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

Finally, if a summary of the applicable law is required along the lines of paragraphs 86 and 87 of the UT's decision, I would simply summarise the principles as follows:-

The main point in this case was not, as the taxpayers suggested a simple pleading question. The UT failed, I think, to identify the basic error that Judge Mosedale had made in the Citibank case, where she said, in effect, that making a first limb Kittel allegation required a plea of dishonesty. It does not; even if in some cases, the findings of knowledge made by the F-tT could have led the F-tT to uphold a plea of dishonesty had it been made. HMRC is entitled to stop short of alleging dishonesty and content itself with pleading, particularising and proving first limb Kittel knowledge. If, however, HMRC do expressly allege dishonesty, they will be required to comply with the normal rules of pleading and disclosure applicable to such cases. In future, it might be helpful in these cases for HMRC to say expressly in their statements of case whether or not they set out to prove the dishonesty of the appellant taxpayer.

In tax appeals, it has long been established that the taxpayer has the burden of showing that the assessment issued or decision reached by HMRC is wrong (see T Haythornthwaite & Sons Limited v Kelly(Inspector of Taxes) (1927) 11 TC 657 for direct tax appeals and Tynewydd Labour Working Men's Club for appeals relating to VAT). In cases where fraud is alleged, it is accepted that HMRC bears the burden of proof. In MobilxLtd and others v HMRC [2010] EWCA Civ 517, [2010] STC 1436 Moses LJ stated that HMRC have the burden of proof in MTIC fraud cases in the following terms:

“[81] …It is plain that if HMRC wishes to assert that a trader's state of knowledge [of connection to fraud] was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary.”

Fraud is not the only situation where HMRC bear the burden of proof in tax appeals. As Mr Gordon observed, HMRC have the onus of proving an allegation that a transaction is a sham: see Hitch and others v Stone (Inspector of Taxes) [2001] EWCA Civ 63, [2001] STC 214 per Arden LJ at [32]. It has also long been accepted that HMRC bear the burden of proving that a person is liable to a penalty for late submission of a return or late payment of tax whereas the taxpayer bears the burden of establishing that he or she has a reasonable excuse.

In determining who bears the burden of proof in an appeal where abuse of law is alleged, it is necessary to consider which party substantially asserts that there is or has been an abuse. As discussed above, it is the nature of an abusive arrangement that the taxpayer's appeal would succeed on the purely formal application of the legislation. The appeal will only fail if it can be shown that there is an abuse, i.e. the resulting tax advantage is contrary to the VAT Directives and the essential aim of the transactions is to obtain a tax advantage. If abuse were not alleged or, having been alleged, cannot be established then the appeal must be allowed. It follows that establishing that a tax advantage is contrary to the VAT Directives and the essential aim of the transactions is to obtain a tax advantage is an essential part of HMRC's case in an appeal where abuse of law is alleged. Accordingly, HMRC bear the burden of proving those matters.

There is no problem so far as concerns the appeal against the VAT assessment. The position on an appeal against a "best of judgment" assessment is well−established. The burden lies on the taxpayer to establish the correct amount of tax due …

It should be noted that this burden of proof does not change merely because allegations of fraud may be involved (see e.g. Brady (Inspector of Taxes) v Group Lotus Car Companies PLC [1987] STC 635 at 642 … per Mustill LJ).

…We are told that, whatever the letter may have said, the Revenue was concerned only to protect its right to interest under section 88, and that, when it came to the hearing before the Commissioners, no attempt was made to advance a case under sections 36 and 39. Rather, the matter was approached, so far as the Revenue were concerned, on an ordinary Haythornthwaite basis. If this is so, and the contrary has not, as we understand it, been asserted, the formal burden of proof was not assumed by the Revenue. The Commissioners had no ground for approaching their fact-finding functions on any other basis than that it was for the taxpayers to make the running.

It may well be that, if the taxpayer companies' version does not correspond with the true facts, it must follow that someone was guilty of fraud. This does not mean that by traversing the taxpayer companies’ case the Revenue have taken on the burden of proving fraud. Naturally, if they produce no cogent evidence or argument to cast doubt on the taxpayer companies’ case, the taxpayer companies will have a greater prospect of success. But this has nothing to do with the burden of proof, which remains on the taxpayer companies because it is they who, on the law as it has stood for many years, are charged with the task of falsifying the assessment. The contention that, by traversing the taxpayer companies’ versions, the Revenue are implicitly setting out to prove a loss by fraud, overlooks the fact that, in order to make good their case, the Revenue need only produce a situation where the commissioners are left in doubt. In the world of fact there may be only two possibilities: innocence or fraud. In the world of proof there are three: proof of one or other possibility and a verdict of not proven. The latter will suffice, so far as the Revenue are concerned."

