Sharon Suttle v The Commissioners for HMRC

“97 Penalties for errors

Schedule 24 contains provisions imposing penalties on taxpayers who –

make errors in certain documents sent to HMRC, or

unreasonably fail to report errors in assessments by HMRC.”

“1 Error in taxpayer’s document

A penalty is payable by a person (P) where –

P gives HMRC a document of a kind listed in the Table below, and

Conditions 1 and 2 are satisfied.

Condition 1 is that the document contains an inaccuracy which amounts to, or leads to –

an understatement of a liability to tax,

a false or inflated statement of a loss, or

a false or inflated claim to repayment of tax.

Condition 2 is that the inaccuracy was careless (within the meaning of paragraph 3) or deliberate on P’s part.

Where a document contains more than one inaccuracy, a penalty is payable for each inaccuracy.”

“1A Error in taxpayer's document attributable to another person

A penalty is payable by a person (T) where –

another person (P) gives HMRC a document of a kind listed in the Table in paragraph 1,

the document contains a relevant inaccuracy, and

the inaccuracy was attributable to T deliberately supplying false information to P (whether directly or indirectly), or to T deliberately withholding information from P, with the intention of the document containing the inaccuracy.

A “relevant inaccuracy” is an inaccuracy which amounts to, or leads to –

an understatement of a liability to tax,

a false or inflated statement of a loss, or

a false or inflated claim to repayment of tax.

A penalty is payable under this paragraph in respect of an inaccuracy whether or not P is liable to a penalty under paragraph 1 in respect of the same inaccuracy.”

“3 Degrees of culpability

For the purposes of a penalty under paragraph 1, inaccuracy in a document given by P to HMRC is –

“careless” if the inaccuracy is due to failure by P to take reasonable care,

“deliberate but not concealed” if the inaccuracy is deliberate on P’s part but P does not make arrangements to conceal it, and

“deliberate and concealed” if the inaccuracy is deliberate on P’s part and P makes arrangements to conceal it (for example, by submitting false evidence in support of an inaccurate figure).

An inaccuracy in a document given by P to HMRC, which was neither careless nor deliberate on P’s part when the document was given, is to be treated as careless if P –

discovered the inaccuracy at some later time, and

did not take reasonable steps to inform HMRC.”

“4

This paragraph sets out the penalty payable under paragraph 1.

If the inaccuracy is in category 1, the penalty is –

for careless action, 30% of the potential lost revenue,

for deliberate but not concealed action, 70% of the potential lost revenue, and

for deliberate and concealed action, 100% of the potential lost revenue.

…

Paragraph 4A explains the 3 categories of inaccuracy.

4A

An inaccuracy is in category 1 if –

it involves a domestic matter,…

If a single inaccuracy is in more than one category (each referred to as a “relevant category”) –

it is to be treated for the purposes of this Schedule as if it were separate inaccuracies, one in each relevant category according to the matters that it involves, and

the potential lost revenue is to be calculated separately in respect of each separate inaccuracy.

…

5

“The potential lost revenue” in respect of an inaccuracy in a document (including an inaccuracy attributable to a supply of false information or withholding of information) or a failure to notify an under-assessment is the additional amount due or payable in respect of tax as a result of correcting the inaccuracy or assessment.

The reference in sub-paragraph (1) to the additional amount due or payable includes a reference to –

an amount payable to HMRC having been erroneously paid by way of repayment of tax, and

an amount which would have been repayable by HMRC had the inaccuracy or assessment not been corrected.

…

6

Where P is liable to a penalty under paragraph 1 in respect of more than one inaccuracy, and the calculation of potential lost revenue under paragraph 5 in respect of each inaccuracy depends on the order in which they are corrected –

careless inaccuracies shall be taken to be corrected before deliberate inaccuracies, and

deliberate but not concealed inaccuracies shall be taken to be corrected before deliberate and concealed inaccuracies.

In calculating potential lost revenue where P is liable to a penalty under paragraph 1 in respect of one or more understatements in one or more documents relating to a tax period, account shall be taken of any overstatement in any document given by P which relates to the same tax period.

In sub-paragraph (2) –

“understatement” means an inaccuracy that satisfies Condition 1 of paragraph 1, and

“overstatement” means an inaccuracy that does not satisfy that condition.

For the purposes of sub-paragraph (2) overstatements shall be set against understatements in the following order –

understatements in respect of which P is not liable to a penalty,

careless understatements,

deliberate but not concealed understatements, and

deliberate and concealed understatements.

In calculating for the purposes of a penalty under paragraph 1 potential lost revenue in respect of a document given by or on behalf of P no account shall be taken of the fact that a potential loss of revenue from P is or may be balanced by a potential over-payment by another person (except to the extent that an enactment requires or permits a person's tax liability to be adjusted by reference to P's).

…”

“9 Reductions for disclosure

(A1) Paragraph 10 provides for reductions in penalties under paragraphs 1, 1A and 2 where a person discloses an inaccuracy, a supply of false information or withholding of information, or a failure to disclose an under-assessment.

A person discloses an inaccuracy, a supply of false information or withholding of information, or a failure to disclose an underassessment by –

telling HMRC about it,

giving HMRC reasonable help in quantifying the inaccuracy, the inaccuracy attributable to the supply of false information or withholding of information, or the under-assessment, and

allowing HMRC access to records for the purpose of ensuring that the inaccuracy, the inaccuracy attributable to the supply of false information or withholding of information, or the under-assessment is fully corrected.

Disclosure –

is “unprompted” if made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy, the supply of false information or withholding of information, or the underassessment, and

otherwise, is “prompted”.

In relation to disclosure “quality” includes timing, nature and extent.

10

If a person who would otherwise be liable to a penalty of a percentage shown in column 1 of the Table (a “standard percentage”) has made a disclosure, HMRC must reduce the standard percentage to one that reflects the quality of the disclosure.

But the standard percentage may not be reduced to a percentage that is below the minimum shown for it –

in the case of a prompted disclosure, in column 2 of the Table, and

in the case of an unprompted disclosure, in column 3 of the Table.

11 Special reduction

If they think it right because of special circumstances, HMRC may reduce a penalty under paragraph 1, 1A or 2.

In sub-paragraph (1) “special circumstances” does not include –

ability to pay, or

the fact that a potential loss of revenue from one taxpayer is balanced by a potential over-payment by another.

In sub-paragraph (1) the reference to reducing a penalty includes a reference to –

staying a penalty, and

agreeing a compromise in relation to proceedings for a penalty.

…

13 Procedure – assessment

Where a person becomes liable for a penalty under paragraph 1, 1A or 2 HMRC shall –

assess the penalty,

notify the person, and

state in the notice a tax period in respect of which the penalty is assessed…

…

(1A) A penalty under paragraph 1, 1A or 2 must be paid before the end of the period of 30 days beginning with the day on which notification of the penalty is issued.

An assessment –

shall be treated for procedural purposes in the same way as an assessment to tax (except in respect of a matter expressly provided for by this Act),

may be enforced as if it were an assessment to tax, and

may be combined with an assessment to tax.

An assessment of a penalty under paragraph 1 or 1A must be made before the end of the period of 12 months beginning with –

the end of the appeal period for the decision correcting the inaccuracy, or

if there is no assessment to the tax concerned within paragraph (a), the date on which the inaccuracy is corrected.

An assessment of a penalty under paragraph 2 must be made before the end of the period of 12 months beginning with

the end of the appeal period for the assessment of tax which corrected the understatement, or

if there is no assessment within paragraph (a), the date on which the understatement is corrected.

For the purpose of sub-paragraphs (3) and (4) a reference to an appeal period is a reference to the period during which –

an appeal could be brought, or

an appeal that has been brought has not been determined or withdrawn.

Subject to sub-paragraphs (3) and (4), a supplementary assessment may be made in respect of a penalty if an earlier assessment operated by reference to an underestimate of potential lost revenue.

In this Part of this Schedule references to an assessment to tax, in relation to inheritance tax and stamp duty reserve tax, are to a determination.

…

15 Procedure – appeal

A person may appeal against a decision of HMRC that a penalty is payable by the person.

A person may appeal against a decision of HMRC as to the amount of a penalty payable by the person.

...

16

An appeal under this Part of this Schedule shall be treated in the same way as an appeal against an assessment to the tax concerned (including by the application of any provision about bringing the appeal by notice to HMRC, about HMRC review of the decision or about determination of the appeal by the First-tier Tribunal or Upper Tribunal).

Sub-paragraph (1) does not apply –

so as to require P to pay a penalty before an appeal against the assessment of the penalty is determined, or

in respect of any other matter expressly provided for by this Act.

17

On an appeal under paragraph 15(1) the tribunal may affirm or cancel HMRC's decision.

On an appeal under paragraph 15(2) the tribunal may –

affirm HMRC's decision, or

substitute for HMRC's decision another decision that HMRC had power to make.

If the tribunal substitutes its decision for HMRC's, the tribunal may rely on paragraph 11 –

to the same extent as HMRC (which may mean applying the same percentage reduction as HMRC to a different starting point), or

to a different extent, but only if the tribunal thinks that HMRC's decision in respect of the application of paragraph 11 was flawed.

…

(5A) In this paragraph “tribunal” means the First-tier Tribunal or Upper Tribunal (as appropriate by virtue of paragraph 16(1)).

In sub-paragraphs (3)(b)… “flawed” means flawed when considered in the light of the principles applicable in proceedings for judicial review.

…”

“19 Companies: officers' liability

Where a penalty under paragraph 1 is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company, the officer is liable to pay such portion of the penalty (which may be 100%) as HMRC may specify by written notice to the officer.

Sub-paragraph (1) does not allow HMRC to recover more than 100% of a penalty.

In the application of sub-paragraph (1) to a body corporate other than a limited liability partnership “officer” means –

a director (including a shadow director within the meaning of section 251 of the Companies Act 2006 (c. 46)),

(aa) a manager, and

a secretary.

(3A) In the application of sub-paragraph (1) to a limited liability partnership, “officer” means a member.

In the application of sub-paragraph (1) in any other case “officer” means –

a director,

a manager,

a secretary, and

any other person managing or purporting to manage any of the company's affairs.

Where HMRC have specified a portion of a penalty in a notice given to an officer under sub-paragraph (1) –

paragraph 11 applies to the specified portion as to a penalty,

the officer must pay the specified portion before the end of the period of 30 days beginning with the day on which the notice is given,

paragraph 13(2), (3) and (5) apply as if the notice were an assessment of a penalty,

a further notice may be given in respect of a portion of any additional amount assessed in a supplementary assessment in respect of the penalty under paragraph 13(6),

paragraphs 15(1) and (2), 16 and 17(1) to (3) and (6) apply as if HMRC had decided that a penalty of the amount of the specified portion is payable by the officer, and

paragraph 21 applies as if the officer were liable to a penalty.

In this paragraph “company” means any body corporate or unincorporated association, but does not include a partnership, a local authority or a local authority association.

…”

“80 Determination of unpaid tax and appeal against determination

This regulation applies if it appears to [HMRC] that there may be tax payable for a tax year under 67G, as adjusted by regulation 67H(2) where appropriate, or regulation 68 by an employer which has neither been –

paid to the Inland Revenue, nor

certified by the Inland Revenue under regulation 75A, 76, 77, 78 or 79.

(1A) In paragraph (1), the reference to tax payable for a tax year under regulation 67G includes references to –

any amount the employer was liable to deduct from employees during the tax year, and

any amount the employer must account for under regulation 62(5) (notional payments) in respect of notional payments made by the employer during the tax year,

whether or not those amounts were included in any return under regulation 67B (real time returns of information about relevant payments) or 67D (exceptions to regulation 67B).

[HMRC] may determine the amount of that tax to the best of their judgment, and serve notice of their determination on the employer.

A determination under this regulation must not include tax in respect of which a direction under regulation 72(5) has been made; and directions under that regulation do not apply to tax determined under this regulation.

(3A) A determination under this regulation must not include tax in respect of which a direction under regulation 72F has been made.

A determination under this regulation may–

cover ... any one or more tax periods in a tax year, and

extend to the whole of [the amount of tax determined by HMRC under paragraph (2)], or to such part of it as is payable in respect of –

a class or classes of employees specified in the notice of determination (without naming the individual employees), or

one or more named employees specified in the notice.

A determination under this regulation is subject to Parts 4, 5, 5A ... and 6 of TMA (assessment, appeals, collection and recovery) as if –

the determination were an assessment, and

the amount of tax determined were income tax charged on the employer,

and those Parts of that Act apply accordingly with any necessary modifications.

...”

“8 Decisions by officers of Board

Subject to the provisions of this Part, it shall be for an officer of the Board –

…

to decide whether a person is or was liable to pay contributions of any particular class and, if so, the amount that he is or was liable to pay, …”

“73 Annual return of relevant payments liable to deduction of tax (Forms P35 and P14)

Before 20th May following the end of a tax year, an employer must deliver to the Inland Revenue a return containing the following information.

The information is –

the tax year to which the return relates,

the total amount of the relevant payments made by the employer during the tax year to all employees in respect of whom the employer was required at any time during that year to prepare or maintain deductions working sheets, and

the total net tax deducted in relation to those payments.

The return must be supported by the following information in respect of each of the employees mentioned in paragraph (2)(b).

The supporting information is –

the employee's name,

the employee's address, if known,

either –

the employee's national insurance number, or

if that number is not known, the employee's date of birth, if known, and sex,

the employee's code,

the tax year to which the return relates,

the total amount of the relevant payments made by the employer to the employee during that tax year, and

the total net tax deducted in relation to those payments.

Paragraphs (2)(c) and (4)(g) are subject to regulation 64(7) (trade disputes).

If an employee was taken into employment after the beginning of the tax year, the employer must also provide the total amounts of –

any amounts required by regulation 43(9), 52(11), 53(3) or 61(3) to be treated as relevant payments made by the employer to the employee during the tax year,

any amounts treated as tax deducted by the employer by any of those regulations,

the sum of the figures given under sub-paragraph (a) of this paragraph and paragraph (4)(f),

the sum of the figures given under sub-paragraph (b) of this paragraph and paragraph (4)(g).

The return must include –

a statement and declaration containing a list of all deductions working sheets which the employer was required to prepare or maintain at any time during that tax year; and

a certificate showing –

the total net tax deducted or the total net tax repaid in the case of each employee, and

the total net tax deducted or repaid in respect of all the employees,

during that tax year.

The statement and declaration and the certificate must be –

signed by the employer, or

if the employer is a body corporate, signed either by the secretary or by a director.”

“229 Mileage allowance payments

No liability to income tax arises in respect of approved mileage allowance payments for a vehicle to which this Chapter applies (see section 235).

Mileage allowance payments are amounts, other than passenger payments (see section 233), paid to an employee for expenses related to the employee's use of such a vehicle for business travel (see section 236(1)).

Mileage allowance payments are approved if, or to the extent that, for a tax year, the total amount of all such payments made to the employee for the kind of vehicle in question does not exceed the approved amount for such payments applicable to that kind of vehicle (see section 230).

Subsection (1) does not apply if –

the employee is a passenger in the vehicle, or

the vehicle is a company vehicle (see section 236(2)).

230 The approved amount for mileage allowance payments

The approved amount for mileage allowance payments that is applicable to a kind of vehicle is –

M × R

Where –

M is the number of miles of business travel by the employee (other than as a passenger) using that kind of vehicle in the tax year in question;

R is the rate applicable to that kind of vehicle.

The rates applicable are as follows –

Kind of vehicle Rate per mile

Car or van 45p for the first 10,000 miles

Motor cycle 24p

Cycle 20p

The reference in subsection (2) to “the first 10,000 miles” is to the total number of miles of business travel in relation to the employment, or any associated employment, by car or van in the tax year in question.

...

