Katarzyna Kondrat-Wilk v The Commissioners for HMRC

On 18 November 2019, HMRC wrote to Moor Green pointing out that this was the first time that it had been stated that there was no documentation available for 2014-2016.

On 4 December 2019, HMRC wrote to the appellant with a copy to Moor Green confirming that the COP9 investigation would be brought to an end. At the beginning of the letter, the officer drew the appellant’s attention to a recent Tribunal decision in a related case, namely Hallen and Persson v HMRC, then unreported but now reported at[2020] UKFTT 291 (TC), which described the outline of the Scheme used by the appellant and Moor Green’s involvement. I observe that those appellants were partners in the partnership with whom the appellant signed the NHP agreement. They were directors of NHP.

The officer explained that the COP9 investigation was to be concluded because no evidence had been provided to explain the amount of the expenses claimed, how the expenses were paid or how they were an allowable business expense. Closure Notices would be issued for the two later years. HMRC pointed out that the letter from Belize (see paragraph 70 above), referred to a future payment and was dated after the years under enquiry, as was the letter from the appellant to Belize.

On 11 December 2019, Moor Green wrote to HMRC referring to the letter of 18 November 2019, which had been received by the appellant but apparently not by themselves, stating:-

“Our client cannot provide what she does not have. Not everyone is aware that documents etc ought to be saved for several years.”

On 3 January 2020, Moor Green wrote to HMRC in the following terms:-

“We would confirm that the initial contribution was made by and on behalf of the taxpayer. We would further explain that the taxpayer borrowed sufficient cash to enable her to make contributions to the Trust in the total amount as stated. As the borrowings were effected via internal client accounts of the Trustee and third parties, these would not necessarily appear on the bank statements nor would related evidential documentation be provided to the taxpayer. We would confirm that the taxpayer would not have access to any such third-party confidential documentation in this regard.”

Moor Green then offered a lengthy argument that the contributions to a Remuneration Trust was in keeping with generally accepted accounting practice (“GAAP”) and were deductible as they were wholly and exclusively for the purposes of the trade. Further correspondence ensued and the appellant’s Notice of Appeal for the discovery assessments was lodged with the Tribunal on 8 March 2020.

On 2 June 2020, HMRC issued the Closure Notice for 2016/17 pursuant to section 28A(1B) and (2) TMA. The Closure Notice increased the tax due from £592.90 to £11,214.80 giving the following reasons:-

On the same day a Closure Notice was issued for 2017/18 and the same reasons were advanced for increasing the tax due from £428.27 to £12,425.14.

On 24 June 2020, Moor Green wrote appealing the Closure Notices on the basis that “the contributions are in keeping with both generally accepted accounting practice and were incurred wholly and exclusively for the purposes of the trade”. It was argued that:-

On 24 June 2020, Moor Green sent HMRC the Foundation Charter of the Aionios Foundation. That makes no reference to the appellant nor details any connection between the appellant and the Aionios Foundation.

HMRC’s review letter dated 29 December 2020 upheld the Closure Notices for 2016/17 and 2017/18 and the appellant’s Notice of Appeal was dated 1 March 2021.

Correspondence ensued and on 16 September 2021 Judge Aleksander issued Directions which, in so far as relevant to this strike out application provided that there should be lodged with HMRC and the Tribunal within 30 days:-

In their application HMRC pointed out that the appellant had only provided a profit and loss account for the tax years ended 5 April 2017 and 5 April 2018 in an email dated 6 December 2021 and, on an unspecified date, two “Contributions Notices” for 2016/17 and 2017/18 which are both dated 20 October 2019. No attempt has been made to explain how those relate to the years under appeal or to the Notice referred to in paragraph 56 above. All Mr Kamal argues is that the later date was simply “tidying up”.

HMRC argued that on being reminded of non-compliance with the Directions, the appellant responded by changing the Grounds of Appeal. There was no explanation for the non-provision of the information requested.

On 20 October 2021, the appellant had lodged amended Grounds of Appeal (described by Mr Kamal as a Statement of Case).

