Deliberate Allegation Test

HMRC often argue that a company, or individual, has not declared sufficient tax and that they acted deliberately. This allegation has benefits for HMRC.

1. They are then permitted to raise tax/VAT assessments going back 20 years; and
2. They can move a company Deliberate Penalty (often 50% of the tax Assessment) onto the directors, or managers personally.

Until now, for Deliberate conduct, HMRC did not have to prove dishonest conduct on the part of the taxpayer and, therefore, did not have to plead this allegation in their Statement of Case before the Tax Tribunal.

Having to plead a taxpayer not only acted Deliberately but was dishonest, causes HMRC two issues.

1. It is much harder for HMRC to succeed in a case where they must plead dishonesty because there are certain procedural safeguards that need to be in place; and

2. For appeals currently running through the Tribunal, it means HMRC will likely fail in defending a Deliberate allegation if they have not pleaded Dishonesty on the part of the taxpayer.

Background to Case

CTM represented New Claire Wine Limited after its previous legal representatives failed in their appeal of VAT and Corporation Tax Assessments (and the associated Deliberate Penalties) to the tax Tribunal.

The previous representatives later applied to the First Tier Tribunal and, later, the Upper Tribunal, for permission to appeal that decision, but those attempts failed because the reasons were inadequate.

As a final throw of the dice, CTM was contacted, and we submitted amended grounds to the Upper Tribunal for permission to appeal.

I have copied the Upper Tribunal’s decision on CTM’s application that has potential far reaching implications for HMRC and the taxpayer.

In essence, we have argued that HMRC cannot succeed in an appeal of a deliberate allegation without also pleading dishonesty. If we are right, HMRC lose this appeal together with hundreds of other appeals. It is a substantial, landmark case being brought forward by CTM and specialist tax counsel David Bedenham, and could have a serious impact on HMRC’s ability to raise assessments going back 20 years and their ability to raise Deliberate Company and Personal Penalties.

The Upper Tribunal Judge gave his reasons for allowing the company to appeal on this basis below:

Introduction

1. The Applicant, New Claire Wine Ltd, applies to the Upper Tribunal (Tax and Chancery) (“UT”) for permission to appeal the decision of the First-tier Tribunal (Tax Chamber) (“the FTT”), constituted as Judge Anne Scott and Member Leslie Brown, released on 4 January 2024 (“the Decision”).  The appeal was decided by the FTT following a hearing conducted between 30 January and 2 February 2023.
2. The FTT dismissed the Applicant’s appeal in principle (albeit with minor adjustments to the amounts of the assessments and penalties) against the following decisions of HMRC:

(a) Five assessments being discovery assessments under Schedule 18 paragraph 41 Finance Act 1998 (“FA 1998”) in respect of Accounting Periods Ending (“APE”) 31 January 2013, 2014, 2015, 2016 and 2017. Together, those assessments for Corporation Tax total £250,654.68;

(b) VAT assessments totalling £176,656 under section 73 Value Added Tax Act 1994 (“VATA”) for the VAT periods ending 06/2012 to 03/2017 inclusive by way of a Notice of Assessment dated 3 December 2018; and

(c) a penalty notice dated 6 November 2019 under Schedule 24 Finance Act 2007 (“FA 2007”) for deliberate (but not concealed) inaccuracies in tax returns submitted to HMRC by way of a Notice of Penalty dated 6 November 2019.

3. By a decision dated 3 July 2024 (“the PTA Decision”), Judge Blackwell refused permission to appeal the FTT’s Decision to the UT on the grounds of appeal pursued by the Applicant.  The Applicant renewed its application to the UT for permission to appeal in-time on 25 July 2024.

4. On 3 October 2024 I refused permission to appeal to the UT on the papers in relation to all three grounds of appeal then pursued by the Applicant.

5. The Applicant requested that permission to appeal be reconsidered at an oral hearing.  That hearing took place on 28 November 2024 by video (CVP).  Mr David Bedenham of counsel appeared for the Applicant having filed a skeleton argument.  I am very grateful to him for the quality of his written and oral submissions.

UT’s jurisdiction in relation to appeals from the FTT

6. An appeal to the Upper Tribunal from a decision of the FTT can only be made on a point of law (section 11 of the Tribunals, Courts and Enforcement Act 2007). The Upper Tribunal has a discretion whether to give permission to appeal. It will be exercised to grant permission if there is a realistic (as opposed to fanciful) prospect of an appeal succeeding, or if there is, exceptionally, some other good reason to do so: Lord Woolf MR in Smith v Cosworth Casting Processes Ltd[1997] 1 WLR 1538.
7. It is therefore the practice of this Chamber of the Upper Tribunal to grant permission to appeal where the grounds of appeal disclose an arguable error of law in the FTT’s decision: grounds with a realistic prospect of success which allege errors of law which are material to the outcome of the case.