231 Mileage allowance relief

An employee is entitled to mileage allowance relief for a tax year –

if the employee uses a vehicle to which this Chapter applies for business travel, and

the total amount of all mileage allowance payments, if any, made to the employee for the kind of vehicle in question for the tax year is less than the approved amount for such payments applicable to that kind of vehicle.

The amount of mileage allowance relief to which an employee is entitled for a tax year is the difference between –

the total amount of all mileage allowance payments, if any, made to the employee for the kind of vehicle in question, and

the approved amount for such payments applicable to that kind of vehicle.

Subsection (1) does not apply if –

the employee is a passenger in the vehicle, or

the vehicle is a company vehicle.

…

233 Passenger payments

No liability to income tax arises in respect of approved passenger payments made to an employee for the use of a car or van (whether or not it is a company vehicle) if –

the employee receives mileage allowance payments for the use of the car or van, and

the cash equivalent of the benefit of the car or van is treated as earnings from the employment by virtue of section 120 or 154 (cars and vans as benefits).

This is subject to subsection (2).

The condition in subsection (1)(b) needs to be met only if the car or van is made available to the employee by reason of the employment.

Passenger payments are amounts paid to an employee because, while using a car or van for business travel, the employee carries in it one or more passengers who are also employees for whom the travel is business travel.

Passenger payments are approved if, or to the extent that, for a tax year, the total amount of all such payments made to the employee does not exceed the approved amount for such payments (see section 234).

Section 117 (when cars and vans are made available by reason of employment) applies for the purposes of subsection (2).

234 The approved amount for passenger payments

The approved amount for passenger payments is –

M × R

Where –

M is the number of miles of business travel by the employee by car or van –

for which the employee carries in the tax year in question one or more passengers who are also employees for whom the travel is business travel, and

in respect of which passenger payments are made;

R is a rate of 5p per mile.

…

235 Vehicles to which this Chapter applies

This Chapter applies to cars, vans, motor cycles and cycles.

“Car” means a mechanically propelled road vehicle which is not –

a goods vehicle,

a motor cycle, or

a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used.

“Van” means a mechanically propelled road vehicle which –

is a goods vehicle, and

has a design weight not exceeding 3,500 kilograms,

and which is not a motor cycle.

“Motor cycle” has the meaning given by section 185(1) of the Road Traffic Act 1988 (c. 52).

“Cycle” has the meaning given by section 192(1) of that Act.

In this section –

“design weight” means the weight which a vehicle is designed or adapted not to exceed when in normal use and travelling on a road laden;

“goods vehicle” means a vehicle of a construction primarily suited for the conveyance of goods or burden of any description.

236 Interpretation of this Chapter

In this Chapter –

“business travel” means travelling the expenses of which, if incurred and paid by the employee in question, would (if this Chapter did not apply) be deductible under sections 337 to 342;

“mileage allowance payments” has the meaning given by section 229(2);

“passenger payments” has the meaning given by section 233(3).

For the purposes of this Chapter a vehicle is a “company vehicle” in a tax year if in that year –

the vehicle is made available to the employee by reason of the employment and is not available for the employee's private use, or

the cash equivalent of the benefit of the vehicle is to be treated as the employee's earnings for the tax year by virtue of –

section 120 (benefit of car treated as earnings),

section 154 (benefit of van treated as earnings), or

section 203 (residual liability to charge: benefit treated as earnings), or

in the case of a car or van, the cash equivalent of the benefit of the car or van would be required to be so treated if sections 167 and 168 (exceptions for pooled cars and vans) [and section 248A (emergency vehicles) ]1 did not apply, or

in the case of a cycle, the cash equivalent of the benefit of the cycle would be required to be treated as the employee's earnings for the tax year under Chapter 10 of Part 3 (taxable benefits: residual liability to charge) if section 244(1) (exception for cycles made available) did not apply.

Sections 117 and 118 (when cars and vans are made available by reason of employment and are made available for private use) apply for the purposes of subsection (2).”

“336 Deductions for expenses: the general rule

The general rule is that a deduction from earnings is allowed for an amount if –

the employee is obliged to incur and pay it as holder of the employment, and

the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.

The following provisions of this Chapter contain additional rules allowing deductions for particular kinds of expenses and rules preventing particular kinds of deductions.

No deduction is allowed under this section for an amount that is deductible under sections 337 to 342 (travel expenses).”

whether there were any inaccuracies in the Returns that amounted to, or led to, an understatement of liability to tax;

whether such inaccuracies were deliberate and, if so, whether they were also concealed – paragraph 19(1) requires the penalty to be payable for a deliberate inaccuracy, whereas the question of concealment is relevant to quantum;

whether the penalty has been correctly calculated; and

whether any amount of any penalty is attributable to Ms Suttle and/or Mr Jaekel.

Ms Suttle’s grounds of appeal were:

Mr Jaekel’s grounds of appeal were:

the PLNs were issued to the Appellants before the decision not to appeal was taken by the administrators of EE139;

the Appellants (and their advisers) were involved in representations made to HMRC on behalf of EE139 ahead of HMRC’s statutory review (eg Schofield Sweeney, acting for the Appellants, wrote to HMRC on 28 April 2017); and

the decision not to pursue the appeal against the penalty issued to EE139 had been taken by the administrators after they had conducted their own review (having possession of all the books and records of the company) and such review had concluded that an appeal would be unlikely to be successful, albeit that the review had concluded that 75% of expenses paid should be treated as taxable earnings (rather than 90%).

Mr Ripley submitted that the present appeal does not amount to “re-litigating” any liability – there has never been any litigation of the Regulation 80 determinations or Section 8 decisions, as EE139 had not appealed those matters; they are now final as regards EE139, and this appeal will have no bearing on that. Furthermore, the decision not to appeal was taken by the administrators of EE139, not the Appellants. That the administrators of EE139 were in contact with the Appellants and gave them the opportunity to make representations makes no difference in this regard.

Mr Firth submitted that there was no conceivable abuse where an individual on whom a penalty is imposed had no control over the decision by the company not to proceed with an appeal. The ability to make representations to the administrators in the context of the administrators’ review of the Assessments, where there was no prescribed procedure and little transparency as to their reasoning, is very different from the right to make an appeal to an independent tribunal.

In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interest of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice.

Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law.

Everyone charged with a criminal offence has the following minimum rights:

to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him;

to have adequate time and facilities for the preparation of his defence;

to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require;

to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him;

to have the free assistance of an interpreter if he cannot understand or speak the language used in court.”

The principle of abuse of process is based on the underlying public interest that there should be finality in litigation, and efficiency and economy in the conduct of litigation. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to an abuse of process if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in earlier proceedings if it was to be raised at all. That principle was explained by Lord Bingham in Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1, at p 31, where he went on to say:

“It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not. Thus while I would accept that lack of funds would not ordinarily excuse a failure to raise in earlier proceedings an issue which could and should have been raised then, I would not regard it as necessarily irrelevant, particularly if it appears that the lack of funds has been caused by the party against whom it is sought to claim. While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party's conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.””

At [33] (cited above) Judge Berner recorded that the principle of abuse of process is based on the underlying public interest that there should be finality in litigation, and efficiency and economy in the conduct of litigation. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to an abuse of process if the court is satisfied that the claim or defence should have been raised in earlier proceedings if it was to be raised at all.

What is required is a broad, merits-based judgment, taking account of all the facts and circumstances. The proper approach is to ask whether in all the circumstances a party’s conduct is an abuse.

The appeal before the Tribunal was by a different party to that which had been the appellant in the MTIC proceedings. That did not prevent the principle of abuse from applying. Mr Hackett had a sufficient degree of identification with Intekx to enable the principle to be applied – he was the sole director, made decisions and gave instructions on its behalf.

As regards the VAT period where the MTIC appeal was the subject of a final determination by the Tribunal, which had involved a hearing of the substantive appeal and the evidence of Mr Hackett, it would be an abuse of process for Mr Hackett to seek to re-litigate the relevant issues determined by the Tribunal in that appeal. Mr Hackett, as director of Intekx, had had an opportunity to put forward his case; it would be contrary to the principle of finality of litigation to allow that determination to be re-visited in Mr Hackett’s appeal, a clear abuse of process and there were no circumstances that could justify such a course.

The circumstances for the other periods were different. There had not been any determination by the Tribunal; there had been a withdrawal of those appeals. Those withdrawals were stated at least in part to be due to the difficult financial position of the company as a result of the denial of repayment of input VAT; this was not decisive, but nor was it irrelevant. Other relevant factors were that the present appeal was made by Mr Hackett and not by Intekx and that, at the time when the earlier appeals were withdrawn, Mr Hackett was unaware that he might be exposed to a PLN in respect of a penalty assessment not then made upon Intekx.

For the appeals which had been withdrawn it would not be an abuse of the processes of the Tribunal for the facts and issues to fall to be determined by the Tribunal on this appeal by Mr Hackett. Judge Berner went further – to fix Mr Hackett with deemed findings in respect of those appeals, where he is appealing against a PLN which has arisen only after those appeals were withdrawn, would be contrary to the interests of justice.

There has not been a substantive hearing by any Tribunal of an appeal by EE139 against either the Assessments or the penalty.

The PLNs were issued to the Appellants in January 2017, very shortly after the penalty was issued to EE139. The existence of the PLNs was known at all times when decisions were taken by EE139 in relation to the Assessments and penalty which had been issued to EE139.

The administrators of EE139 had considered and sought advice as to whether EE139 should pursue the appeals which had been made. The administrators had all the books and records of the company, engaged with HMRC and this process had included various opportunities for the Appellants to make representations:

The relevant decisions as to whether to make or pursue an appeal were taken by the administrators of EE139 and not by the Appellants as directors of EE139.

The administrators are officers of the court and Ms Goldring referred to them as having various duties to act in good faith, be impartial and act in the best interests of creditors as a whole. We did not have the benefit of detailed submissions as to the duties of insolvency practitioners.

The scope of the review which was conducted by Armstrong Watson was described in the letter dated 2 October 2017. The description of the review does refer (when summarising the conclusions and the scope of the review) to both the Assessments and the penalty, and it is clear that Armstrong Watson were advising not to appeal against either. However, we infer from that letter and all of its attachments that the focus of the exercise conducted was on the Assessments – they looked at the expenses claimed, the records available to evidence those expenses and the controls/systems of EE139. There is no reference therein to the fact that the penalty was issued on the basis of deliberate (and concealed) behaviour, or any conclusions expressed in relation thereto.

“[ ] In relation to the penalty and personal liability notice, the Respondents bear the burden of proving that:

EE139’s P35 returns and P14 forms and RTI returns were inaccurate and that such inaccuracies amounted to, or led to, an understatement of liability to tax;

That such inaccuracies were deliberate and concealed;

That the deliberate and concealed inaccuracies were attributable to the Appellant as an officer of the company; and

That the penalty amounts as attributable to the Appellant are correct.”

If the Respondents are wrong about this, and Ms Suttle and Mr Jaekel are permitted to litigate the underlying Regulation 80 determinations, and Section 8 decisions, the burden rests, in the ordinary way, on them to show that they were wrongly imposed. That is irrespective of the fact that they form part of the penalty appeal (see The Commissioners for His Majesty’s Revenue and Customs -v- Zaman [2022] UKUT 252 (TCC) at [34] – [35].”

Ms Goldring submitted that Zaman also concerned a challenge to a PLN, and the matter determined by the Upper Tribunal was thus the same as that before us. Even if there is a question as to the timing of HMRC’s reliance on this case, Zaman is a decision of the Upper Tribunal, released on 16 September 2022, and not only are HMRC entitled to rely on it, but this Tribunal is bound to follow it. Explaining HMRC’s position as to the burden of proof in written closing, Ms Goldring set it out as follows:

Mr Ripley emphasised that this Tribunal is not required to abandon principles of procedural fairness when faced with new authorities. Ms Suttle had prepared for the hearing on the basis that HMRC would discharge the evidential burden which it had accepted, and HMRC should be estopped from changing its position.

Mr Firth submitted that it was too late for HMRC to change its position. He also submitted that Zaman could be distinguished, drawing attention to the fact that the appellant in that case had not been represented and that his grounds of appeal had been that the assessment (issued to the company) was wrong. Mr Firth acknowledged that it may be thought to be unsatisfactory to distinguish on such grounds, as the application of the decision in Zaman would then depend on how an appellant had framed its case.

“5(1) Subject to the provisions of the 2007 Act [ie the Tribunals, Courts and Enforcement Act 2007] and any other enactment, the Tribunal may regulate its own procedure.

The Tribunal may give a direction in relation to the conduct or disposal of proceedings at any time, including a direction amending, suspending or setting aside an earlier direction.

In particular, and without restricting the general powers in paragraphs (1) and (2), the Tribunal may by direction –

…

permit or require a party to amend a document; …”

avoiding unnecessary formality and seeking flexibility in the proceedings,

ensuring so far as practicable that the parties are able to participate fully in the proceedings”.

An application to amend will be refused if it is clear that the proposed amendment has no real prospect of success. The test to be applied is the same as that for summary judgment under CPR Part 24. Thus the applicant has to have a case which is better than merely arguable. The court may reject an amendment seeking to raise a version of the facts of the case which is inherently implausible, self-contradictory or is not supported by contemporaneous documentation.

Beyond that, the relevant principles applying to very late applications to amend are well known. I have been referred to a number of authorities: Swain-Mason v Mills & Reeve [2011] 1 WLR 2735 (at paras. 69 to 72, 85 and 106); Worldwide Corporation Ltd v GPT Ltd [CA Transcript No 1835] 2 December 1988; Hague Plant Limited v Hague [2014] EWCA Civ 1609 (at paras. 27 to 33); Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 928 (QB) (at paras. 4 to 7 and 29); Durley House Ltd v Firmdale Hotels plc [2014] EWHC 2608 (Ch) (at paras. 31 and 32); Mitchell v News Group Newspapers [2013] EWCA Civ 1537.

Drawing these authorities together, the relevant principles can be stated simply as follows:

a) whether to allow an amendment is a matter for the discretion of the court. In exercising that discretion, the overriding objective is of the greatest importance. Applications always involve the court striking a balance between injustice to the applicant if the amendment is refused, and injustice to the opposing party and other litigants in general, if the amendment is permitted;

b) where a very late application to amend is made the correct approach is not that the amendments ought, in general, to be allowed so that the real dispute between the parties can be adjudicated upon. Rather, a heavy burden lies on a party seeking a very late amendment to show the strength of the new case and why justice to him, his opponent and other court users requires him to be able to pursue it. The risk to a trial date may mean that the lateness of the application to amend will of itself cause the balance to be loaded heavily against the grant of permission;

c) a very late amendment is one made when the trial date has been fixed and where permitting the amendments would cause the trial date to be lost. Parties and the court have a legitimate expectation that trial fixtures will be kept;

d) lateness is not an absolute, but a relative concept. It depends on a review of the nature of the proposed amendment, the quality of the explanation for its timing, and a fair appreciation of the consequences in terms of work wasted and consequential work to be done;

e) gone are the days when it was sufficient for the amending party to argue that no prejudice had been suffered, save as to costs. In the modern era it is more readily recognised that the payment of costs may not be adequate compensation;

f) it is incumbent on a party seeking the indulgence of the court to be allowed to raise a late claim to provide a good explanation for the delay;

g) a much stricter view is taken nowadays of non-compliance with the Civil Procedure Rules and directions of the Court. The achievement of justice means something different now. Parties can no longer expect indulgence if they fail to comply with their procedural obligations because those obligations not only serve the purpose of ensuring that they conduct the litigation proportionately in order to ensure their own costs are kept within proportionate bounds but also the wider public interest of ensuring that other litigants can obtain justice efficiently and proportionately, and that the courts enable them to do so.”