For the first time that advanced the argument that the contributions were made for the purpose of setting up a structure whereby benefits might be provided to the spouse of the appellant. It was argued that the appellant would produce a witness statement to say that her spouse had taken on roles which freed her up to better focus on the trade carried on by the appellant. The Trust was said to provide a structure whereby benefits could be obtained by her spouse in the future. “It was understood that the terms of the Trust were wide enough to allow the spouse of the Appellant to become a beneficiary and the Trustees would be a third party who would owe a direct fiduciary obligation to the spouse”.

There is no evidence that any payment was actually made to a trust or that it was a remuneration trust of which the appellant was an employee or from which she received remuneration either directly or through the PMC. In any event the PMC only existed latterly and was dormant.

At various times it has been argued that she paid contributions through her bank account, then she received a loan from a trust, then borrowings were effected via internal accounts of the trustee and third parties, then the contribution was made by the PMC but there is no evidence.

The Contributions Notices do not prove payments or a liability and one of them predated the existence of the PMC.

There is no evidence in relation to her spouse.

The argument that the trust would benefit relationships with her suppliers cannot be accurate because it is NHP which has all dealings with suppliers.

These appeals were unusual for a number of reasons but prime amongst those were the very unusual arguments advanced by both Moor Green and Mr Kamal.

Some are more easily dismissed than others. As an example, Moor Green asserted in the case of the first and second appellants that payments into the Trust were wholly and exclusively for the purpose of the business because the appellants believed them to be for the benefit of the business. They went further in the original grounds of appeal for the first appellant where they stated:

“The clear intentions and beliefs of the Appellant’s advisers acting on the Appellant’s behalf and to which the Appellant evidently acquiesced, are attributable to the Appellant as his employed purpose. This is key evidence for the purposes of determining the Appellant’s purpose in making the contribution”.

Whilst Mr Kamal no longer adheres to those Grounds of Appeal it is indicative of the approach by Moor Green throughout and is supported by the more extensive argument in this case (see paragraph 62 above) where Moor Green argued that case law states that it is the subjective view of those running the business which is determinative.

That is plainly wrong in law. For more than a century, not only in the United Kingdom but also in many countries around the world, the concept of “wholly and exclusively” is well understood, at the highest level, to be a matter that is objectively determined.

I raise that, in part, because there was a suggestion that those advising the appellants could provide witness statements. I pointed out to Mr Kamal that witnesses are witnesses of fact. Arguments on the law are a matter for submissions.

On the issue of evidence, the Response stated under that heading that the Scheme was “widely applied, well recognised and, indeed, there have been a number of recent decisions on it: Dukeries Healthcare Limited v HMRC [2021] EWHC 2086 (Ch) and Marlborough DP Limited v HMRC [2021] TC 08246. It is unlikely that the parties would have wished to deviate from it.”

Firstly, the fact that something is widely used does not make it right. Secondly, and infinitely more importantly, as can be seen from those case reports, in both cases there was voluminous contemporary documentary evidence. That is most certainly not the case in this instance.

Another example of an unsustainable argument is Mr Kamal’s statement in correspondence to HMRC that “Questions of compatibility of domestic laws with EU laws are questions of principle and do not need facts”. He reiterated that at the hearing, insisting that it was simply a matter of principle. The problem with that is that the primary function of the First-tier Tribunal is to find the facts and then to apply the law. The Tribunal does not consider the law in the abstract.

It has been exceptionally difficult to identify many facts. The position has persistently changed. Since the investigations began in January 2018, when asked to justify the claims for Other Business Expenses, in broad terms the stance of Moor Green and latterly Mr Kamal have covered the following changes:-

At the outset of the hearing in this matter, Mr Kamal confirmed that, apart from the documents already submitted by Moor Green including what he described as a “contribution document”, the appellants would rely on parole evidence, inferences to be drawn from that and from the documents in the Bundles and the fact that that Scheme had been “widely applied” so that would give it credibility. I recapped that to him and he agreed that it was a fair summation of his submissions.

Mr Vallis argued that that highlights the reason for HMRC’s applications. It also confirms the quotations from Moor Green to the effect that there is no tangible evidence.

In debate thereafter, in summary, initially, Mr Kamal conceded that it was possible that no money had passed hands. Latterly, he conceded that no money had passed hands.