The grounds of appeal

8. The Applicant’s representative had originally filed submissions containing three grounds of appeal arguing that the FTT erred in law in making its Decision.  The submissions and original grounds were drafted by Mr Geraint Jones KC who had appeared for the Applicant at the hearing before the FTT.

9. Mr Bedenham now appears for the Applicant On making the application for reconsideration of permission he advanced one reformulated ground of appeal (Ground 1) and one new ground of appeal (Ground 2).

Second ground of appeal

The FTT’s findings

23. The FTT made findings that the Applicant’s conduct was deliberate in the context of the corporation tax appeal (see [310]-[313]) and VAT appeal (see [353]) as follows:

310. In order to satisfy paragraph 43 Schedule 18 the loss of tax must have been brought about by the careless or deliberate behaviour of the appellant or someone acting on their behalf. HMRC have argued that the behaviour in this instance was deliberate.  That is on the basis that both of the directors knew that income was payable to the appellant, albeit it had been collected by them ostensibly in their capacity as directors of the appellant, but that income was not reflected in the accounts or tax returns.  It was the directors who made all of the purchases and sales so they would have known the large sums of money that were passing through their hands.  The accounts simply did not reflect that.

311. In the words of HMRC, the appellant’s record keeping arrangements were:

“fundamentally inadequate and its business processes were not sufficiently robust to ensure that all income and associated expenses were brought into account in calculating its profits chargeable to corporation tax. That is not the behaviour of a prudent and reasonable taxpayer wishing to comply with their legislative requirements”.

312. All of that is true but we would go further. This is not simply a case of lamentably poor record keeping which in itself was entirely caused by the directors. What was the appellant’s intention? Having made the choice to use the appellant as a trading vehicle, nevertheless the directors chose to operate using their own debit and/or credit cards, and bank accounts. The Barclays account was used both for the appellant and the Bottle Stop. They knew that those transactions were not in the accounts. They chose to buy and sell 9,700 cases of Villa Radiosa off record. The stock flow exercise identifies significant volumes of off record sales and purchases.

313. They were responsible for the appellant’s accounts and tax returns and, not least because of the sheer volume of anomalies in the records, they must have known that they were not accurate. In our view, to paraphrase the Supreme Court in HMRC v Tooth[2021] UKSC 17, at every stage there was an intention to mislead the Revenue with the consequence that there was insufficiency of tax. Looking at the totality of the evidence we find that the behaviour was deliberate.

353. It is argued for the appellant that Mr Paudel believed that the records were correct and therefore the VAT returns would have been correct. We do not accept that for the reasons given in relation to Corporation Tax. We have explained at paragraphs 310 and 311 above why we thought that the behaviour was deliberate for Corporation Tax purposes and we adopt that reasoning for VAT. We find that the behaviour was deliberate but not concealed.

[emphasis added]

24. The FTT rejected any need to find that the Applicant’s behaviour was dishonest and accepted that HMRC did not plead, allege or put their case on the basis that the deliberate conduct was also dishonest.  It did so in the following terms at [238]-[241] of the Decision:

Whether HMRC alleged fraudulent or dishonest behaviour? 

238. We do not propose to address every argument that was advanced for the appellant in relation to the argument that HMRC had alleged fraudulent and dishonest behaviour. Mr Jones argued that it had not been put to Mr Paudel that he was fraudulent or dishonest and indeed it was not. However, we find that that was because, although HMRC certainly argued that the appellant’s behaviour, through its directors, was deliberate and caused a loss of tax, they did not argue that it was either fraudulent or dishonest.

239. Mr Jones argued that HMRC had “rowed back” on the issue of fraudulent or dishonest  behaviour but there was an “undercurrent” to that effect in the assessments and HMRC’s case. The only inference to that effect that we found was at paragraph 73 of the VAT Statement of Case where HMRC had said that the behaviour was “at least deliberate”.  That was not repeated and Mrs McIntyre did not advance that argument at any stage.

240. In any event, in our view, that had not been Officer Dyson’s approach. He made it very clear that he had relied on what had been said at the meeting on 16 May 2017 and had given VKM and others numerous opportunities to comment thereon and they simply had not responded in any satisfactory fashion.  Officer Maqsood had adopted the same approach.

241. In summary, deliberate behaviour is not necessarily either fraudulent or dishonest and we do not accept that HMRC have argued fraudulent or dishonest behaviour.

The Applicant’s argument

25. Mr Bedenham, on behalf of the Applicant also seeks permission to appeal on the following ground:  The FTT held that the Appellant had deliberately understated its tax liabilities (see paragraphs 309-313 and 353 of the FTT decision). However, the FTT erred in making that finding in circumstances where (as the FTT acknowledged at paragraphs 238 and 241) HMRC had not alleged (and it was not open to the FTT to find) that the Appellant had behaved dishonestly.