In Tower MCashback LLP 1 and anor v HMRC [2011] UKSC 19 the Supreme Court considered, inter alia, the question of whether HMRC could pursue arguments supporting a conclusion in a closure notice which had not been advanced in the notice itself. Lord Walker at [15] quoted with approval the words of Henderson J in the High Court:

"There is a venerable principle of tax law to the general effect that there is a public interest in taxpayers paying the correct amount of tax, and it is one of the duties of the commissioners [the predecessors of the FTT] in exercise of their statutory functions to have regard to that public interest. [The judge then considered changes in the tax system and continued] For present purposes, however, it is enough to say that the principle still has at least some residual vitality in the context of section 50, and if the commissioners [that is to say now the FTT] are to fulfil their statutory duty under that section they must in my judgment be free in principle to entertain legal arguments which played no part in reaching the conclusions set out in the closure notice. Subject always to the requirements of fairness and proper case management, such fresh arguments may be advanced by either side, or may be introduced by the commissioners on their own initiative."

These sources make clear that in determining what arguments the tribunal may permit to affect its decision the guiding principle must be fairness in the circumstances of the case. Fairness does not require formality, and Rule 2(2)(b) expressly requires formality to be avoided. Fairness does not require, for example, that to advance an argument not present in its statement of case or the notice of appeal a party must always formally apply to amend its earlier pleading. On the other hand it does require that the other party is given adequate opportunity in the circumstances to meet the point, whether by argument or with evidence.

If a new argument is a pure point of law it might be addressed, as the case may be, after: a few minutes' thought; an evening's consideration; or one or more days' research. Provided that the other party has an appropriate opportunity to meet the point, it would generally not be unfair for the tribunal to take that argument into account.

When the argument gives rise to the possibility that it may be rebutted by further evidence, the other party must have a fair opportunity to bring that evidence to the tribunal. Depending on the circumstances that may mean no more than asking a few extra questions of a witness who is at the hearing in any event; or it may mean arranging for documents to be provided, or further evidence called, the next day; or seeking a longer adjournment. We do not wish to be thought to be laying down any particular rules, as what fairness requires will depend on all the circumstances of the case, and cases in the FTT vary enormously from informal appeals that take a very short time to elaborately argued cases that last for many days.

On the other hand, there will be circumstances where it is simply too late for a point to be raised. Where it is not reasonably possible in the circumstances of the case – having regard in particular to the resources of the parties and the need to avoid delay – for the other party to have a fair opportunity to rebut a new point, that is likely to mean that it would be unfair for a new point to be taken.

These requirements of fairness seem to us to arise however a new point emerges, that is whether the argument is one raised expressly or implicitly by: the appellant – for example by a non-represented appellant who has provided only a rudimentary notice of appeal; by HMRC – for example an argument which arises as a result of the questioning of a witness; or by the tribunal itself.

In the same way that a statement of case should set out HMRC's arguments clearly and unequivocally with sufficient detail, a new argument should only be taken into consideration if, among other things, it has been made clear to all parties what it is, and that it is being made.

In HMRC's case the FTT's Rules require the statement of case to set out their position in relation to the appeal, but flexibility, fairness and the tribunal's duty to seek that taxpayers pay "the correct amount of tax" require that they should not be so constrained by the arguments there set forth that no other argument may be raised. Whether or not that is permissible will depend upon whether the taxpayer can be given a fair opportunity to meet it. It would be contrary to the objectives of avoiding unnecessary formality and seeking flexibility if a greater hurdle for raising a new argument were placed in front of HMRC simply because it had set out its view at a particular time in the proceedings. That would risk Statements of Case becoming burdened by boilerplate and generalities rather than plainly indicating HMRC's real concerns.”

We consider that HMRC had clearly assumed the burden of proof in the SoCs as regards all matters which were set out as being in issue. There was no distinction drawn (either expressly or by implication) between the “ultimate” or “persuasive” burden versus an evidential burden.

Mr Firth referred in his skeleton argument to another recent decision of the Upper Tribunal (by way of illustration), that of Ellis v HMRC [2022] UKUT 254 (TCC) (released on 21 September 2022). That was an appeal against case management directions in relation to disclosure, but in the course of setting out the background to the substantive appeals the Upper Tribunal set out the following:

The approach set out in Ellis is how we would, but for Zaman (or the authorities referred to therein, considered further below) being drawn to our attention, have approached the issues in these appeals. HMRC continue to accept that they bear the burden of proving “deliberate and concealed”. This is used in paragraph 3 of Schedule 24 to describe the inaccuracy, such that our approach would have been to consider whether HMRC had established (on the balance of probabilities) that any inaccuracy on which they relied was deliberate and concealed, and this required them to establish both the inaccuracy and the conduct for each inaccuracy.

There is, arguably, a leap within HMRC’s pleadings from (unspecified and unquantified) inaccuracies to the penalty amounts being attributable to the Appellants (and this also occurred at [10] of Ellis). HMRC had accepted that they bear the burden of proving the Returns “were inaccurate”, and that the inaccuracies amounted to or led to an understatement of liability to tax; that such inaccuracies were deliberate and concealed and that the “penalty amounts as attributable to the Appellant” are correct. The SoCs do not expressly refer, as a separate limb, to the calculation of the PLR, or to each inaccuracy which is relied upon in support of the Assessments which themselves form the basis for the calculation of the PLR. We consider that the sub-paragraph referring to the penalty amounts is referring to the proportion to be attributed to each Appellant (ie the stage after calculation of the amount of the penalty). The point remains, as stated at [(3)] above, that we would not have focused on this in the absence of considering [28] of HMRC’s Skeleton and its reference to Zaman and we are now looking at these pleadings with the benefit of hindsight and infer that the missing link (if indeed there is one) was not intentional. Furthermore, and significantly in this context, there was no reference in the SoCs to HMRC considering that the Appellants bore the burden of proof on any issue in these appeals.

HMRC first indicated that they sought to rely on Zaman in HMRC’s Skeleton, on 21 November 2022. The Upper Tribunal had released its decision in that case on 16 September 2022. As party to that appeal, HMRC would have known of the decision shortly after its release. There was no explanation from HMRC as to the failure to draw attention to its reliance on this decision in the way proposed prior to the service of its skeleton.

Our view is that HMRC could and should have informed the Appellants that they would be seeking to rely on the decision in Zaman and their interpretation of that decision before they served their skeleton argument; we would not expect them to have been in a position to do this immediately, but we would expect a delay of no more than two weeks for this purpose. We nevertheless recognise that such a notification by HMRC (whether framed as an application to amend the SoCs or otherwise), even at the beginning of October 2022, would still have prompted these same objections from the Appellants given the hearing was listed for December 2022.

At [20] the Upper Tribunal referred to the well-established law that on an appeal from an assessment to VAT the assessment stands good unless the appellant is able to produce evidence to show that it is wrong. They had referred to the judgments of the Upper Tribunal and Court of Appeal in Award Drinks Ltd v HMRC [2020] UKUT 0201 (TCC) and [2021] EWCA Civ 1235, the extracts cited themselves referring to Brady v Group Lotus Car Companies plc [1987] 3 All ER 1050, Ingenious Games v HMRC [2015] UKUT 0105 (TCC) and Khan (trading as Greyhound Dry Cleaners) v Customs and Excise Commissioners [2006] EWCA Civ 89.

HMRC had accepted that they bore the burden in relation to the validity of issuing the PLN, and that Mr Zaman could appeal the PLN on the basis that the underlying assessment and penalty were wrongly issued. However, where Mr Zaman asserted that there were no VATable supplies, at that point Mr Zaman assumed the evidential burden of displacing the assessment. The challenging of the VAT assessment in the context of an appeal against a PLN did not and could not affect the applicability in the PLN proceedings of the rules governing the way in which assessments to VAT are challenged.

At [23] the Upper Tribunal set out HMRC’s submission that the Tribunal erred in treating the appeal as a penalty appeal in which the legal and evidential burden of proof remained with HMRC throughout in relation to all issues. HMRC’s position was that once Mr Zaman challenged the issuing of the PLN on the sole ground that the assessment to VAT on Zamco was wrong, “the FTT should have approached the appeal by considering firstly whether HMRC had established that the PLN was validly issued and, if that burden was discharged, by then considering whether Mr Zaman had established that the assessment to VAT on Zamco was wrong”. In relation to that latter issue, the evidential burden was on Mr Zaman to establish that the assessment should be discharged in the same way as it would have been on Zamco to establish that it had been overcharged by the assessment if it had decided to bring an appeal against that assessment.

At [34] the Upper Tribunal recorded their conclusion that HMRC were plainly right that, as per their submissions, if the challenge to the PLN was brought on the basis that the assessment to VAT on Zamco was wrong, the legal rules relating to the way in which the assessment could have been challenged by Zamco if it had appealed the assessment remain in play in any appeal against the PLN. It is well-established law that it is for the taxpayer to prove, by evidence, that an assessment to VAT issued by HMRC is incorrect. HMRC do not have that evidential burden and that cannot sensibly be affected by the fact that the challenge to the assessment occurs in satellite litigation where, as in this case, a penalty charged on Mr Zaman is sought to be defended on the basis that the assessment to VAT on Zamco was wrong. In their judgment, it was clear that the Tribunal lost sight of the fact that after establishing whether the PLN was validly issued, the evidential burden in relation to the assessment to VAT on Zamco shifted to Mr Zaman when he sought to positively challenge the assessment as the sole basis on which the PLN was invalidly issued

In any case where −

for the purpose of evading VAT, a person does any act or omits to take any action, and

his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),

he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct

…

…the burden of proof as to the matters specified in subsection (1) (a) and (b) above shall lie upon the Commissioners."

“[74] This view is reinforced by a number of considerations: (i) it is the appellant who knows, or ought to know, the true facts; (ii) s 60(7) makes express provision placing the burden on Customs in relation to specified matters. This suggests that the draftsman saw it as an exception to the ordinary rule, and seems inconsistent with an implied burden on Customs in respect of other matters; (iii) the distinction is also readily defensible as a matter of principle. Mr Young relied on 'the presumption of innocence' under art 6 of the Convention, but he was unable to refer us to any directly relevant authority. The presumption clearly justifies placing the burden of proof on Customs in respect of tax evasion and dishonesty; but once that burden has been satisfied, a different approach may properly be applied (compare R v Benjafield [2002] UKHL 2, R v Rezvi [2002] UKHL 1 (on appeal from R v Benjafield, R v Leal, R v Rezvi, R v Milford) [2003] 1 AC 1099, [2002] 1 All ER 815, in relation to confiscation orders in criminal proceedings); (iv) in relation to the calculation of tax due the subject-matter of the assessment and penalty appeals is identical. This link is given specific recognition by s 76(5) (allowing combination in one assessment). It would be surprising if the Act required different rules to be applied in each case; (v) s 73(9) provides that the assessed amount, subject to any appeal, is 'deemed to be an amount of VAT due …'. In a case where either there was no appeal against the assessment, or the penalty proceedings followed the conclusion of any such appeal, this provision would appear to preclude any attempt to reopen the assessment for the purpose of assessing the penalty. The subsection does not apply directly where, as here, the penalty appeal is combined with an appeal against the assessment, and the assessment has not therefore become final, but it indicates another link between the two procedures. (I do not see the provision as necessarily confined to enforcement, as Mr Young argues. Nor in the present context do I need to spend time on his argument that this interpretation could cause unfairness in proceedings against a third party under s 61, although I note that under that provision there appears to be a general power to mitigate the penalty.); (vi) to reverse the burden of proof would make the penalty regime unworkable in many cases. In a case such as the present, a 'best of judgment' assessment is needed precisely because the potential taxpayer has failed to keep proper records, so that positive proof in the sense required in the ordinary civil courts is not possible. The assessment may be no more than an exercise in informed guesswork. Indeed to put the burden on Customs would tend to favour those who have kept no records at all, as against those who have kept records, which are merely inadequate, but may be enough to give rise to an inference on the balance of probabilities.

[75] We were referred in this connection to Hindle (t/a DJ Baker Bar) v Customs and Excise Comrs [2003] EWHC 1665 (Ch), [2004] STC 412, a decision of Neuberger J given shortly after the tribunal decision in this case. That case also concerned a small trader who had failed to make VAT returns, and was subject to compulsory registration, followed by a 'best of judgment' assessment and an assessment to a civil penalty, all of which were upheld on appeal to the tribunal. The appeal to the High Court failed on the facts (see [2004] STC 412 at [34]). However, Neuberger J had earlier made some observations on the statutory criteria. It had been argued on behalf of the trader that different approaches were required in considering, on the one hand whether the statutory threshold for registration was exceeded, and, on the other, whether the 'best of judgment' assessment should be upheld. The judge agreed (see [2004] STC 412 at [29]–[32]):

'[29] … As a matter of ordinary language, it seems clear to me that s 73(1) involves two issues where they are both being fought, as here. The first is to determine whether the person concerned has failed to make any returns required under this Act, which in this case involves the tribunal satisfying itself on the evidence before it whether or not the trader's turnover would or was reasonably expected to exceed £55,000. If so satisfied, the tribunal would then go on to consider the assessment by reference to determining whether the commissioners had indeed made the assessment to the best of their judgment.

[30] The point is reinforced when one considers a case where the commissioners have simply registered a trader for VAT and he appeals against that decision, without there being any assessments against which he has appealed. In those circumstances, Miss Shaw, I think realistically, concedes that the tribunal would make its own assessment, based on the evidence before it and the balance of probabilities, as to whether or not there has been a failure to make returns “as required under this Act”, ie in a case such as this, whether, on the evidence before it, the tribunal considers that the trader's turnover exceeds or is reasonably likely to exceed £55,000. It would be very odd if the proper approach to determining whether or not there has been a failure to make returns required under this Act depended on whether or not there happened to be a challenged assessment at the same time.

[31] Miss Shaw makes the point that, in a case such as this, if the argument which I favour is correct, then there is a slightly odd double requirement of the tribunal: first, to decide on the evidence before it and the balance of probabilities whether, in this case, the turnover of the appellant exceeded or is likely to exceed £55,000; secondly, on a more familiar reviewing Wednesbury type approach (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223), whether the Commissioners' assessment was to the best of their judgment.

[32] I think there is something in that point, but I do not find it particularly powerful. In each case the tribunal is being asked to look at different things. The first is whether the turnover exceeds, or is likely to exceed, a particular figure on the evidence before it. The second is whether, on the evidence before them, the actual figure for turnover which resulted in the VAT assessment of the commissioners was one arrived at to the best of their judgment. If slightly different questions involve slightly different approaches to the burden of proof or other matters, it is not that surprising. Certainly there is nothing so surprising in the result that it justifies what seems to be to be a re-wording of s 73(1), which is what the commissioners' argument involves.'

[76] I make two comments on that passage. First, it was concerned with a different issue from the present: that is, the basis of calculation for the appeal against compulsory registration. No argument appears to have been addressed to the question of calculation for the purposes of the penalty assessment. Secondly, I think the judge was presented with a false dichotomy. As has now, I hope, been made clear by this court in Pegasus Birds, a 'Wednesbury type approach' (see Associated Provincial Picture Houses Ltd v Wednesbury Corpn [1948] 1 KB 223, [1947] 2 All ER 680) to a VAT assessment is the exception not the norm. In an ordinary case there is no reason for different approaches to the two forms of appeal. Whenever an appeal raises an issue of the correct calculation of turnover for the purposes of VAT, the primary task of the tribunal is, as we said in Pegasus Birds, 'to find the correct amount of tax, so far as possible on the material properly available to it', and, in the absence of any provision to the contrary, the burden of proof lies on the appellant. (In fairness to Miss Shaw, I note as already mentioned that she had summarised the position accurately in her skeleton argument before the tribunal in the present case, a few months before Hindle.)

The present case

[77] If this is the correct approach, I agree with the judge that the tribunal's decision is unimpeachable. There was ample material to support a prima facie case that there had been evasion of tax, and that this had been intentional and dishonest. In the absence of evidence from Mr Khan to the contrary, the tribunal was clearly entitled to reach its conclusion. As to the precise amount of tax evaded, I do not see how it was possible in the absence of better records for Customs to do more than they did. Whether or not this would have been sufficient if the burden of proof had truly been on them, on the view I take of the law it was enough to support the tribunal's conclusion. For these reasons I would dismiss this ground of appeal.”