Before leaving this part of the case, I should mention the contention that there is a presumption of innocence which operates in any case where the defendant, by controverting the case put forward by the plaintiff, impliedly suggests that he has been guilty of dishonest conduct. I do not accept this argument. The fact that the possibility of fraud is on one side of the case will of course require the tribunal to take particular care when weighing the evidence, given the seriousness of any finding which puts in question the honesty of a party to a civil suit (see Hornal v Neuberger Products Ltd [1957] 1 QB 247). At the same time, I cannot accept that this bears on the burden of proof. The burden is material only to the question of which party succeeds if the tribunal is left in doubt. I can see no reason why the rule which entails that the taxpayer should fail in such a situation needs to be completely turned round simply because the alternative explanation of the facts to that advanced by the taxpayer is one which is explicable only on the ground of dishonesty on his part.

I therefore conclude without hesitation that the commissioners were in error in stating that it was for the Revenue to prove fraud if the taxpayer companies' claim for an adjustment of the assessments was to be defeated.

At the heart of the Appellants' amended case is the proposition that it is not open to HMRC to put allegations of dishonesty (or other serious forms of misconduct) to their witnesses, or to invite the FTT to make adverse findings of fact on such a basis, unless the relevant allegations have been pleaded with full particularity and the Appellants have been given a proper opportunity to respond to them.

In cases where the burden of proof lies on HMRC to establish fraud or dishonesty, these principles undoubtedly apply in the same way as they would in ordinary civil litigation. Examples include cases where HMRC wished to make assessments to income tax outside normal time limits on the ground (before 1989) of fraud or wilful default under section 36 of the Taxes Management Act 1970 , or (in the modern world) where, relying on principles developed by the Court of Justice of the European Union, they wish to deny a VAT-registered trader his otherwise incontrovertible right to deduct input tax because of his alleged participation in, or connection with, “missing trader” (or MTIC) fraud.

The present case, however, is not of that nature. It is common ground that the burden of proof lies on the Appellants to displace the closure notices issued to them by HMRC within normal time limits, and (in particular) to establish that the businesses of the relevant LLPs were carried on with a view to profit. This issue, as I have explained, is properly pleaded in HMRC's statement of case. No burden lies on HMRC to establish that the businesses were not carried on with a view to profit. It is for the Appellants to adduce such evidence as they think fit with a view to discharging the burden which throughout lies on them.

The IFP2 Information Memorandum is one of the pieces of documentary evidence relied upon by the Appellants as supporting their case on this issue. HMRC were under no obligation to accept it at face value, when it was disclosed to them, and they were fully entitled to cross-examine the witnesses for the Appellants who had been involved in its preparation in order to test its reliability and examine the assumptions on which it was based. HMRC were not obliged to give advance notice of the lines of questioning which they intended to pursue with the witnesses, and still less were they obliged to plead a positive case of dishonesty in preparation of the Memorandum before putting questions to the witnesses which, depending on how they were answered, might in due course provide a foundation for the FTT to draw such a conclusion. The obligations which lay on HMRC were in my judgment of a different nature. First, as a matter of professional duty, counsel may not put questions to a witness suggesting fraud or dishonesty unless they have clear instructions to do so, and have reasonably credible material to establish an arguable case of fraud. Secondly, as the FTT rightly recognised, it is not open to the tribunal to make a finding of dishonesty in relation to a witness unless (at least) the allegation has been put to him fairly and squarely in cross-examination, together with the evidence supporting the allegation, and the witness has been given a fair opportunity to respond to it. Important though these obligations are, they are quite different from, and do not entail, a prior requirement to plead the fraud or misconduct which is put to the witness. If it were otherwise, a party would be obliged to serve an amended statement of case before attempting to expose a witness as dishonest in cross-examination, and the element of surprise which can be a potent weapon in helping to expose the truth would no longer be available.

A related question is whether there is any obligation on HMRC to plead an allegation of fraud, with the necessary particularity, in a case where the burden of displacing the assessment remains throughout on the taxpayer, but HMRC wish to rely on the possibility, or even the certainty, that some form of fraud must have been committed when testing the evidence adduced by the taxpayer. In my view, it is clearly implicit in Brady that this question must be answered in the negative.

In the present case, the Upper Tribunal clearly had these principles well in mind. In a section of the UT Decision, headed “Proof, pleadings and dishonesty”, they referred extensively to Brady and Ingenious Games at [30] to [35], before concluding:

“36.

Two principles emerge from Ingenious and Brady:

(1)

The burden of showing an assessment is incorrect remains on the taxpayer throughout the appeal. This is so even if the circumstances of the case are such that there either must, or may, have been some fraudulent conduct on the part of the taxpayer which is relevant to the tax liability.

(2)

The allegation that a witness is dishonest must be put fairly and squarely to the witness in cross-examination before the tribunal can find the witness is dishonest, but does not need to have been pleaded in advance in cases where the burden is on the taxpayer.

37.

The fact that no authority was cited in Ingenious for that latter proposition reflects that it is a long-held and established principle: Browne v Dunn (1893) 6 R 67 explains that the principle is grounded in fairness. That principle was approved by the Court of Appeal in Markem Corporation v Zipher Ltd [2005] EWCA Civ 267.”