UT (Tax & Chancery) UT/2023/000096 - [2024] UKUT 00203 (TCC)

At [158] to [159] the FTT identified that the issue was whether or not the Appellants’ behaviour in submitting the tax returns was deliberate. They expressed agreement with the statement of the FTT in Auxilium where at Auxilium[63] the FTT said in relation to “deliberate inaccuracy” in Schedule 24 Finance Act 2007:

In CF Booth Ltd v HMRC [2022] UKUT 217 (TCC) (“CFB”) the Upper Tribunal has, at CFB[37], subsequently agreed with these comments of the FTT in Auxilium.

It was common ground before us that the FTT had set out the correct legal test, and had not misdirected itself. The Appellants submitted that the FTT erred in law in the application of this (subjective) test, by applying what they submitted was objective reasoning.

In Greenberg, Popplewell LJ (with whom the other members of the court agreed) set out (at Greenberg[57]) the principles which govern the approach of an appellate tribunal or court to the reasons given by, in that case, an employment tribunal. These included:

The reference to “Meek-compliant” is a reference to the decision of the Court of Appeal in Meek v Birmingham City Council [1987] IRLR 250 in which Bingham LJ set out the fundamental criteria that must be met by the decision of a tribunal as follows:

Significantly, having set out these principles, Popplewell LJ then stated in Greenberg:

This guidance as to the approach to be taken by an appellate tribunal to a challenge based on the FTT having erred in its application of a subjective test when it reached its conclusion that the Appellants knew that their returns were inaccurate emphasises the high bar which must be met by the Appellants, and warns us as the appellate tribunal of the dangers to avoid when considering these submissions, including in particular the need to avoid being hypercritical or focusing on individual phrases or passages in isolation.

We have considered carefully the entirety of the Revised Decision when considering whether the FTT’s reasoning involves an error of law. We have not, however, addressed Mr Woolf’s submissions which were made by reference to the reasoning of the FTT in Sacutia – we do not regard it as helpful or relevant when determining this appeal to express any conclusions as to the application of the Auxilium test in Sacutia, a decision which was not the subject-matter of the appeal before us.

When considering the FTT’s reasoning and conclusion that the loss of income tax was brought about deliberately by the Appellants, ie that the Appellants knowingly provided HMRC with tax returns which contained an error with the intention that HMRC should rely upon them as accurate, we remind ourselves that in the present context the relevant error was the claim by the Appellants for trading losses in their tax returns for 2005/06. We have described the Montpelier Arrangements under the heading “The scheme” and summarised the FTT’s findings under the heading “Decision of the FTT”. We comment on two aspects at this stage:

We have set out [164] to [173] of the Revised Decision in full above. These paragraphs need to be considered in their entirety, and as part of the whole decision.

When reading this part of the Revised Decision there are two significant features which are relevant when assessing Mr Woolf’s challenges:

[164] summarises six findings which are said to have already been made by the FTT, and then leads to the finding at [165] that “Therefore we find that each of the appellants knew at the time of filing their respective SATRs that they were not carrying on a trade which entitled them to make a claim for loss relief.” Ms Choudhury submitted that the findings at [164] were sufficient to reach this conclusion, whereas Mr Woolf submitted that the findings do no more than record that this was a marketed tax avoidance scheme, the Appellants knew this, and they did not seek advice from BR; he submitted that the key finding at [164(b)] that “they knew that that scheme involved the need to have a trade and thereafter create losses, whereas the reality was that there was no trade” was based not on a finding of knowledge of the Appellants but imputing the FTT’s own conclusions to the Appellants.

We recognise that Mr Woolf’s submissions did invite us to undertake the very type of critique which Greenberg reminds us is not appropriate. That is particularly significant here as [164] is stated to be a summary of earlier findings which have been made by the FTT (“We have already established that we find…”) and should not be analysed in isolation.

By this point in the Revised Decision, the FTT had:

However, having conducted this exercise, there are then two potential problems which emerge from the FTT’s reasoning, and it is those that we assess further below, remaining mindful of the guidance set out in Greenberg:

The FTT, when reaching its conclusions as to whether the Appellants knew that their tax returns were inaccurate, ie that they knew they were not entitled to the claimed losses, did not need to cross-refer back to each of the findings which it had made on which it relied. It did, however, need to explain its reasons for concluding that the subjective test had been met. It is in this regard that we consider that [164(b)] potentially discloses an error of law.