The submissions from the parties on [28] of HMRC’s Skeleton and Zaman were made as part of the hearing of the Appellants’ appeals against the PLNs. We have heard all of the evidence. On the basis of the evidence put before us in these appeals, it cannot be said that the question of where the burden of proof lies is academic.

We have already accepted (at [79]) that the Appellants have prepared for this hearing on the basis that HMRC bore the burden of proof on all issues and that HMRC had accepted that they bore such burden. Allowing (if this is a question of judicial discretion, our hesitation being based on this being a question of burden of proof) HMRC now to adopt a different position would cause significant prejudice to the Appellants. This is particularly significant where, as here, there is criticism of the lack of evidence from, eg, clients and umbrella employees – it was the Appellants’ position that it was for HMRC to choose to call them as witnesses if it wished to rely on their evidence. This absence of evidence from third parties was not something that could be rectified by, eg, a short adjournment, even one of a couple of days at the beginning of the hearing.

We recognise that refusing permission (if indeed permission is required) would prejudice HMRC – but consider this is to a lesser extent as HMRC had accepted it bore the burden in its SoCs, and has only changed its position subsequently.

We considered whether HMRC’s submissions as to burden of proof are qualitatively different from, eg, introducing a new line of argument on which it relied as to inaccuracies. We are, obviously, reluctant to proceed to make a decision on a basis which is, or may be, in error. However, this is the same issue as is faced when a party is refused permission to rely on a new ground of appeal (whether as appellant or respondent), and even more so if an appeal is struck-out (or the respondent is barred from proceedings) as a consequence of an exercise of judicial discretion following repeated failure to comply with directions (rather than based on there being no realistic prospect of success).

As a subsidiary issue, we considered that there were practical difficulties with the approach being put forward by HMRC. Mr Firth had (separately from the parties’ differing positions as to burden of proof) referred to the fact that not all of the Returns are in the bundles before us, and submitted that the burden of proof as regards deliberate inaccuracies (and HMRC continue to accept that they bear the burden as regards behaviour) means that HMRC must establish that each inaccuracy (which amounts to or leads to an understatement of tax) was deliberate. If HMRC do not have to establish the amount of the inaccuracy, just that there was some level of inaccuracy, how then does that sit with them being required to show that each inaccuracy which formed the basis of the calculation of the PLR and thus the PLN, was deliberate? We recognise that this Tribunal can and does draw inferences when making findings of fact; but accept that Mr Firth raises a fair point as regards the evidence, in particular where HMRC’s submissions and the evidence before us identified a range of potential inaccuracies, as well as some potential inaccuracies but on which HMRC does not rely (eg as to the treatment of holiday pay).

The hearing of the appeals took place on the basis that no decision had been made by us as to [28] of HMRC’s Skeleton. Witnesses who had been called to give evidence were cross-examined on their evidence, with no party being restricted in the approach they took to such cross-examination.

In the present appeals, whilst the grounds of appeal of both Appellants challenged the decisions reached by HMRC in relation to EE139, both also challenged the calculation of the penalty (and thus the PLNs) by reference to PLR which – they submit – is too high. Importantly, this contrasts with the position in Zaman, where the decision expressly referred to the limited grounds on which Mr Zaman had challenged the PLN.

In Zaman the Upper Tribunal had not addressed the significance (or otherwise) of the differences in the legislation pursuant to which HMRC had imposed the penalty in Khan and that at issue in Zaman.

In the present appeals:

We do not accept that we are required by the authorities to apply different burdens of proof to whether a Return was inaccurate and whether an inaccuracy was deliberate (or deliberate and concealed) when the subject-matter of the appeals is that of penalties which have been issued to the Appellants.

The Appellants are not appealing against the Assessments issued to EE139 (and indeed could not do so). (We make this point simply because [28] of HMRC’s Skeleton refers to “If…Ms Suttle and Mr Jaekel are permitted to litigate the underlying Regulation 80 determinations, and Section 8 decisions…”.) The Assessments are final.

The appeals against the PLNs include (when read as a whole) the grounds of appeal that the PLR used for the purpose of calculating the penalty issued to EE139 and thus the PLNs issued to the Appellants was incorrectly calculated by HMRC, and is not the amount of tax assessed in the Assessments.

In the context of these appeals against the PLNs, HMRC bear the burden of proving that the PLNs were validly issued. Paragraph 19 provides that HMRC may issue a PLN to an officer of a company “where a penalty under paragraph 1 is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company”. The approach taken by paragraph 19, namely that of attributing a penalty payable by a company under paragraph 1, means that an appeal under paragraph 19 necessarily involves establishing the validity of the penalty issued to EE139, and that includes the calculation thereof.

The burden on HMRC requires them to establish, to the required standard (namely the balance of probabilities) that each of these components was met. In these appeals (and ignoring provisions relevant to carelessness) this requires HMRC to establish:

HMRC have reduced the percentage penalty payable by EE139 to reflect their position on the quality of the disclosure in accordance with paragraphs 9 and 10. The Appellants bear the burden of establishing that a higher percentage than that which has been allowed should be applied, or that HMRC’s decision not to exercise their discretion under paragraph 11 to reduce the penalty was flawed.

Ms Suttle had prepared very detailed witness statements, addressing the detailed points made by Officer McConnell in his witness statements and his conclusions in relation to expenses and earnings, both generally and in relation to the employees within the samples. Ms Suttle was based in EE139’s offices throughout (other than when she was on maternity leave) and had initially processed expenses herself, and as the business expanded and they hired more office staff she remained the director physically present in the office and to whom questions could be addressed.

Mr Jaekel’s evidence was much less detailed, both in his witness statements and at the hearing. In part this is due to passage of time and the medical difficulties he has experienced, but in large part we accept that this is a consequence of his role in the business. Mr Jaekel’s role largely involved travelling to clients and potential clients, marketing the services offered by EE139; whilst he and Ms Suttle were both directors of EE139 and discussed matters regularly, he was not routinely in EE139’s office. He did not process expenses and payroll himself.

If it is established that there were inaccuracies in EE139’s Returns, it is readily apparent that the interests of Ms Suttle and Mr Jaekel are not aligned. Nevertheless, their evidence as to each other’s roles within the business, knowledge of HMRC’s investigation and discussions with each other was broadly consistent with each other.

He accepted that he did not know more than what was stated in the witness statements and exhibits of Officer McConnell.

The Regulation 80 determinations for 2012-2013 and 2013-2014 are not in the bundle of exhibits. He had not previously identified this in his review.

For those after April 2012, he confirmed that Officer McConnell had taken the expenses to be disallowed from the RTI returns submitted by EE139. They had been disallowed at 90% of the amount of the expenses. Officer Carbery had not reviewed the constituent parts of these amounts of expenses for the employees to trace through from the RTI returns to the underlying expenses. He was not able to comment on what Officer McConnell had done.

As to how Officer McConnell had reached the conclusion that 90% was to be disallowed, Officer Carbery was only able to say that this was based on Officer McConnell’s investigation into the expenses; he could not say how he had reached 90%, rather than a different percentage.

As to whether any mileage claims were “excessive”, Officer Carbery was not aware of any employee having been asked if they had claimed for more mileage than actually travelled.

“If the Tribunal is satisfied that there is a prima facie case that Ms Suttle and Mr Jaekel either knew they were submitting misleading information to the Respondents, or turned a blind eye to it, then the Tribunal can, if no proper reason has been given for the absence of key witnesses, draw the inference (per Jones v Dunkel) that Ms Suttle and Mr Jaekel fear to call witnesses who could have provided useful evidence about the end users, whether they disagreed with the evidence adduced by the Respondents (i.e. if it is to be said that Mr McConnell is lying or made an error) and this fear is evidence that if they were brought to give evidence they would have exposed facts unfavourable to Ms Suttle and Mr Jaekel. The same applies to their failure to call evidence from further employees at EE139.”

HMRC had not called any witness with contemporaneous knowledge of the matters in issue (whereas the Appellants had three such witnesses, including themselves).

It was open to HMRC to call evidence from the witnesses to which it referred (in particular given that Officer McConnell had been in communication with those clients and HMRC were seeking to rely on those communications).

Further, given that the Appellants’ position was that HMRC bear the burden of proof and they sought to rely on this evidence, as Mr Firth put it – if HMRC rely on end clients saying that workers were engaged for more than six hours, where is the evidence from those end clients, or from the employees. Mr Firth’s submission was that it is insufficient for HMRC to seek to rely on the email exchanges which raise questions of their own (eg whether travel time is included within ranges given) and show that Officer McConnell was pushing for particular answers. Conversely, what is the evidence in relation to distances claimed to have been travelled – HMRC submit that the distances are implausible, yet this has not been put to employees. Officer McConnell did send a questionnaire to some employees; but this was not one of the questions.

The consideration which a court should give to the fact that a potentially relevant witness has not been called is well established. I can take the principles from the judgment of Brooke LJ in Wisniewski v Central Manchester Health Authority [1998] PIQR P324 at P340 where, having reviewed the authorities, he said:

"From this line of authority I derive the following principles in the context of the present case:

In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.

If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.

There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.

If the reason for the witness's absence or silence satisfies the court, then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified."

This statement of principle is in accordance with the earlier decisions of the House of Lords in R v IRC ex p. T C Coombs & Co [1991] 2 AC 283 and Murray v DPP [1994] 1 WLR 1 and the comments of Lord Sumption in the Supreme Court in Prest v Prest [2013] 2 AC 415 at [44].

These principles mean that before I draw an inference and made a finding of fact adverse to a witness who was not called, I need to ask myself:

is there some evidence, however weak, to support the suggested inference or finding on the matter in issue?

has the Defendant given a reason for the witness's absence from the hearing?

if a reason for the absence is given but it is not wholly satisfactory, is that reason "some credible explanation" so that the potentially detrimental effect of the absence of the witness is reduced or nullified?

am I willing to draw an adverse inference in relation to the absent witness?

what inference should I draw?”

There are many statements of opinion in Officer McConnell’s witness statements and we place no weight on such opinion.

Officer Carbery’s adoption of Officer McConnell’s witness statement and attendance at the hearing as a witness does not of itself result in our placing more weight on the matters of fact set out in Officer McConnell’s witness statements than if Officer Carbery had not adopted those statements (or if Officer Carbery had not been available for cross-examination). We make this point as Ms Goldring sought to submit that Officer McConnell’s witness statements contained detailed evidence of his investigation and the information obtained by him and had not been challenged; that is correct, but the reason it was not challenged is that Officer McConnell did not attend the hearing for cross-examination and Officer Carbery had given clear evidence as to the scope of his review of the witness statements and exhibits.

The Appellants were clear that they did not accept the matters of fact set out in the witness statements. By way of illustration, Mr Ripley indicated that they would have wanted to cross-examine Officer McConnell on:

The Appellants were not provided with an opportunity to challenge these (or other) aspects of Officer McConnell’s evidence (and our recitation above of matters that Mr Ripley would have sought to challenge should not be taken to mean that Mr Firth would not similarly have wished to challenge Officer McConnell’s evidence). The panel also had questions in relation to Officer McConnell’s witness statements. We would have had to decide whether, in the light of questions put to him in cross-examination, it was in accordance with the overriding objective to raise these matters (in particular so as not to open matters which were not in fact challenged by the Appellants) but we would also have sought clarification as to, eg, the approach to sampling of employees, the decision to disallow 90% of expenses (rather than, eg, 85% or 95%), and how he had ascertained the amount of expenses for the first two years of the Relevant Period (before the RTI returns, where the returns filed by EE139 did not include details of non-taxable payments made). We also had questions as to the communication with clients, eg Client S’s statement to Officer McConnell (recorded in his notes of that meeting) that they did not source their own workers contradicts information provided a few weeks later to him by EE139 – had he identified this contradiction?

Officer McConnell has exhibited what appears to be most of the information he relied upon. We say “most” as, eg, it was clear that some communications with clients were incomplete and there was no direct evidence which assisted us with the 90% or calculation/estimate of the total expenses claimed.

the experience and background of the Appellants and the business of EE139 and the advice taken by EE139;

the investigation conducted by Officer McConnell, and his communications with EE139 and its advisers (primarily Chartergates). Unless expressly stated to the contrary, we record Officer McConnell’s findings and conclusions, and his record of the explanations provided by or on behalf of EE139 as such – these are not findings of fact by this Tribunal;

EE139’s sourcing of employees and the employment contracts, its processes, the treatment of claims received from employees, the hours worked and expenses claimed by employees and reimbursed to them, as well as the awareness or means of knowledge of the Appellants.

Ms Suttle had worked for SDH Global Source Ltd (“SDH”) since around April 2003. SDH predominantly worked in the telecoms industry, as well as in construction. They focused on large projects and recruited workers. SDH used payroll companies, one of which was MaxiPay Accounting Services Ltd (“MaxiPay”). Ms Suttle became Office Manager at SDH, and her role included raising invoices, paying suppliers, looking after the software database, reconciling the invoice factoring account, liaising with the accountant, collating timesheets and submitting these to payroll companies.

In around 2005, Ms Suttle approached Mr Hulin, one of the founders of SDH, with the idea which ultimately became Earn Extra, namely that they set up a payroll company which SDH could use.

Mr Hulin approached Mr Jaekel, who was at that time working for MaxiPay, as Mr Jaekel had a better knowledge of the payroll industry and had client contacts. There were a series of meetings over several months, and Mr Jaekel agreed to join them in taking this forward.

In the initial years there were three people working for EE139 itself – the Appellants and one member of office staff, Melanie Crowther. The roles of Ms Suttle and Mr Jaekel are described further below, but Mr Jaekel’s role meant he was not based in the office.

They recruited four more office staff in 2007-2009, but three of those left by 2010, as did Ms Crowther. These office staff had been very young (in their late-teens) with little work experience, and had included Ms Robson.

By 2010, it was the Appellants and Ms Robson. Ms Robson had joined part-time in February 2007, whilst she was still at school, helping with administrative tasks. Ms Robson later started assisting with the processing of timesheets and expenses.

Ms Suttle went on maternity leave in October 2010. Whilst she was on leave, Ms Robson was the only member of office staff, but she and Mr Jaekel were supported by an accountant who worked on a consulting basis, Martin Bignell.

Ms Suttle started to return to EE139 from June 2011, and by November 2011 Ms Suttle was working for EE139 for four days per week.

They did recruit four additional office staff in 2014 to 2015, but two of those roles were short-lived.

EE139 later recruited office managers with payroll backgrounds. Rick Tomlinson joined in February 2014. He started to get familiar with the business, and after HMRC’s visit in July 2014 Mr Tomlinson assisted with obtaining the information requested by HMRC. Mr Tomlinson was absent for various periods of time. He left in May 2015, but did return as a consultant. Terri Radcliffe then joined in July 2016, and her role also included oversight of the payroll and expenses process.

Review of contracts – These included the employment contract where there was discussion of the share allocation (namely that it must not be included).

Review of processes – This looked at banking, invoicing and administrative processes.

Review of different options – They outlined single person companies, umbrella companies, composite companies and CIS composite companies.

Flow of contracts/monies – Flowcharts illustrating the position for these different models.

CIS Changes – This referred to changes to the CIS scheme being introduced from April 2007.

In context of Review of processes, it is said “If any agency, employer or contractor requires a breakdown on their invoice this is to be done as an attached schedule that we send out but do not file or keep ourselves.”

They also address the possibility of a VAT enquiry, and the notes record:

EE139’s application to NatWest for a loan in 2009, which referred to them having gone back to Accountax after the changes to composite companies were announced in March 2007; and

In September 2014 Ms Suttle had forwarded a question about whether visa fees incurred by an employee to change from a spouse visa to a leave to remain visa were allowable to Acumen Legal.

