UT/2022/000157 - [2024] UKUT 00346 (TCC)

Our starting point is the judgment of Carnwath LJ in Pegasus Birds, to which we have referred extensively above. As we have set out above, the relevant test as to whether an assessment is made to the best of HMRC’s judgment is “whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it” (Chadwick LJ, Rahman No. 2 [32], as quoted by Carnwath LJ at Pegasus Birds [22]). This is an “authoritative statement of the law”. Courts and tribunals should not attempt to refine or add to it. Phrases used in other judgments – such as “wholly unreasonable” or a failure “fairly (to) consider all material placed before them” (Van Boeckel) – should not be seen as providing a separate and sufficient test of the invalidity of the assessment (Pegasus Birds [22]).

The FTT found that there was a breach of the best judgment requirement in this case (FTT [644]). The only relevant defect that the FTT identified as forming the basis of its conclusion that the assessment was not in accordance with the best of HMRC’s judgment was the decision of Mr Foster not to take the York Wines bank statements into account. The FTT found that that decision was deliberate, but it did not find that Mr Foster was dishonest or guilty of fraud or corruption. If the FTT had taken this view, it would have been reasonable to expect the FTT to make a specific finding to this effect. It did not. The high point of the criticisms of Mr Foster made by the FTT was its finding (FTT [57]) that his evidence in relation to the assessments was “clearly misleading”. It is not clear whether that finding was made in relation to Mr Foster’s evidence in relation to the question of lifting the corporate veil, or whether it applied to Mr Foster’s evidence as a whole. Whichever it was, the words chosen by the FTT were “clearly misleading”, not “dishonest”.

Mr Webster KC sought to persuade us by reference to the FTT’s criticisms of Mr Foster’s evidence earlier in the FTT Decision (in particular at FTT [55]-[57]) that, in its conclusions on this issue (at FTT [663]-[664]), the FTT was expressing more widely-based conclusions. We acknowledge that the FTT were highly critical of Mr Foster’s evidence, which was characterized at various points as “clearly misleading” (FTT [55]), and “combative, evasive and obstructive” (FTT [663]). But the fact remains that that the FTT were not prepared to find that Mr Foster had been dishonest or guilty of fraud or corruption in relation to his decision to leave the York Wines bank statements out of account. And, despite these findings, the FTT identified only one deficiency in Mr Foster’s calculations which, in its view, was relevant to determining whether the best judgment requirement had been met.

Against that background, and notwithstanding the FTT’s views on the unsatisfactory nature of Mr Foster’s evidence, it is perhaps surprising that such a defect – in particular one which, on Mr Hayhurst’s submissions, would only have been to the benefit of the taxpayer (see below) – should be regarded by the FTT as “inconsistent with an honest and genuine attempt to make a reasoned assessment” or of such a nature that it “compels the conclusion that no officer seeking to exercise best judgment could have made it” (to adopt the words of Chadwick LJ, Rahman No. 2 [32]). However, it seems to us, that if we are to reach a firm view on that point, we would need to undertake a detailed review of the process that Mr Foster undertook in reaching his assessment. Although we have heard detailed submissions on some aspects of Mr Foster’s approach, we are not in a position to reach a firm view without hearing much more of the evidence that was before the FTT.

What is clear, however, is that, in reaching its conclusion, the FTT did not refer back to the words of Chadwick LJ in Rahman No. 2 [32], which Carnwath LJ regarded as an authoritative statement of the law. Rather, it referred to the words of Woolf J in Van Boeckel (failure to “fairly consider”) (FTT [663]). That approach was contrary to the clear guidance of Carnwath LJ in Pegasus Birds (Pegasus Birds [22]), which counselled against the adoption of any test other than that set out by Chadwick LJ in Rahman No. 2. The FTT applied the wrong test. The consequence was, in our view, that the FTT placed undue reliance on one particular error in HMRC’s assessment. It did not consider the effect of the defect that it had identified on the assessment as a whole and failed, contrary to Chadwick LJ’s guidance, to consider the best judgment requirement in the round. In our view, that was an error of law.

For this reason, we allow the appeal on Ground 4. As we have identified an error of law in the FTT Decision, we are required by section 12(1) TCEA 2007 to consider whether or not to set aside the FTT Decision. We will return to that issue towards the end of this section.