26. He submits that whether the Appellant behaved deliberately was relevant to:
27. whether some of the corporation tax assessments were made in time (see paragraph

321of the FTT decision).

1. whether the penalty was properly calculated on the “deliberate” basis.
2. whether some of the VAT assessments (which were dated 3 December 2018) were made in time (not referenced in the FTT decision but addressed at paragraph 60 of “part 2” of HMRC’s Statement of Case1).

27. Mr Bedenham further contends that the FTT’s holding at paragraph 241 that “deliberate behaviour is not necessarily…dishonest” is (at least arguably) inconsistent with the Supreme Court’s decision in HMRC v Tooth[2021] UKSC 17 where, when considering the meaning of “deliberate inaccuracy” in s118(7) of the Taxes Management Act 1970, the Supreme Court stated at [47]:

“…for there to be a deliberate inaccuracy in a document within the meaning of section 118(7) there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so”

28. He relies on the Supreme Court’s definition of dishonesty: A person is dishonest if, on the facts as known or genuinely believed by him/her/them, his/her/their actions would be regarded as dishonest by an ordinary, reasonable and honest person (see Ivey v Genting Casinos[2017] UKSC 67 at [74]).

29. Mr Bedenham argues that it is, at the very least, arguable that a finding that someone has acted with “an intention to mislead the Revenue” per Tooth is a finding of dishonesty per Ivey(or, put another way, a  conclusion that the Appellant’s behaviour was deliberate required a finding that the Appellant had behaved dishonestly) Therefore such a finding was not open to the FTT in circumstances where the same had not been advanced by HMRC (and none of the procedural safeguards required by allegations of dishonesty had been given).

30. He fairly accepted and drew to my attention to the direct authority against him which states that a deliberate inaccuracy does not require dishonesty: the Upper Tribunal’s decision in CF Booth Ltd v HMRC[2022] UKUT 217 (TCC) where the UT stated at [41]:

“There is in our judgment no requirement for HMRC to plead or prove dishonesty when seeking to impose a penalty for deliberate inaccuracy under Schedule 24 FA 2007. As the FTT held in Auxilium, deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. We do not consider that anything said by the Supreme Court in Tooth calls that test into question.”

31. Nonetheless Mr Bedenham submits that the decision in CF Boothis wrong, it did not consider Ivey when considering Tooth and the point should be revisited by the UT. At the very least, that position is arguable.

Determination

32. I grant permission on this ground on the basis it just passes the arguability threshold and holds a realistic prospect of success. On the substantive appeal the Applicant will need to persuade the UT that the decision in CF Booth(determined by an authoritative panel which the President of the UT Tax and Chancery Chamber chaired) was wrongly decided and that allegations of deliberate conduct in bringing about a loss of tax or deliberate inaccuracies in returns do indeed equate to allegations of dishonesty.

33. Nonetheless, at this stage the Applicant only need satisfy me that that decision in CF Boothis arguably wrong.  In the circumstances in CF Booth where the Supreme Court’s decision in Tooth was not considered by reference to that in Ivey v Genting Casinos (presumably because it was not brought to the UT’s attention) the point is worthy of further argument.

34. Further I take into account that there is another compelling reason to revisit the issue.  Mr Bedenham accepted that this ground, should it have ultimate merit, has serous ramifications for a significant proportion of the appeals that the Tribunal hears and the way in which HMRC presents their cases in many appeals: all those in which the FTT considers allegations of deliberate conduct or inaccuracies on the part of a taxpayer.

35. Mr Bedenham accepts that the definition of deliberate in Toothis in the context of a definition as to what constitutes deliberate inaccuracy in returns and only in relation to one specific provision – section 118(7) of the Taxes Management Act 1970.  It is not necessarily presented as being a statement of more general application – see the discussion of the Supreme Court in Tooth at [37]-[47], particularly [39].  I pointed out to Mr Bedenham that the statutory context in which the threshold of ‘deliberate’ conduct or inaccuracies applies varies widely.  This case is a good example – the word ‘deliberate’ appears in statutes in relation to deliberate conduct in bringing about a loss of tax in relation to discovery assessments and extending time limits in which to make assessments and in relation to statements made to the Revenue for example in penalties for deliberate inaccuracies.  The word appears in different contexts for different taxes. The differing context and legislative history of each statute may be relevant to the understanding or construction of its meaning.   The range of different contexts may be considered in this appeal.

Conclusion and right to reconsideration

36. Permission to appeal to the Upper Tribunal is refused on Ground 1 but granted on Ground 2.