The Officers informed EE139 that the review had been initiated by a referral following the identification of the fact that several power companies with a large annual turnover but no workforce were using umbrella companies, of which EE139 was one. HMRC had examined EE139’s payroll submissions on RTI. This examination had shown that both the tax and NICs being paid by EE139 were low. EE139 were told that the review would involve checks with both the company and its workers, and end users of the company.

Ms Suttle confirmed that EE139 had been able to obtain all of the requested records, other than contracts between EE139 and their clients but these could be made available at a later date. Ms Suttle provided records for the 12 employees selected by Officer McConnell.

Mr Jaekel explained that EE139:

Ms Suttle explained workers were obtained from a number of sources – marketing material at training sites, referrals from fellow workers, some end clients (eg Client S) would obtain the workers and ask EE139 to employ them, and they would approach end clients direct.

In relation to expenses, Ms Suttle said that the workers were reimbursed for business travel at 45p per mile for the first 10,000 miles and 25p per mile thereafter, and that this was paid from the workers’ homes “or digs”. Many workers were away from home for up to six months. They all owned and used their own cars/vans to go to site. Mileage claims were submitted along with claims for phone bills, hotel bills, together with receipts. No general meal/lodging allowance is paid. Everything has to be receipted.

In relation to wage calculation, Ms Suttle explained that EE139 was paid a set amount for each contract by their client, and took 5% of this as their fee, before deducting employers’ NI, holiday pay and pension contributions. The employees were paid for six-hour days at the minimum wage, five days a week. No time sheets are maintained by EE139. The six hours per day is based on the knowledge that British Telecom control gave jobs that lasted six hours per day, excluding travel. Expenses were reimbursed and any surplus money from the contract was paid to employees as a bonus, which was taxed. Ms Suttle said that EE139 provided employees with payslips and paid them by BACS. When the Officers pointed out that they were unable to reconcile the weekly mileage claim to the payslips, Ms Suttle explained that sometimes there would not be enough money in the contract to pay all the expenses and this this would have to be carried forward as a credit recorded at the top of the payslip.

Officer McConnell referred to his visit with Client S who had said that the workers worked a ten-hour day and only worked at one site per day. The director had said that time sheets would have been EE139’s responsibility. Ms Suttle said that timesheets were not kept and that she was unaware that workers only worked at one site.

The client told EE139 what they were prepared to pay on a particular contract. For example, Client S emailed an offer to EE139 and EE139 invoiced Client S. Although Client S showed a daily rate for the workers, EE139 paid the workers the minimum wage.

The company not maintaining time sheets. From enquiries made with end clients it appears hours worked are well in excess of the arbitrary six hours a day used to calculate taxable pay.

Agency expenses are paid as a non-taxable amount and he needs to understand to what these relate.

There is a lack of detail on mileage claims and sometimes no detail at all. Sometimes passenger names are not included and there are daily home-to-site claims of up to 560 miles per day.

Expenses claims include weekly hotel bills, personal items and multiple meals near the home address appear to have been allowed.

Overarching contracts – He expressed doubts as to whether the contracts with employees were overarching contracts (in particular whether there were obligations relating to payment between assignments).

Failure to tax the correct hours – He considers EE139 is not taxing all the hours worked. He had received a time sheet submitted to EE139 that confirms that all those workers involved in the power lines work operate out of depots using vehicles supplied by the client. They commence work at between 7am and 8 am and work a ten-hour day.

Agency expenses – No receipts have been supplied to support these. The payment of a round sum allowance to an employee by their employer is taxable. He asked for the total paid out to all workers in 2014-2015.

Mileage claims – In virtually all cases there is a total lack of records being maintained to support the mileage expenses. This questions the authenticity of the pay records as a whole. The company guidelines to employees on mileage claims state: state each journey and the miles for that journey, not “various sites”; and mileage claims are randomly audited so do be accurate when quoting your mileage. The guidelines do not appear to have been followed.

Other expenses – Only five employees within the sample claimed other expenses.

His summary records that it is his opinion that workers are not employed on overarching contracts, and it is likely that each assignment is a separate contract of employment and a permanent workplace. As a result, all expenses from home to site would be taxable. If the worker then travels to a series of temporary workplaces throughout the day then that travel may be allowable, subject to evidence.

He then records that he has major concerns at the way EE139 is managing its payroll and expenses. The client would appear to be paying EE139 at the going rate for the jobs undertaken by the worker which is well in excess of the minimum wage being applied by EE139. The evidence would suggest that with many of the contracts, EE139 has a starting point at which the worker will pay little or no tax and any balance of earnings will be treated as expenses. There is also a lack of evidence that the expenses are actually incurred.

“Going forward the company should only allow genuine expenses incurred while the employee is travelling in the performance of their duties or travelling to or from a place they have to attend in the performance of their duties – as long as the journey is not ordinary commuting or private travel.”

Taxing of correct hours – EE139’s agreement with their client provided for them to provide services for six hours per day. The six hours per day was provided within the payroll software as being the number of hours required, this was also during days where less than six hours was required. The software is updated annually but it would seem this anomaly was never rectified by the software provider.

Agency expenses – They do not believe these are round sum allowances; but in any event EE139 is now applying PAYE to all payments unless employees submit a receipt.

Mileage claims – The claim forms reviewed are in their original form as submitted by employees; it is likely some were rejected. EE139 has invested significantly in their payroll software, and the software monitors each employee’s mileage claim for the year.

Other expenses – Claims reviewed are purely claims submitted in their original form and do not represent the reimbursement that may have been made.

On the taxing of correct hours he said:

He asked for records used to review the mileage claimed, he had no evidence that the mileage claims were being rejected. The same point was made in relation to other expense claims.

Taxing of correct hours – The calculation is based on “mean hourly output rate”; the original agreement was based on a calculation provided by BT of a job every two hours at three jobs per day. EE139 used this as BT are an industry leader.

Mileage and other expenses claims – EE139 does operate a system of checking expenses. EE139 requests details of receipts in every case where these are not included as part of the claim. EE139 insists employees complete their claim form which requests details including details of all journeys. These claims are then checked by EE139. In most cases where the claim cannot be substantiated the claim is rejected.

Hours – it had been admitted in previous correspondence that the correct hours had not been taxed and they were now stating that the correct hours were taxed. Officer McConnell had evidence that workers in telecoms and overhead power cabling started at 7 or 8am at the depots and returned between 5 and 6pm. They were paid by the end client at daily rates of between £100 to £200, which EE139 then reduced by what it claimed to be legitimate expenses.

Expenses – after two years, Officer McConnell had not received evidence that expenses were rejected.

The response included a significant amount of supporting documentation, including what it described as a typical contract between EE139 and its client, payslips for six employees (in the context of points which had been made about overarching contracts), examples of agency expenses, copies of expense claim forms that set out mileage for two employees, information about vehicles used for travel, further information in relation to other expense claims for eight employees (which were within HMRC’s original sample), and examples of rejected expenses claims from 2014 to 2016.

That letter also addressed s339A ITEPA 2003 (which removed the exemption for home-to-work travel for temporary workplaces). In that letter Chartergates said EE139’s employees travel and work at multiple sites for EE139’s clients; each of these sites continues to meet the definition of a temporary workplace. In addition, a majority of the travel carried out by EE139’s employees was in the performance of their duties of employment; s339A is unlikely to affect that position.

He noted EE139 were now saying that agency expenses are in relation to lodging allowances (they had said they were not at the meeting of 8 July 2014).

Mileage claims should record all sites visited during the day. Checks show that nine of the 12 vehicle registrations provided are registered to fleet hire companies.

When asked about how Officer McConnell had arrived at his assessed figures, he said they were taken from the non-taxable amounts returned on RTI returns. Based on the evidence to hand he had given a 10% adjustment for expense claims, but he could have assessed 100% of the expense amounts.

Chartergates explained that EE139 had employed two new office staff to check claims and that EE139 had also dismissed some employees for fraudulent claims. In Chartergates’ opinion there had been massive changes at the business.

Officer McConnell met with Client S on 12 June 2014;

he selected a sample of 12 employees of EE139 for review – KM at Client P, RI at SDH, MA at NGIS, HT at Client D, MH at Capital, MMcE at Client N, CZ at Client P, CS at Client S, MG at G/Client D, AT at Client D, MP at Inspirium and AC at Client P;

he attended the July 2014 Meeting with EE139 at which the Appellants provided records for these 12 employees. He reviewed these records, which were a sample of the expense claims and payslips for these individuals;

he spoke to Client P on 14 August 2014, and followed up by email later that month;

he received information from Lisa Cam from HMRC’s National Minimum Wage (“NMW”) team, who was conducting a NMW enquiry in relation to one EE139 employee, SH. SH was not within Officer McConnell’s sample, but he was working for Capital Outsourcing Group UK Ltd (“Capital Outsourcing”), and was sub-contracted to a telecoms project for Kelly’s;

he extended his review to 20 employees (which he communicated to Chartergates on 22 October 2014), for the three-month period 1 April to 30 June 2014. Those 20 employees included 11 of the initial 12 (not HT at Client D), and the records were received from Chartergates in March 2015. The additional employees were selected from what Officer McConnell described as EE139’s largest clients – 318 out of 430 umbrella employees were supplied to these clients;

he sent questions to Client N in February 2015 about their use of intermediaries, with a response by email from Client N’s accountant on 5 May 2015;

he prepared a questionnaire to be sent to the 20 employees in May 2015 (the “Employee Questionnaire”);

on 9 February 2016 he wrote to the DVLA to check the registered keeper of vehicles identified from the Expense Claim Forms submitted by the sample of 20 employees, with further requests to the DVLA being sent in May and September 2016;

he requested information from Client D on 24 May 2016, had a telephone conference with them on 27 June 2016, with further information provided by email in September and October 2016; and

he reviewed additional information which he was sent by Chartergates in August 2016, and additional material which he was sent by them in December 2016 and January 2017.

The 12 employees named by Officer McConnell were not randomly selected. His witness statement says that for the purposes of his review at least one worker was selected from each of EE139’s larger clients. We agree that this was the case. We do not have any information as to how that one (or more) worker(s) was then chosen, ie whether it was based on amounts of expenses claimed or truly random.

The note of the July 2014 Meeting refers to Ms Suttle as having provided records for the 12 employees. It is apparent from the description of the review then conducted that only a sample of the records for these employees was provided.

EE139 had failed to provide him with sufficient evidence to support the expenses which equate to up to 80% of the employee’s total earnings. Evidence obtained from both the employees and clients would suggest that the vast majority of the expenses claimed have not been incurred and are false; and

the tax liability of £5,533,065 was calculated “disallowing around 90% of the expenses payments treating them instead as “additional” pay taxed at 20%”.

JB at Inspirium received holiday pay as non-taxable amounts;

JF at Capital Outsourcing received a non-taxed payment of £748 for holidays in lieu in April 2014;

MG at G, received £233 in lieu of holidays;

MH at Capital Outsourcing received holiday pay in week ending 25 May 2014; and

MP at Inspirium received pay in lieu of holiday.

Holiday pay not being taxed was noted as a concern in Officer McConnell’s witness statement. 

At the hearing, the references to holiday pay occurred during the cross-examination of Ms Suttle, volunteered by Ms Suttle as opposed to it being put to her as a specific issue.

Whilst holiday pay and payments in lieu of holiday should have been taxed by EE139, this was not part of the quantum of the Assessments and penalties. Holiday pay was not a relevant inaccuracy for the purposes of Schedule 24 and HMRC did not plead that it was in the SoCs.

We consider that the evidence before us as to working patterns from clients was broadly representative of EE139’s clients from September 2012 (once it had moved into overhead power lines). This is supported by the (limited) evidence before us in relation to turnover and customers, which included evidence that in 2013 80% of the sales to date were from seven customers (demonstrating the concentration of EE139’s business).

The number of employees in the samples was relatively small, at 12 and then 20, at a time when EE139 had over 400 umbrella employees. We have made findings of fact in relation to this evidence, and take account of the size of the sample alongside other evidence (or lack of evidence) when reaching our conclusions in the Discussion.

We have approached the evidence throughout on the basis that the burden is on HMRC to establish the PLR in respect of the inaccuracies on which they rely.

Ms Suttle confirmed not only the range of different ways that EE139 sourced employees, but also that the majority of workers were introduced to EE139 by a client – the client would then provide EE139 with the workers’ contact details and a member of the office staff would make contact to explain how they operated. In addition, Mr Jaekel would attend training schools, and this offered an opportunity to take on a large number of employees at once.

Mr Jaekel (who had attended that meeting with HMRC) confirmed this was correct.

The Appellants have consistently referred to Client S as an example of a client which had its own workers and asked EE139 to employ them. Before meeting with EE139, Officer McConnell had met with Client S on 12 June 2014. At that meeting, Officer McConnell’s notes record that Client S denied sourcing their own workers and then referring them to EE139. There was no documentary evidence that Officer McConnell told EE139 at the July 2014 Meeting that Client S had given a different explanation about the workers used to provide services to Client S. The meeting had only taken place the previous month. We find that he did not tell them. We also find that Client S did source its own workers and refer them to EE139 – this is consistent with the documentary evidence, eg an email from Client S dated 29 October 2013 headed “New starts”, giving names and contact details of three “new starts” and asking EE139 to get in touch with them and register them.

Client D also recruited the workers that were then supplied to them by EE139. This was explained to Officer McConnell by SG of Client D in the call on 27 June 2016.

There is no fixed place of work.

Normal working hours are to be decided at the beginning of each scheduled assignment.

The employee will be paid NMW. They will be paid any allowable expenses they incur in performing their duties including mileage upon completing and submitting expense/mileage claim forms and providing any evidence requested by EE139.

Letter on expenses claims – employees must state each journey and the miles for that journey, as EE139 cannot accept milage claims stating “various sites”. Meal and subsistence claims must have a receipt.

Guidelines for expenses – The section on mileage claims refers to travelling expenses for private vehicle usage.

expense claim form (the “Expense Claim Form”) – This includes:

These Expense Claim Forms were the only version before us – we had blank samples of them, completed versions used by the employees within Officer McConnell’s samples (both the initial 12 and the 20 during the period of April to June 2014), and completed versions provided on the USB from August and September 2016. We were not taken to any other version during the hearing.

There were email exchanges amongst the office staff (and with Ms Suttle) in August 2016 which referred to the development of a new version. We infer that EE139 was seeking to improve the forms, with suggestions being that they require a postcode to be provided (rather than simply destination) and that number of passengers be changed to name of passengers. These were changes being discussed at that time.

Company Receipts - This is the amount agreed between the client and EE139, received by EE139 for the work to be provided by a particular worker that week. All of the payments to be made by EE139 (to the umbrella employee or HMRC, or as its own fee) were funded from this amount;

Company deductions – This box shows how the total of Company Receipts are allocated. These are Employer Costs (a company deduction, calculated on basic pay element, and includes employers’ NI and pensions), Expenses (total of allowed expenses that are being used in that week), Margin (EE139’s margin, which was 5% of the Company Receipts), Retained Holiday Pay (calculated at 12.07% of basic pay) and the amount Paid to Employee;

Employee payments – Basic pay (at NMW) and Expenses (total of allowed expenses that are being used that week); and

Employee deductions – PAYE Tax and NI, calculated and deducted from the Basic pay.

If the expenses claimed and reimbursed were less than the £261.60 in this example, this difference would be paid to the employee as what EE139 describe as a taxable bonus. The additional amount is not separately identifiable as such by a separate line on the payslips, but is paid within Basic Pay. There were some specific examples of this having happened in the bundle (eg MP at Inspirium).

