragraph in its entirety is responding to Mr Firth’s argument that one of the aspects demonstrating reasonable care taken by Mainpay was the advice taken from Mr Hugo. In context, it is part of the FTT’s discussion of the overarching contract issue. At FTT[206], to take one example, the FTT dismissed an argument raised by HMRC in relation to the use of scale rates as irrelevant because it was not part of the case put forward by HMRC in relation to carelessness.

Therefore, we do not accept Mr Firth’s argument on the pleadings issue. The complaint that HMRC did not particularise the issue of causation is best addressed in the context of the argument that the FTT erred in finding that Mainpay’s carelessness brought about the loss of tax. Therefore, we deal with this under issue (3) below.