In BPP University College of Professional Studies v HMRC 5 the FTT found that HMRC had failed to comply with an “unless” order under Rule 8(3) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the Rules).
BPP supplied standard-rated education to students, including (within that single supply) printed matter. A reorganisation of the business took place in 2006 so that a separate company would make a supply of books to the students whilst another continued to supply the education. The intention was to take advantage of the zero-rating for VAT purposes on supplies of books6.
From 19 July 2011, this zero-rating was amended by section 75 Finance Act 2011 to exclude, broadly, a supply of goods where, had the two supplies been made by a single supplier, they would have been treated as a single supply of services, where that supply would have been taxable. From 19 July 2011, BPP accounted for VAT on the supply of the printed materials.
On 29 November 2012, HMRC issued assessments on certain BPP companies of approximately £6m for the period September 2008 to 18 July 2011. The assessments were based on the grounds that VAT should have been charged on the supply of books, either because there was a single composite supply, or on the basis of an abuse of law under Halifax7.
On 6 December 2012, HMRC issued a decision to certain BPP companies in relation to the supply of printed materials made after 19 July 2011.
The assessments and decision were appealed in time, and the appeals joined together pursuant to directions issued by the FTT that required HMRC’s statement of case to be served by 2 October 2013. HMRC applied for a short extension of time when their statement of case was filed late on 21 October 2013.
In the interim, on 24 April 2013, HMRC withdrew the assessments which were the subject of the first two appeals, the remaining appeal relating to the post-18 July 2011 position.
On 11 November 2013, BPP sought further and better particulars from HMRC. BPP applied to the FTT on 22 November 2013, for an order that unless replies were provided within 14 days of the date of the order HMRC would be barred from further participation in the proceedings pursuant to Rule 8(3)(a) of the Rules.
Although the parties agreed the replies would be provided by 31 January 2014, HMRC was unwilling to consent to an order which provided that they would be barred in the event that the direction was not complied with, so BPP proceeded with its application.
Directions were issued by the FTT but they did not give effect to BPP’s application, which would have meant that HMRC was automatically barred from taking further part in the appeal in the event of their default. Instead, the directions provided, in accordance with Rule 8(3)(a), that if HMRC failed to provide replies “to each of the questions identified” in the Request for Further Information then HMRC “may be barred from taking further part in the proceedings.”
HMRC served a reply on 31 January 2014.
It fell to the FTT to determine whether HMRC complied with the “unless” order and, if not, what sanction should be imposed.
HMRC’s reply stated that they did not accept that at the hearing of the appeals they would be confined to relying only on the facts, matters and submissions set out in the reply. The reply was stated to merely “elaborate” on their statement of case.
This was despite a direction requiring HMRC to:
“identify, with the same degree of particularity as will be relied upon at the hearing of these appeals, each and every matter on which they rely in support of their argument…”
The FTT found that it was not open to HMRC to say that they were not obliged to fully comply with the above direction. That HMRC may have subsequently considered it was unwise to have agreed to a direction requiring pleadings in that level of detail did not permit them to later resile from the agreement.
Furthermore, in the view of the FTT HMRC’s reply failed to identify a single fact on which they relied. The reply referred to HMRC’s letter of 29 November 2012. This letter dealt predominantly with the assessments, which had by this stage been withdrawn, but did provide a detailed summary of HMRC’s understanding of the factual position. This was too detailed, failing to identify the (more limited) facts on which HMRC relied in the extant third appeal. Had the letter been adequate, HMRC should not have agreed to subsequently supply the reply.
HMRC had not therefore complied with the January 2013 directions. It then fell to the FTT to consider what sanction should be imposed for such failure.
The FTT was of the view that Mitchell was not strictly relevant, particularly as no sanction had yet been applied to HMRC (from which it could seek relief). The Mitchell guidance was, though, held to be authority in stressing the “significant weight” which should be given to “the factors (a) and (b) of CPR 3.9 to ensure fair and just hearings.”
The FTT concluded that there was “very clear prejudice” to BPP in not knowing HMRC’s case, observing that litigation “is not to be conducted by ambush”. HMRC’s “continued failure to make a proper statement of their case” resulted in a delay of some eight months to the progress of the appeal. The FTT did not have a clear understanding of the reason for HMRC’s default. The FTT was critical of HMRC’s conduct, commenting that they had “not shown a great respect for time-limits”, nor had they “appreciated the importance of adhering to directions.”
Having identified this prejudice the FTT considered that costs would not adequately compensate BPP. No alternative was suggested by HMRC other than simply allowing the appeal to proceed. It was agreed by HMRC that they should be barred only where the breach was incapable of remedy or had not been remedied.
HMRC also argued that they should not be barred from taking further part in the appeal because this was effectively a test case for HMRC. The FTT gave short shrift to this argument, stating that if HMRC are barred “they will simply have to find another test case.”
The FTT found that HMRC were clearly on notice that they were at risk of a direction barring them from further participation in the appeal from January 2013, but did not remedy the position for a further five months, making barring the appropriate sanction.
The FTT found that Mitchell was not strictly relevant to the exercise of its discretion, but that it provided useful guidance when exercising its powers. This case is a timely reminder to HMRC that they should not underestimate the importance of complying with directions issued by the FTT.
When HMRC fail to comply with any of the Rules, taxpayers should give serious consideration to applying to the FTT for a direction providing that unless HMRC complies with the relevant Rule they will be barred from taking further part in the proceedings.
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