If expenses claimed and to be reimbursed by EE139 were higher, then as the basic pay cannot be reduced (as it is paid at the NMW), the excess is carried forward by EE139 and available to be paid in future weeks (if there is sufficient money being paid by the client in such weeks). This amount of outstanding expenses carried forward is recorded at the top of the payslip. A large number of the payslips in the bundle recorded such carried forward amounts, and several were £2,000-£3,000, with some being higher.

clients would send to EE139 a document setting out the work which had been performed by EE139’s workers. That document, sometimes referred to as a timesheet, would set out the rate which the client was paying and the quantity (often expressed at a day rate by number of days); and

EE139 received Expense Claim Forms from employees.

EE139 gave guidance to employees about the claiming of expenses (referring to the introductory email sent to them as set out at [189]). This guidance included that all claims (other than for mileage and agency expenses) had to be receipted;

the office staff at EE139 were trained on processing of claims;

office staff checked some claims. They were not able to check all expenses claims – they were processing payroll weekly and there was insufficient time to check all claims;

EE139 introduced further checks after receiving the letter from Officer McConnell on 22 October 2014; and

EE139 rejected claims that did not meet the guidance.

There was no additional, more detailed guidance given to office staff than this short note that was sent to all umbrella employees. We were not taken to any such detailed written guidance, and when Ms Robson referred to guidance which the office staff had received, she confirmed that she was referring to this document.

There was no formal training given to office staff about allowable expenses, or about the nature of the jobs that were being undertaken by the umbrella employees for different clients. They were trained on how to use the Merit software to process expenses and generate payroll. Office staff could raise questions they may have had as to particular claims with Ms Suttle, or Ms Robson after she became team leader in 2012.

EE139 accepted claims for processing that were made by Expense Claim Forms, in the body of an email or (later) on the online portal.

EE139 did not check the vast majority of the expenses claims which were submitted. Claims that were submitted but not checked were paid to employees as non-taxable reimbursement of expenses or AMAPs (with no distinction being drawn between these forms of payment on payslips).

At the beginning of the Relevant Period, all expenses claims were received by way of an Expense Claim Form or in the body of an email. After May 2013, this continued alongside some claims being submitted by employees using Merit’s online portal.

EE139 did make some spot-checks, but this involved a very small minority of the expense claims submitted. EE139 had identified by February 2014 that there were significant deficiencies in its approach to processing of claims (and this had led to their decision to employ Mr Tomlinson). Even when EE139 sought to improve its processes after receiving the letter from Officer McConnell in October 2014, they only aimed to check 10% of claims which had been processed (ie after the event) with a view to identifying whether any claims had been wrongly accepted, and Ms Suttle’s evidence in relation to Mr Tomlinson’s time spent on providing documents to HMRC and his absences leads us to infer that EE139 did not achieve this intended level of checking.

Ms Suttle was critical of the approach adopted by Officer McConnell in his investigation, saying that he had equated a claim being made by a worker with it being accepted and processed by EE139 and then reimbursed. We have approached the documentary evidence before us very carefully when making our findings about checks and rejections. Where EE139 did check expenses claims by way of spot-checks:

As regards the claims for AMAPs:

Client S started in March 2012; GH is the director and shareholder, MH is the operational director and SH was commercial director. Their office is in Wetherby, near Leeds. They work on refurbishment and installation of overhead power lines. All the work is carried out in Northern England, although they were expecting to move into Scotland shortly. Their current contract was with Morrison Utility Services, who would have contracts with many of the utility power and water companies. Both MH and SH had previously been employed by Morrison’s.

The company owns two vans which are used to transport men to site. All other vehicles including additional vans, cherry pickers, lorries, diggers and trailers are either rented from Morrisons or from a local hire company 2Rent.

The company has three direct employees, all other labour is sourced and provided by EE139. Currently 17 workers were supplied by EE139, and the reason for this was they had tried to recruit directly and been unable to do so. Officer Scullion asked if they ever found workers and referred them to EE139 for payment purposes but they said this was not the case. They reverted to this subject later in the meeting and it was again confirmed that none of the workers had originally been sourced by either Morrison’s or Client S and then referred on to EE139.

They did not have a copy of the contract with EE139 to hand, but Client S did identify that there was a “digs” allowance included in the payment to EE139 for each worker, but they did not know what the amount was. KMcC said he had not even received an invoice from EE139, and assumed SH would have something.

The type of workers included linesmen, digger drivers, general labourers and one planner. The planner, NH, worked within Morrison’s offices planning the work.

Workers came from all parts of the UK and Ireland and tended to work either five days on two days off or ten days on four days off. They all worked a ten-hour day and would have to report to Morrison’s premises in Leeds every morning where they would be picked up and driven to a particular site. During a typical day they would visit one particular area which may involve the replacement of one or two poles. Only the earth guys whose job is to cut the power at the transformers would be required to travel to several sites during the day, however this would still tend to be within the same area.

On the question of timesheets, GH said that all he knew was that EE139 employees kept these.

They only paid for the flights home for all the Irish employees of EE139.

There was a digs allowance included in the payment to EE139 for each worker. On the basis of the payslips of workers provided to Client S, this was £200 per week and was paid to workers as agency expenses, and was pro rated where a worker worked fewer than five days in a week.

Employees provided to Client S worked a ten-hour day (on the basis of the meeting notes).

Client S did not provide timesheets recording the number of hours worked each day by the workers to EE139.

Workers used their own vehicles to travel between home and the depot each day. Whilst the meeting notes refer to Client S having two vans, these were said to be used to transport workers to the site, and we infer this was from the Leeds depot to the site and back. We do not consider it feasible that the other leased vehicles, eg cherry pickers and lorries, would have been made available for workers to travel home in, particularly given the uncertainty as to where the employees would leave them overnight.

Workers did not use their own vehicles to travel from the depot to sites or between different sites during one day – either there was no such travel, or if there was then it was in Client S’s vehicles (either its own vans or the leased additional vehicles).

Client P is in the overhead power industry. CO’N used to work for Leven Energy but set up on his own as a sub-contractor to Leven. He could offer workers work in Manchester, Cornwall and the Lake District. Client P has two employees, CO’N and a secretary. As well as working out of the company premises in Barnsley, he also works out of an office in Leven.

He supplied all vehicles and equipment. Vans are hired from Northgate and he owns two lorries. No vehicles are supplied by Leven.

When asked whether the workers would have used their own cars to travel to sites, he said some might but he held no records.

He would have about five crews of between two and four men and each crew would service about 18 sites a day. There would be sufficient seating in the vehicles provided for all members of the crews.

Rates per day varied according to the job skill. There were three categories – foremen, linesmen and digger drivers.

Officer McConnell pointed to the ten hours recorded each day on the timesheet. CO’N said he used a 2^nd sheet, based on a daily rather than hourly rate. The time sheet recording hours and hourly rate was from EE139 which was completed and returned by his secretary. He confirmed that the workers did work ten hours a day as recorded and that the hourly rate recorded was the rate applicable to the job carried out by the worker.

Workers were mostly from Northern Ireland and would generally fly in on Monday and return to Northern Ireland on Friday. He estimated that around 95% of the total workforce would fly. Some workers would also use the ferry. He had nothing to do with these costs.

Some workers might have worked ten days on and four days off, some might have worked continuously. These different working patterns would have been rare.

No accommodation was provided by Client P. Only exceptionally during storm work would the power companies provide accommodation. Generally, the workers would stay in B&Bs, pubs, etc. They would also have to pay for their meals. He assumed they would have kept receipts and presented these to EE139.

The workers would report to various depots daily. Depots could be owned by Leven or one of the major power companies. He was allowed to keep his equipment vehicles at these sites. Line managers employed on the books of EE139 would oversee. Instructions would come from power companies and Leven and these would be agreed between himself and representatives of these companies. Daily work sheets were all hard copies.

The hourly rates on the timesheet are the rates they, Client P, pay EE139 for their services. This may not be the same as what they pay their own employees.

They do not record the number of hours worked per day by an employee, they simply record their attendance and if the issue was completed. The work is issued on a “job and knock” basis so the guys on site could be working considerably less hours per day if they are productive. The ten hours documented on the timesheet is for record purposes only and is simply used as a division of the agreed day rate.

Workers supplied to Client P were paid on the basis of a day rate. They were also paid agency expenses of £200 per week (on the basis of the payslips of workers provided to Client P).

The payment per day meant that Client P did not necessarily need to keep records of the number of hours worked. We find that Client P did not send timesheets to EE139 specifying the number of hours worked per umbrella employee. We accept that the sample timesheets in the form provided to HMRC were used as standardised documents and were not seeking to record actual hours (as they record ten hours for every named employee for every working day).

Client P did have the means to find out and record the number of hours worked by the umbrella employees each day. Whilst CO’N’s email of 27 August 2014 confirming that workers never worked less than eight hours, and often more than ten hours per day, is unambiguous on its face, we have carefully considered whether to take this at face value. It is apparent from the correspondence that Officer McConnell was pressing CO’N to confirm that employees worked ten hours per day (as had been shown on Client P’s timesheet which they had provided to HMRC). Officer McConnell kept asking the same question, and the first confirmation which had been provided (on 14 August 2014) had been by reference to the timesheet. We find that workers did work not less than eight hours per day (but go no further than this).

From the explanation provided to Officer McConnell, we find that umbrella employees were using vehicles supplied by Client P to travel between sites during the working day.

As to vehicles used to travel from home to work, CO’N’s evidence about the proportion of workers who would fly from Northern Ireland each week would suggest that those workers would be likely to stay locally to the depots to which they would be expected to report (assuming this was known in advance), and would be less likely to have access to their own private vehicles. However, of the three Client P employees in the sample of 12, none had addresses in Northern Ireland – AC’s was Cardiff, KM was Powys and CZ was Torquay – and there was no evidence that these were temporary addresses or that they otherwise lived in Northern Ireland. The vehicle that CZ declared he was using was registered to him, whereas the vehicle declared by AC was fleet hire (which could in theory have been leased by him or by Client P and supplied to him). Whilst we accept that some umbrella employees supplied to Client P were flying from Northern Ireland, we consider that the picture was more mixed than that conveyed by CO’N. We conclude that some employees were using their own vehicle to travel from home to depot, whereas others were supplied with a vehicle by Client P.

The workers provided by EE139 drive company vehicles. At night they are stored at a secure yard with no personal use of the vehicles.

Workers are paid on the basis of day rate/price per job as agreed between Client N and EE139.

Officer McConnell asked if workers would work a minimum of nine hours a day five days a week. The response was that on most days they would work full days but all depends on the job being done. There is a job of work and they engage EE139 to provide the labour service until the job is complete.

He does not have access to the names of the workers for which the flights are paid. There is just an agreed rate between Client N and EE139 for the supply of services on any particular job. Flights would not be invoiced as a separate item.

Client N paid EE139 for workers on the basis of a day rate.

Client N’s accountant would not confirm that workers worked nine hours per day, instead referring only to full days. We do not consider this supports Officer McConnell’s conclusion that they were working nine to ten hours, but accept, on the basis of general working practices, that they were working not less than eight hours per day.

Client N did not provide timesheets recording the number of hours worked to EE139.

Workers used their own vehicle to travel between home and the relevant depot each day.

During the working day, they then used vehicles provided by Client N to travel between sites, and this could be anything from one to ten sites per day.

Client D is within the telecoms industry; they work for KN Networks, who work for BT. The work involves putting fibre cabling into homes and surveying.

The contract with KN is for the supply of usually two men, a van/fuel and hand tools. They do not own any of the vans but hire them on a weekly basis from West Wallasey Fleet Hire. They might have anything up to 40 vans on the road at any one time. Vans hired would be transit size and would have no equipment.

They would supply ladders, but any cabling materials would be picked up at KN/BT depots. Client D supplied the mens’ belts/kits.

Fuel was provided – workers are provided with an All Star fuel card.

G was her sister’s company. G did overhead cabling. As her sister did not have any credit facilities when starting her business, Client D supplied her with the vans/fuel/labour. This has now ceased since September/October last year.

When asked about the labour, SG said they had around 8-10 on PAYE. As a lot of the work was reactive and fluctuated from week to week, they also used labour providers. The main one was EE139; she estimated that EE139 supplied between 20-30 employees. She also identified other external providers.

She had never checked payslips or PAYE but had been with EE139 for years without any trouble.

When asked how the workers were hired, she said that they would advertise but generally it was by word of mouth. When the worker contacted them, they would have to provide ID. They would then be asked to use a payroll company and most chose to use EE139. No contract would be drawn up between the worker and Client D.

The fleet hire company would normally deliver the vans to the worker’s house, or the worker might agree to pick it up at a yard after they had received their induction.

When asked if any of the workers supplied by EE139 would use their own vehicles, SG said that there would be a few and that they would be on a higher rate. She said she could identify these individuals.

documentation relating to the workers including names/rates of pay/amounts paid; and

a list of contractors who provide their own vehicle. The remaining staff named in the schedules were either provided with a vehicle by Client D or the end customer.

Drivers providing their own vehicle receive a premium rate, £20 a day more, but she acknowledged this was difficult to see from the schedule.

They do not keep records of exact hours worked, however the standard working day with their clients is from 8am to 4pm Monday to Friday and staff would be expected to work within these hours.

For AT at Client D, there was a timesheet which showed the contract amount being paid by Client D to EE139 for each week for AT. That showed a Daily Rate of £150, with five units being paid most weeks, four in others (consistent with a pattern we would expect around bank holidays), and then a number of units of different rates, which we infer were hours worked at different overtime rates. In the payslips the total amounts were shown in Company Receipts, with Daily Rate (5 x £150), Normal Time at two different rates (16 x £19.50 and 10 x £24). Basic pay was £353 in one particular week, up from £189 in a different week when no such additional “Normal Time” payments had been made by the client to EE139. The increase in additional pay can only be explained as based on knowledge of hours worked, as the level of expense claims, coupled with the ongoing carry forward of expenses, meant that there was no surplus in the contract.

There was an email exchange on 11 February 2015, in relation to the hours worked by a particular worker. Client D sent a copy of a payslip to EE139 that had been issued to PB. The email (from Client D) said he was contracted to work 15 hours per week, whereas his current payslip shows 40 hours per week which was said to be incorrect. Client D asked that his payslips reflect the 15 hours. The response was from Ms Suttle, asking Client D to detail the hours worked on the schedule that they send to EE139 to ensure that the correct hours are applied when calculating the wages.

We had a document which Client D had sent to Officer McConnell, headed “Earn Extra payroll schedule”, listing 43 employees for a week in August 2016 and pay rates (which is expressed as a single total amount). The amount differs between the employees, and we infer it already reflects any difference in rates of pay and also the number of days worked. There is a column which is part of that table headed Additions, with amounts varying from £20 to £308. There are then further columns on the document (separate from the table), marking “own vehicle” against seven names. We find that the table headed “Earn Extra payroll schedule” was provided to EE139 each week. We accept that it didn’t have the further columns in relation to vehicles – Ms Suttle didn’t recall seeing them, and the emails between SG and Officer McConnell indicate that these additional columns had been added by her to illustrate her explanations to him.

There was a time sheet for two workers for the week ending 17 July 2016, recording number of hours worked each day, relevant rates per hour, and that shows that they were working more than 50 hours per week

Workers were working not less than eight hours per day.

Client D kept records of the hours worked by employees. They provided pay schedules to EE139 which recorded total amounts to be paid and did not generally specify the number of hours worked. Client D did provide to EE139 the number of hours worked for some employees, including in situations where the relevant employee questioned their payslips (eg PB) or, we infer, where employees had worked overtime hours in a particular week (eg AT).

Client D provided vehicles and fuel cards to most of its workers. The fleet hire company used by Client D delivered the van to the worker’s house, or worker might collect from a yard after their induction. We infer from this that the vans provided were being made available for use by workers to travel from home to the sites, as well as for their use during the working day.

If EE139 received (we infer from clients) details of hours worked, they would pay for actual hours; sometimes a client would send a timesheet to EE139, and they would use this information.

If expenses claimed by an employee were relatively low such that there was money left from that which had been paid by the client to EE139, the surplus or excess would be paid as a taxable bonus (in addition to the payment of basic pay calculated on the basis of NMW per hour for six hours per day).