His argument came down to saying that contributions were “done through an oral declaration of trust”, to which witnesses would speak. Then he said that the appellants “would argue that you can declare a trust without actually moving money”. In essence he argued that by creating a trust a contribution was made.

He then moved on advancing a new argument stating that the appellants had not simply declared a trust but that certain funds were held by them on behalf of the trust. I put it to him that what he was saying was that witnesses would give evidence to the effect that they had declared a trust and the money was still in their hands but could be claimed as a deduction because of the bare trust. He agreed.

Understandably, Mr Vallis observed that this was an unheralded and completely new argument.

When asked why every taxpayer did not attempt to do the same, Mr Kamal’s response was that his only submission was that it seemed that it was a case of “shoddy paperwork” but that would be a matter to decide in the substantive hearing. He wished the opportunity to adduce witness statements from unspecified parties in order to manage the deficiencies in the paperwork and expand the evidence.

As far as deficient paperwork is concerned, in the Response, and there talking about the documents provided by this appellant (see paragraph 83 above) Mr Kamal argued that “it is perfectly reasonable for documents to have been entered into after the event in the course of “tidying up”. Those documents were dated at least 18 months after the later of the tax periods in question and long after the investigation commenced. In my view, that is not a strong argument absent compelling reasoning.

The Tribunal’s powers in relation to strike out are contained in Rule 8(3)(c) of the Rules which reads:-

“(3)

The Tribunal may strike out the whole or a part of the proceedings if –

(c)

the Tribunal considers there is no reasonable prospect of the appellant’s case, or part of it, succeeding.”

HMRC sought strike out. Mr Kamal opposed that seeking the opportunity to provide witness statements.

As far as witness statements are concerned, there is extensive law on the approach to be taken to the approach to evidence.

As Stewart J observed in Kimathi & Ors v The Foreign and Commonwealth Office [2018] EWHC 2066 (QB):

“95.

In recent years there have been a number of first instance judgments which have helpfully crystallised and advanced learning in respect of the approach to evidence. Three decisions in particular require citation. These are:

•

Gestmin SGPS SA v Credit Suisse (UK) Limited [2013] EWHC 3560 (Comm) – Leggatt J (as he then was)

•

Lachaux v Lachaux [2017] EWHC (Fam) – Mostyn J

•

Carmarthenshire County Council v Y [2017] EWFC 36 – Mostyn J

Rather than cite the relevant paragraphs from these judgments in full, I shall attempt to summarise the most important points:

In these appeals, by the time they get to trial, it will be more than ten years since the earliest of the disputed years in question. That poses obvious problems with oral evidence.

Furthermore, the accounts of what happened, or is alleged to have, happened have changed right up to and including this hearing.

The Upper Tribunal has provided guidance, upon which HMRC rely, at paragraph 33 of The First De Sales Limited Partnership and others v HMRC [2018] UKUT 396 (TCC) (“De Sales”) and I annex a copy thereof as an Appendix.

The first question that I must ask myself is, would the appellant have a realistic as opposed to a fanciful prospect of success of establishing that at least part of the sums claimed were deductible for income tax purposes.

As I have already pointed out, the question is not about the EU arguments on “wholly and exclusively”. The key question is, can the appellant establish that expenditure was incurred?

The current argument that there is a bare trust does not sit well with the previous arguments advanced for the appellant as can be seen from the findings in fact.

It is clear that Moor Green and the appellant had in mind the MSL fees when talking about contributions which raises the inference that those were the only payments made (see paragraph 70 above).

The fact that the PMC was dormant at all times does not assist and nor does the fact that it only came into existence in November 2017. There is no explanation in relation to the earlier years.

Moor Green made it explicit that the appellant had no records for 2014 to 2016.

I dismiss the argument that GAAP might assist the appellant. When I asked why Judge Aleksander’s Direction 1(a) in this appeal had not been obtempered, Mr Kamal said that parole evidence would establish that the contribution had been made. I can only take it from that, that that is consistent with saying that no money passed hands, there was a bare trust and therefore GAAP is not relevant.

Bare trusts are not a simple matter. There is simply a very late assertion that such a thing exists.