The FTT states that they have already established that they find that “They knew that that scheme involved the need to have a trade and thereafter create losses, whereas the reality was that there was no trade” (at [164(b)]). The reference to “whereas the reality was that there was no trade” appears to refer back to the FTT’s own conclusion on the absence of a trade, rather than being a subjective reference to the Appellants’ knowledge. On its own, such a concern could be no more than an example of the very real dangers which arise when scrutinising each phrase of a decision too closely. It could have been entirely plausible that the FTT intended to say something along the lines, eg, that “whereas it was obvious to anyone that there was no trade and we infer that the Appellants must also have known this”. The difficulty is, and the reason why we consider that the FTT did indeed intend to refer to its own conclusions at this point, is that the FTT’s own conclusion as to the absence of a trade is the only relevant finding that had been made as to what amounts to a trade.

Explaining this further, it is clear from the opening words of [164] that the FTT was not seeking to make further findings of fact at this point in the Revised Decision. It was simply referring to some of the findings it had already made. The Revised Decision does refer to the other transactions entered into by the Appellants as being “mere window dressing” (at [147]), and we were taken to the Montpelier Materials, the speaking notes forming part of which include both a statement that a one-off transaction may amount to a trade but also the recommendation that an individual trades daily. The FTT accepted that this is how the Montpelier Arrangements were marketed to the Appellants. However, there is no finding as to what the Appellants understood (however they came by that understanding) to amount to trading – eg, whether they were told that they should undertake “some” unspecified number of further transactions, or that “one or two” would be sufficient, or referring this back to their previous background transacting in oil futures and what they “must have known” based on their own experience. There is, similarly, no finding or inference earlier in the Revised Decision that the Appellants must therefore have known that the number of transactions that they entered into did not amount to trading. This is significant in the context of a subjective test and whether the Appellants knew that they were not trading and therefore knew that they were not entitled to claim the losses. We do recognise that the FTT did then reach a clear conclusion at [165] when it found that the Appellants knew that they were not carrying on a trade, but that is reached by reference to the findings at [164] and potentially contaminated by the reasoning at [164(b)].

We concluded that this was then exacerbated by the reasoning which followed from [166] to the conclusion at [172] that “In submitting their SATRs we find that they acted deliberately with a view to claiming non-existent losses”.

In this part of the reasoning, the FTT refers to the Appellants’ reliance on Montpelier, their failure to check anything, the contents of counsel’s opinion (acknowledging that the Appellants had not asked to see it), that there was no FSA protection, the Appellants’ assertions that they were not men with an eye for detail, that they did not know whether they had accepted Pendulum’s repurchase offer, and their failure to check what had happened in subsequent years (which we infer is a reference to the loans).

We agree with Mr Woolf that the FTT is here assessing whether the Appellants took reasonable steps to ensure their returns were accurate, and is applying an objective test of the kind that the FTT in Auxilium had warned against. We have considered two counter-arguments against this:

Whilst we have remained mindful of the need to be slow to conclude that where, as here, the FTT has correctly stated the legal principles, it has not applied those principles, we do reach that conclusion here. We have concluded that this is clear from the language used by the FTT when it was assessing the knowledge and intention of the Appellants. We reach this conclusion based on the language used in [164] (both the reference to the findings already having been made and to the FTT’s assessment that the reality was there was no trade), the absence of findings as to the Appellants’ understanding of what amounts to a trade, the absence of inferences or conclusions from this as to what the Appellants then knew about their own level of activity and whether that met their understanding of a trade, and the reference to factors which relate to the Appellants’ lack of reasonable care rather than their knowledge. This is a material error of law.

The Appellants submitted that the FTT had made further errors of law. There was considerable overlap between the Appellants’ submissions on Grounds 1 and 4 and we had the benefit of full written and oral submissions from both parties. However, in view of our decision on Ground 3 it is not necessary to reach a decision on these further grounds and we do not do so.

We set aside the Revised Decision made by the FTT pursuant to s12(2)(a) TCEA 2007 because it contained a material error of law.

We have considered whether to remit the case to the FTT for its reconsideration or to re-make the decision.

In their Notice of Appeal from the FTT the Appellants submitted that the Revised Decision should be quashed and remitted to a new tribunal for redetermination. Mr Woolf maintained this position in his written submissions before us. HMRC submitted in their written submissions that if we were to conclude that the Appellants had established that the FTT had made an error of law, we should go on to consider whether the Revised Decision could nevertheless be upheld on the basis that its findings were consistent with the Appellants having blind-eye knowledge, ie inviting us to re-make the decision.

We have significant reservations about remitting the appeal. The losses claimed by the Appellants were stated to relate to the period from 18 April 2005 to 31 March 2006. The meeting between the Appellants and Montpelier took place in March 2006. The Revised Decision acknowledges that the matters occurred 16 years ago and records at [126] that both Appellants repeatedly said that they could not remember what had happened. The position is unlikely to have improved since the hearing before the FTT in March 2021.

However, we have concluded that it is necessary in accordance with the overriding objective for us to remit the case to the FTT for a new hearing of the appeal:

Accordingly, we remit the case to the FTT to be re-heard by a differently constituted panel.