MH at Capital Outsourcing was paid at three different hourly rates for a total of 26 hours in the week ending 6 April 2014 (plus a “client bonus” of £150),

PJ at Client N was paid for 54 hours at two different hourly rates, and

AMcK at Capital Outsourcing was paid for 19 hours at two different rates.

Client S – ten-hour days;

Client P – not less than eight hours per day;

Client N – not less than eight hours per day; and

Client D – not less than eight hours per day.

The Employee Questionnaire asked employees how many hours per week they were contracted to work. There were just eight responses, and these were – varied (two responses), 40 hours, minimum 30, 30 to 40 (three), not given any. Four of these workers who responded were working for Quinn’s in the telecoms sector (with EE139’s client being, we infer, Capital Outsourcing) and their responses were mixed across this range – varied, minimum 30, 30-40 and not given any.

RI at SDH, a telecoms worker, had worked 31 hours in one week in July 2015.

SH at Capital Outsourcing, who was working for Kelly’s, told HMRC in a NMW questionnaire that each single job would take from one hour to three hours depending on how difficult the individual job was, and on average he would carry out three jobs per day. He said his working day always started at 8am, and most of the time ended at 6pm, although it did vary depending on workload.

Ms Suttle acknowledged that this default setting may have been used when it was less clear that the employee would have been working for six hours per day. The move into powerlines was several years after the Merit software settings had been set up. She described this as an unintentional oversight on EE139’s part.

Ms Suttle’s evidence went further, and she accepted that even in July 2014 she knew this was not accurate for workers in overhead power lines (and they had been in this sector since September 2012) and said she had told Officer McConnell that they realised they needed to adjust the methodology. We find that this same information was known by Mr Jaekel – he maintained relationships with clients and spoke to them directly (and was thus even better placed than Ms Suttle to be aware of this) and he was present at the July 2014 Meeting where Officer McConnell told them that Client S had said workers did ten-hour days.

At the meeting in March 2006 (which was attended by both Appellants), Accountax had advised EE139 that if there was a VAT enquiry then EE139 should only give HMRC access to the accounts, and if asked for timesheets they must say that they were unable to locate them and ask HMRC to put the request in writing.

The sales and marketing packs which were developed and used by Mr Jaekel when he met with new and existing clients included a series of documents. One of those, “Extra News Update”, referred to timesheet management, and another “Earn Extra Contractor Support” refers to employees being able to submit timesheets at their convenience. Mr Jaekel said that whilst he used these documents, he wouldn’t necessarily have handed all of them over; he did not accept that these documents meant there were timesheets (by inference, recording hours worked).

We were not taken to any forms which an employee would complete and return to EE139 to record the hours they had worked. Furthermore, Ms Suttle’s evidence, in various contexts, was that employees were generally poor at providing paperwork and documentation, and generally EE139 would take the approach that they should approach the clients with questions, not employees.

The screenshots of the Merit system show the online portal which was used by employees to claim expenses. They show a button for timesheets, and this was included within the technical specification which had been agreed between EE139 and Merit. Ms Suttle’s evidence was that this functionality did exist within Merit, but that it was an optional add-on and EE139 had not paid for it to be included within its licence. Mr Jaekel’s evidence was also that employees couldn’t enter timesheets on the portal.

There were various references to EE139 receiving a document or schedule from clients which recorded all the people that had to be paid, and what amount, which was then input into Merit. That document was sometimes referred to as a timesheet; but it was not clear from these references that this would necessarily include information as to hours worked. Ms Robson’s evidence was that she didn’t recall seeing hours worked on schedules from clients.

As regards the four clients focused on by Officer McConnell, we have found that:

In the context of being taken to expense claims and payslips of various employees within the sampling exercise, the bundle contained various charge sheets which appeared to have been produced by the end clients and sent to EE139. Those were considered in the context of making findings for the four clients, above.

The picture which emerged from the emails about particular employees is mixed – there are references to timesheets being needed for various clients, but on only one of the four clients below does it appear that the worker was to be paid by hours worked, or that hours were being recorded:

Where clients were paying day rates to EE139, there was said to be no commercial need for clients to record and inform EE139 of the number of hours worked. This is not necessarily correct – commercially, clients should want to ensure that the workers were paid the NMW for the hours worked; and to be satisfied that employees were working for the number of hours that the client had assumed when calculating the day rate it was prepared to pay.

MA at NGIS was claiming AMAPs in a particular week of £672.50 based on his declaration of miles travelled. Yet the net amount paid to him that week (ie including AMAPs and reimbursement of expenses) was £546.38 (with some of the expenses claimed being carried forward). Officer McConnell’s conclusion was that this meant he was working at a net loss; and, by implication, this cannot be what was happening. The Appellants disagreed, referring to AMAPs as being payments in line with statute that did not necessarily reflect actual expenses incurred, and drawing attention to the absence of direct evidence of, eg, likely cost of fuel for this level of mileage.

JF was submitting claims for daily mileage of 350 miles, with his payslip showing basic pay of £177, and expenses of £876. HMRC challenged the proportion of pay represented by reimbursement of expenses.

Employees built up large amounts of carried forward expenses, where there was no visibility as to what this comprised of, and where there was not enough money in the contract between EE139 and the client to meet all the claims which had been processed and accepted by EE139 in relation to the relevant employee, eg KM at Client P, in the week ending 13 April 2014, had carried forward expenses of £6,425.

At the July 2014 Meeting, the Appellants had told Officer McConnell that no general meal or lodging allowance was paid. Everything had to be receipted.

In their letter of 19 August 2016 Chartergates said, in relation to agency expenses, that based on the considerable costs incurred by EE139’s employees, they often agree additional payments, made by EE139 in line with the industry’s working rule agreement, and all such payments made by EE139 are in relation to lodging allowances.

Ms Suttle’s evidence sought to explain the different versions of events as being that these agency expenses were not EE139 paying general meal or lodging allowances, or lump-sum expenses, rather that clients would pay such allowances to EE139, which were then being paid on by EE139 to the employees.

MA at NGIS was paid agency expenses of £12 in week ending 6 April 2014;

JB at Inspirium was paid agency expenses of £250 each week;

AC at Client P was paid agency expenses, usually of £200 per week, and for some weeks this was shown at £160 per week (on weeks where there were four units of daily rate being paid);

MG at G was paid agency expenses of £200 per week;

RI at SDH was paid agency expenses of £76 and £100 in different weeks;

KM at Client P was paid agency expenses of £200 per week;

SN at Client S was paid agency expenses of £200 per week;

MP at Inspirium was paid agency expenses of £250 per week; and

CS at Client S was paid agency expenses of £40 per day – this was recorded separately on the charge sheet which was prepared by Client S and sent to EE139. This amount was simply multiplied by the number of days worked each week and paid separately on payslips.

Agency expenses were round-sum allowances paid to some employees.

They were not claimed by employees (on an Expense Claim Form or otherwise), and employees did not need to produce any receipts for any expenditure in order to receive these amounts. They were paid irrespective of the amount of expenses incurred by employees, and were paid in addition to such reimbursement.

They were treated as non-taxable payments, not as part of taxable income.

Workers at Client S used their own vehicles to travel between home and the depot each day. Workers did not use their own vehicles to travel from the depot to sites or between different sites during one day – either there was no such travel, or if there was then it was in Client S’s vehicles (either its own vans or the leased additional vehicles).

Workers at Client P were using vehicles supplied by Client P to travel between sites during the working day. Some employees were using their own vehicle to travel from home to depot, whereas others were supplied with a vehicle by Client P which they were using for this purpose.

Workers supplied to Client N used their own vehicle to travel between home and the relevant depot each day. During the working day, they then use company vehicles to travel between sites, and this could be anything from one to ten sites per day.

Client D provided vehicles and fuel cards to most of its workers. The vans provided were being made available for use by workers to travel from home to the sites, as well as for their use during the working day.

SDH provided vehicles to EE139’s umbrella employees. SDH’s main client was Morrison’s, and the vehicles on Expense Claim Forms were mainly fleet hire, and one was registered to Morrison’s.

Capital Outsourcing, or those to whom it was sub-contracting the workers (Quinn and Kelly’s) provided vehicles to EE139’s umbrella employees. This was confirmed by SH as part of the NMW enquiry.

Professional Quality Management Services Ltd (“PQMS”) confirmed to EECIS that they supplied vehicles to workers.

MA at NGIS claimed AMAPs of 1,247 miles for the week ended 28 September 2013, and 199 to 242 miles per day in week ending 6 April 2014 with description “work/various”. He also claimed passenger miles for an unnamed passenger in the week ending 13 April 2014. The details he provided were for a van on fleet hire, which we infer was provided to him by NGIS.

JB at Inspirium claimed AMAPs each week. The Expense Claim Form has five entries, each “Destination and Reason for Journey” being “working” and then listing miles per day of varying amounts, but the weekly total was always 2,228 miles. In the Employee Questionnaire he said he used his own vehicle to pick up the company van. There were no details or separation of journeys between his own vehicle and the company van, and we consider it very unlikely that he was travelling 2,228 miles per week in his own vehicle separately from journeys in a company van (and infer that he did not do so).

AC at Client P claimed AMAPs of around 340 miles per day. The vehicle was registered to a fleet hire company, and we have found that this was provided by Client P. He would have been entitled to claim AMAPs for his home to work journey, which Officer McConnell estimated at 40 miles (from Cardiff to Bedlinog), yet no separate identifiable claim was made.

JF at Capital Outsourcing claimed AMAPs for week ending 6 April 2014 for 350 miles per day for five days. In the Employee Questionnaire he said he was using his own vehicle. However, SH (who was provided by Capital Outsourcing to Kelly’s) had confirmed he was provided with a vehicle plus fuel. JF was working at Quinn’s, as was MH (another EE139 employee who was supplied to Capital Outsourcing), and MH was claiming mileage for a vehicle registered to fleet hire and had said he drove to site to collect a company van. On balance, we conclude that JF had also been provided with a vehicle.

MH at Capital Outsourcing claimed AMAPs of 277 to 309 miles per day. The Expense Claim Form records the Destination and Reason for Journey as Nottingham/Derby. The vehicle is registered to fleet hire, and in the Employee Questionnaire he had said he drove to site (we infer using own vehicle) to collect a company van. Officer McConnell records that the distance from Nottingham (where MH lived) to Derby is 15 miles. This journey, in his own vehicle, would be allowable; but additional mileage in a company vehicle is not.

We did not have Expense Claim Forms or payslips for SH at Capital Outsourcing, but the RTI return for 2013-2014 declares taxable pay of £578.58 and non-taxable payments of £1678.19. We infer that most if not all of this were AMAPs. SH had told HMRC that Kelly’s (to whom his services had been provided by Capital Outsourcing) supplied a van and fuel, as well as equipment. We conclude that he was not entitled to AMAPs.

RI at SDH claimed AMAPs (as well as the cost of fuel), yet the vehicle was a fleet hire vehicle. We infer it was provided to him by SDH (or Morrison’s) and he was not entitled to AMAPs.

PJ at Client N claimed AMAPs for his daily mileage. All claims for mileage in April 2014 were round numbers (multiples of 50), with one exception of a claim for 220 miles. His address was in Northern Ireland, and he claimed various expenses including four nights in a B&B for £200 in week ending 4 May 2014. In the Employee Questionnaire he had said he sometimes used his own vehicle. Client N only worked on sites in England. We infer that PJ was flying over to England and staying near the work sites. Client N supplied vehicles for travel between sites; the only potentially allowable mileage was for return journeys from B&B to the depot.

MMcE at Client N claimed AMAPs for between 210 to 280 miles per day. The details he provided were for his own car, which we infer he used to travel to the work site each day, but we have found that he would then be using Client N vehicles for travel between sites.

AMcK at Capital Outsourcing claimed AMAPs for 53 to 81 miles per day in the week ending 13 April 2014. He worked at Quinn’s, and although he said he had his own vehicle, we infer that (as with JF) he was provided with a vehicle for work during the day. He would be entitled to claim AMAPs for travel from home to and from work.

JM at PQMS claimed AMAPs for more than 300 miles per day. He did not provide any vehicle details, described the journey as various and claimed for an unnamed passenger. Some of the Expense Claim Forms claim AMAPs for seven days per week, yet we could only identify two weeks in the sample period where JM was paid the day rate for seven days; most weeks he was paid the day rate for four or five days. PQMS were providing vehicles to workers.

KM at Client P claimed AMAPs for daily journeys of either 260 or 300 miles. The payslips indicate that these claims were being paid. Client P provided vehicles to workers for travel between the depot and sites.

SN at Client S claimed mileage of 350 to 490 miles per day. The first journey in the week is described as Perth/Leeds, the final one being Leeds/Perth. This is consistent with a journey from home in Perth to Client S’s depot in Leeds, and staying locally during the week (he was also claiming accommodation costs). Yet within his claims for AMAPs are daily mileage that we infer relate to travel during the working day (which would be in Client S vehicles).

MP at Inspirium claimed AMAPs. His Expense Claim Forms provided vehicle details and listed the sites visited each day, with claims for varying amounts – the majority for less than 100 miles per day, but an occasional 203 miles, and some were as low as 54 or 60 miles. The DVLA records show this was a fleet hire vehicle, and we infer this was provided by Inspirium.

PS at Client D claimed AMAPs for 188 to 304 miles per day. Whilst Client D generally provided vehicles, PS was one of the workers identified in SG’s pay schedule as using his own vehicle. He confirmed in July 2016 that he was using his own vehicle, but we do accept that in September 2016, ie after the Relevant Period, he was provided with a vehicle by Client D (this being clear from an exchange of emails). PS was thus entitled to claim AMAPs for distances travelled for the purposes of his employment.

AT at Client D claimed AMAPs, and for one week against a worksite of Lincoln he claimed 1220 miles. He also claimed £640 for overnight stays that week. Client D provided vehicles and fuel to AT. He was not entitled to claim AMAPs.

HT at Client D claimed mileage for around 300 miles per day; the vehicle was fleet hire, and Client D identified HT as having been provided with a vehicle. In the Employee Questionnaire HT said he used his own vehicle to collect a van. We do not accept that the mileage of 300 miles per day related to journeys in his own vehicle; the mileage travelled in the van provided by Client D was not eligible for AMAPs.

PT at PQMS claimed AMAPs for daily journeys of 130 to 170 miles. He lived near Cardiff, journeys are described as “various destinations throughout mid, south and west Wales”. He was not using his own vehicle – DVLA records show it is fleet hire, PQMS said they provide vehicles and on the Employee Questionnaire he had said he did not use his own vehicle. He was not entitled to these AMAPs.

CZ at Client P claimed AMAPs, and the Expense Claim Form includes details of a vehicle that is registered to him. He lived in Torquay, with work sites in Gainsborough and Coventry. He was being paid an overnight allowance, and was claiming mileage for 578 or so miles per day, with claims totalling 2312 miles in one week (and this was repeated in other weeks). He was provided with a vehicle by Client P for journeys during the working day.

CS at Client S, who lived in Dunfermline, was reporting to a depot in Leeds, a distance of about 250 miles. His mileage claims were 1340 per week. He was being paid agency expenses of £40 per day. We infer that he was driving down to England each week and saying locally.

CZ at Client P was claiming mileage for 578 miles per day. Officer McConnell’s opinion was that this is a nine-hour round trip, which is “clearly not happening”. We do not place any weight on the opinion, but recognise the underlying fact as to the time that would be taken for such journeys.

There were very few employees who were using their own vehicle both for the journey from home to work and for travel between sites during the working day. PS at Client D is the only example from the sample of 20. He was claiming between 188 and 304 miles per day. HMRC have not satisfied us that such claim was not valid.

Some employees were provided with a vehicle and fuel from the client (eg Client D) and we find that the arrangements for provision of that vehicle were such that they were allowed to use that vehicle for journeys from home to work as well as between sites during the day. This doesn’t apply to all employees for a particular client (eg PS from Client D used his own vehicle).