As can be seen from paragraph 86 above, there is the argument that the alleged payments (ie the monies allegedly held on bare trust) were for the purpose of making loans to the appellant’s spouse at some unspecified point. It is not for me to determine whether that would be an allowable expense in this or any business but, this is a specialist Tribunal, and the extensive case law, not on “wholly and exclusively” but on “for the purposes of the trade” suggests the prospects of success beyond a de minimis basis are likely to be very slim. There is also the issue in terms of the law of bare trusts as to whether that purpose has been fulfilled. It seems not.

Looking at the history of this investigation, the paucity of the documentation and the conflicting accounts offered, I find that there is no realistic possibility of the appellant producing evidence that, in terms of section 34(1) ITTOIA, expenditure was incurred. That is the first step long before one gets to whether it was wholly and exclusively incurred for the purposes of the trade.

The second question I must ask is whether there is any real substance in the factual assertions made. Given the multiplicity of contradictions in the documentation over the years, I find that there is not.

Given that the appellant bears the burden of proof in relation to the Closure Notices, I cannot find that any new evidence is likely to come to light. The appellant has been given multiple opportunities to produce any evidence at all, and in the context of Information Notices, and only conflicting accounts have been produced.

I do not accept the argument that the appellant could not have produced a witness statement before now. Mr Kamal has been involved since January 2021 and the appellant has been professionally advised throughout. The fact that HMRC appear to have considered that witness statements would not assist is not relevant. If the appellant had had any information that would have assisted the appeal then that should have been lodged long ago whether in the form of a witness statement or, like much of the other information, by correspondence.

I do agree with Mr Kamal, as do HMRC, that it is incumbent on HMRC to discharge their burden of proof in regard to the discovery assessments. However, that is in relation to timing and competency.

Did the officer discover a loss of tax and were the assessments raised in time? The absence of any credible information or records to vouch the alleged substantial expenditure means that the short answer to that is that it certainly appears that that is a burden that would be discharged.

Where I fundamentally disagree with Mr Kamal is that it is certainly not for HMRC to prove that no expenses were incurred. Income tax is a self-assessed tax and it is not for HMRC to prove a negative.

HMRC have described as “ludicrous” the arguments about the compatibility of domestic legislation with EU law and the argument that there should be a new “Proposed Test”. I understand why they are baffled but I do not propose to consider the EU law question because I do not need to do so.

The simple point is that the domestic legislation, which is the starting point, requires evidence that expenditure has been incurred by the appellant and that it is for the purpose of the trade. For the reasons set out above I find that there is no realistic possibility of the appellant doing so. Therefore section 34 ITTOIA, which is a relieving section, is not engaged. There can be no deduction from the profits of the trade. The concept of “wholly and exclusively” does not fall to be explored.

For the avoidance of doubt I am aware that there is a lot of money at stake in this matter. I have weighed in the balance the totality of the evidence and whether anything could be achieved by directing the production of witness statements since it would appear that that is all that is possible.

In the context of this appeal, given the lack of documentary evidence and the contradictions in the evidence and the various submissions, whether by Moor Green or Mr Kamal, I find that a witness statement and oral testimony would be very unlikely to assist in a substantive hearing. I do not accept that it is only at the substantive hearing that adequacy or not of the evidence is to be tested; that is very clear from De Sales.

This appeal has already absorbed a huge amount of time and money. There have been procedural issues. HMRC have made strenuous attempts to elicit information over a long period of time in the face of a flow of ever changing argument which did not address in a meaningful way the core issue. That issue was, and is, proof that expenditure was incurred, to whom, when, how and why. HMRC have also addressed many of the lengthy “EU” arguments. It has been to no avail.

Whether I strike the appeal out is a discretionary matter and I have had in mind Rule 2 of the Rules. Parole evidence, which is all that is offered, in the context of the multiple previous contradictory accounts and very many years after the events in question is very unlikely to assist the Tribunal. I find that there is no reasonable prospect of this appeal succeeding.

For all these reasons I grant the application to strike out the appeal. In the event that the appeals were not formally consolidated then appeal TC/2020/80626 is also struck out.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.