The vast majority of employees were using their own vehicle to travel from home (or the place they were lodging) to work at the beginning and end of the day, and using a vehicle provided by the client (whether the client’s own vehicle or hired by them or by the client’s client) for any travel between work sites during the day. Examples are JB at Inspirium, AC at Client P, JF at Capital Outsourcing, MMcE at Client N and SN at Client S. However, none of the employees separated out the distances travelled for the various journeys – they did not distinguish between, and separately declare, journeys from home to work and journeys during the working day. All declared a single, total mileage, and we conclude that only some of this was allowable. HMRC have adduced some evidence as to the length of home to work journeys (by way of estimates produced by Officer McConnell based on the employees’ home address and what was known about either the location of the depot or where the employee said they were working); and the panel takes judicial notice of the actual location of various addresses and destinations.

MA at NGIS was claiming £10 for a van wash weekly in the three-month period April to June 2014. There was one example of such a claim being rejected due to absence of receipt. Whilst there was no other evidence of rejection of claims by emails, we accept that Merit screenshots show that only expenses being paid out in several of these weeks were AMAPs. These claims were being rejected.

PJ at Client N claimed for parking, which was rejected.

MMcE at Client N claimed for meals in restaurants (for two or three people, sometimes more), one of which was paid for at 10.54pm for £233, alcohol, and goods from a hardware store (sheep wire, posts, barb wire). Whilst Ms Suttle’s evidence was that not all expenses were actually paid to him, she was not processing these claims herself, there were no emails rejecting these claims and Merit screenshots do show that MMcE was being paid expenses in addition to his claims for AMAPs. We infer that these claims were reimbursed.

AMcK at Capital Outsourcing claimed AMAPs in the week ending 13 April 2014 as well as £204 of other expenses, including £117 for subsistence costs but receipts show one meal had included two children’s meals, another was a set meal for two, another was on a Sunday. Payslips show reimbursement of expenses of more than £390 each week. Whilst it is difficult to reconcile the claims with payslips exactly, the amounts being paid lead us to infer that not only was the AMAPs being paid but most (if not all) of these claimed expenses were also being paid.

SN at Client S claimed reimbursement of a variety of expenses – there was a receipt from Next in Perth for £36, and the items were described thereon as a yellow spot top and cream floral top, clothing from River Island for £16, footwear from River Island for £28, £91 for groceries from Tesco. There are restaurant receipts from restaurants in Perth at weekends. SN claimed for dinner, bed and breakfast for £350, with no further details provided. There is a receipt for diesel (of £83) in addition to claims for AMAPs. The payslips show he was being paid basic pay of £189 per week, and the remainder of the contract amount was being paid as reimbursement of expenses (or payment of agency expenses), and there was no documentary evidence of any of these claims being rejected. We find that they were processed and paid.

AT at Client D claimed £640 for overnight stays (and the form indicates that receipts were provided, but they were not all exhibited). We accept this was allowable (in that HMRC have not established otherwise). However, in one week AT claimed for shoes, printer ink, shelving, food of £261 and overnight stays of £435. We infer this claim was processed in full – the payslip for the week pays expenses of £495.49, shows carried forward expenses of £188.71, and by the following week the payslip shows these carried forward expenses have increased to £542. The overnight stays were allowable, but the food and other expenses were not.

From Ms Suttle:

From Mr Jaekel:

Whilst the umbrella employees were employed by EE139, they were provided by EE139 to clients such that clients would then give instructions directly to the workers. We accept that this meant that EE139 did not have (direct or indirect) oversight of their work, and did not know (without asking or being told by either the relevant employees or clients) what workers were doing on a day-to-day basis, either as to the number of hours worked, where they were working, or which vehicles they were using.

In the first few months of the Relevant Period, Ms Suttle was still processing some of the expense claims submitted by umbrella employees herself, but had been recruiting office staff to take over this role. Once Ms Suttle returned from maternity leave the following year, her role was more supervisory and she was not processing claims herself. Mr Jaekel was not based in the office, and whilst he did register, or enter details of, new employees onto Merit he did not (and never had) process expense claims.

Both Appellants knew that, unless they were provided with timesheets recording different hours worked by clients, the basic pay of umbrella employees was being calculated by the Merit software used by EE139 on the basis of NMW for six hours per day. Whilst Mr Jaekel accepted that he knew this for, eg, telecoms clients, he said he didn’t know this was being used for all workers, eg overhead power lines. We do not accept this recollection as accurate – the documentary evidence from the beginning showed this approach of six hours per day, and whilst this pre-dated EE139’s move into overhead power lines, it was going to apply to all workers unless EE139 decided to change it, and there was no documentary evidence about making such a change, or even considering making such a change (other than that where, as found, EE139 had timesheets recording different hours actually worked).

Both Appellants knew, before the July 2014 Meeting, that this default approach of six hours per day did not reflect the hours worked by those in overhead power lines. This was then reinforced by what they were told by Officer McConnell in relation to Client S.

Whilst EE139 were not generally receiving timesheets recording hours worked from clients, both Appellants knew that some clients were keeping their own records of actual hours worked, as can be seen, eg, from Ms Suttle’s correspondence with Client D and Mr Jaekel’s emails when setting up the processes for new clients.

The facts found at [207] in relation to the processing of claims were known to both Appellants. As part of this processing:

Both Appellants attended the July 2014 Meeting, and all correspondence from Officer McConnell to EE139 or Chartergates was seen by both Appellants. They were both therefore aware of the nature of the concerns being expressed by Officer McConnell and his statements as to what he was being told by their clients. This included, eg:

Drafts of the letters that were sent by Chartergates to HMRC were sent to both Appellants, such that both knew what was being said on EE139’s behalf.

Mr Jaekel had relationships with all of EE139’s clients throughout. Ms Suttle also had direct contact with each of them, as clients provides schedules to EE139 of the amounts to be paid to the umbrella employees, and would engage directly with them to ask or answer questions. The email exchange between Ms Suttle and Client D in February 2015 makes it clear that Client D were keeping records of hours worked. Both Appellants were thus in contact with individuals at clients who would be in a position to answer questions about hours worked, distances travelled and provision of vehicles.

Whilst the number of EE139’s clients varied, a large proportion of turnover was attributable to its top seven or eight clients.

The responses to the Employee Questionnaire were provided to Chartergates, and Chartergates provided the summary to Officer McConnell. We find that this summary table would have been provided by Chartergates to EE139, and both Appellants had this information in September 2015.

EE139 had not been told by any client that they (or their client) were providing a vehicle to an umbrella employee of EE139 in circumstances where that employee was claiming AMAPs.

EE139 did not send a questionnaire to clients asking for additional information relevant to the matters raised by Officer McConnell until after the Relevant Period. There was no documentary evidence of the existence of such a questionnaire (eg a blank pro forma), no documentary evidence of it having been sent (eg emails attaching it or chasing a response), Chartergates made no reference to it in their correspondence with Officer McConnell and any evidence of responses was confined to matters several months after the end of the Relevant Period, eg PQMS confirmed that they did supply workers with vehicles, but this confirmation was given to EECIS, after EE139 had entered administration.

Whilst Officer McConnell had told EE139/Chartergates about some of the information he learned from clients at various time (as referred to in the correspondence), he sent Chartergates a copy of the relevant notes of meetings/telephone calls and emails in November 2016, ie after the Relevant Period.

the Section 8 decision issued on 21 September 2016 which states the amount EE139 is liable to pay on the earnings for the period 6 April 2011 to 5 April 2016 is £6,991,449; and

the Regulation 80 determinations issued on 21 September 2016 for each year. The tax assessed is recorded at [13] above. Each determination refers to Employee Expenses Payments, and states the pay for which tax remains unpaid. The amounts of pay for 2010-2011, 2011-2012, 2014-2015, 2015-2016 are £566,687, £1,080,000, £7,100,000, £7,855,643 (with E indicating that these figures are estimated).

EE139 calculated its employees’ pay on the basis of an arbitrary figure of six hours work per day at the NMW, resulting in excessively low wages. The figure of six hours per day was lower than the hours that were actually worked by the employees.

EE139 accepted expense sheets for mileages which were unsupported by records and, in many cases, clearly false. Claims for other expenses, such as accommodation, were also accepted without sufficient evidence.

The decision taken by HMRC was expressly based on disallowing 90% of the expenses paid to EE139’s employees, which itself was based on Officer McConnell’s conclusions as to vehicle ownership, and that the consequence of this is that questions and concerns raised by Officer McConnell and relied upon by HMRC in the course of the hearing as to whether there was an understatement of hours, or even distances travelled, are irrelevant.

In any event, these allegations are not made out on the basis of the evidence. Even if (which was not accepted), the use of six hours as a default did lead to an understatement of tax, it would be necessary for HMRC to identify what the quantum of the resulting understatement of tax was. The decisions issued are not based on an alleged understatement of hours and HMRC have not identified what they say was the resulting inaccuracy.

HMRC must identify an inaccuracy in a relevant document (ie something which amounts to or leads to an understatement of a liability to tax), and Schedule 24 envisages that one document may include multiple inaccuracies such that it is necessary to identify the culpability of each of the errors (which is acknowledged by paragraph 6 of Schedule 24). Here, HMRC’s arguments are in the realm of generalities, detached from the Returns, and this is particularly significant where it is alleged that the inaccuracies are deliberate.

HMRC had produced no evidence that the expenses claimed were wrong – asserting that distances claimed are implausible, or “clearly not happening”, or lacking in detail does not make them incorrect or false. The umbrella employees submitted these claims, declaring them to be true, and HMRC have not asked the employees if they claimed for the correct mileage. As to vehicle ownership, ITEPA 2003 does not make ownership of a vehicle a condition of AMAPs, the requirement is that the vehicle must not be a “company vehicle” yet no clients have been called as witnesses.

Even if HMRC can establish some inaccuracies, that does not lead to the conclusion that 90% of expenses claims were inaccurate. An inaccuracy in relation to payment of mileage allowance for one employee in a period does not prove anything about inaccuracies of different returns for different individuals for the same or other periods.

HMRC have not set out the basis on which they decided to disallow 90% of the expenses.

As set out under Background and Findings of Fact, the following were sent to EE139/Chartergates in relation to the decisions reached by HMRC:

The Regulation 80 determinations themselves (for the years which were included in the bundle) refer to “Employees Expenses Payments”. We infer that the determinations for 2012-13 and 2013-2014, which were not in the bundle, were issued on the same basis.

The Section 8 decision states that EE139 is liable to pay contributions for the period from 6 April 2011 to 5 April 2016 “in respect of the earnings of Linesmen and Telecom workers”.

The penalty explanation schedule (which had been issued to EE139 on 23 January 2017) set out the basis for charging the inaccuracy penalty under Schedule 24 FA 2007 as being that the company has failed to provide sufficient evidence to support the expenses claims that equate to up to 80% of the employees’ earnings. Information supplied by employees and clients has shown that the vast majority of the expenses claimed would not have been incurred and are false. The hours worked are significantly more than are being recorded by the company, and the company either had this information or would have been able to have accessed it. In the context of helping, the schedule sets out that EE139 has declared the non-taxable payments on RTI returns, helping HMRC to produce estimated determinations.

HMRC’s review conclusion letter dated 15 January 2018 (in respect of the review of the PLN which had been issued to Ms Suttle, but we infer one was also sent to Mr Jaekel in similar terms) includes:

In his witness statement, Officer McConnell explained his decision as follows:

The SoCs cite the correspondence between EE139/Chartergates and HMRC and plead that the company ignored timesheets, used false records of working hours, accepted mileage claims with little or no detail and reveal implausible figures, approx. 88% of the total expenses claimed was for mileage, the vast majority of workers did not perform their duties in their own vehicles and most employees would not qualify for home to work travel in any event as the employment contracts were not overarching.

Most employees would not qualify for home to work travel in any event as the employment contracts were not “overarching”. There was generally no provision to pay the employee between engagements and so no mutuality of obligations existed.”

Overarching contracts – We proceed on the basis that the contracts between EE139 and the umbrella employees are overarching contracts. We recognise that HMRC have never accepted that they are overarching contracts – Officer McConnell had doubts about this (referring in correspondence to the absence of mutuality of obligations), never expressed himself satisfied with explanations provided by Chartergates during the course of the investigation, the reviewing officer considered the contracts were not overarching, and the SoCs include a pleading that most employees would not qualify for home to work travel as the contracts were not overarching. However, HMRC’s Skeleton makes only passing reference to this (in the context of type of conduct rather than as precluding any expenses being allowable even if the submissions as to vehicle ownership were not made out) and, more fundamentally, whilst we were taken to a sample employment contract in the context of provisions for payment for hours worked, HMRC have not put forward any detailed submissions as to the requirements for overarching contracts or sought to provide any evidence of the factual position between engagements (or even made submissions as to inferences from the lack of such evidence). HMRC did not cross-examine any of the witnesses of fact (ie the Appellants and Ms Robson) on this factual issue. Other than in the most general terms, HMRC have not put forward a clear case for the Appellants to seek to meet. In all the circumstances, we consider it is not open to us to reach any conclusion other than that the employment contracts are overarching contracts.

Relevance of hours worked – We do not accept the Appellants’ submission that the basis of the decision to disallow 90% of expenses means that HMRC’s arguments as to the understatement of hours worked (even if correct, which was not admitted) are irrelevant. We agree with Ms Goldring that, if such understatement is established, the understatement of hours and calculation of taxable pay on the basis of these understated hours provided space for EE139 to pay a higher amount of (non-taxable) expenses. This is a consequence of the approach to calculation of taxable pay, seen from the payslips and the methodology of which was not in dispute, which involved EE139 receiving an amount from the client, taking its own margin from this, then applying the balance towards, first, its calculation of taxable pay, then the amounts it was required to pay to HMRC (or hold back on account of holiday pay, etc), with the balance being available to pay as reimbursement of expenses. That approach resulted in some expenses claimed and processed not being reimbursed, but instead carried forward for reimbursement in future weeks (subject to sufficient funds being available). A higher level of taxable pay (based on a greater number of hours worked) would have had a direct impact on the amount available to reimburse expenses (or pay AMAPs). We do therefore assess the submissions, evidence and our findings as to hours (and those aspects of the expenses claims which are not related to vehicle-ownership) when considering whether there are inaccuracies in the Returns.

Amount of expenses reimbursed – The Appellants challenged HMRC’s decision to disallow 90% of the expenses (with submissions relating to the need to identify inaccuracies, lack of evidence as to how this 90% was arrived at (rather than, say, 85%) and criticism of Officer McConnell’s investigation). Whilst there was minimal evidence before us as to how HMRC had calculated what it treated as the total amount of expenses reimbursed (and to which Officer McConnell applied the 90% disallowance), particularly as regards the first two years for which there were no RTI returns, such that EE139 had not declared (on any form of returns to HMRC) the total amount of non-taxable payments made to employees, no challenge was made to the quantum of this non-taxable amount by the Appellants (either in the grounds of appeal or subsequently). We proceed on the basis that the total expenses reimbursed by EE139 during the Relevant Period was £30,739,250, but recognise that the Appellants did challenge HMRC’s decision as to how much of this to disallow and treat as additional pay.

We have found (at [252]) that generally umbrella employees were working more than six hours per day. However, whilst there was some evidence of employees being paid for more hours than this (and of some being paid for fewer hours), generally workers were being paid for six hours per day. To the extent that EE139 paid workers for fewer hours than they actually worked, calculating their basic pay on this basis and reporting this as their taxable income in the Returns constituted an inaccuracy which amounted to or led to an understatement of tax.

EE139 paid agency expenses to some umbrella employees as non-taxable payments, and these amounts were paid irrespective of the amount of expenses incurred by employees, and in addition to such reimbursement. The amounts varied between £12 and £250 per week, with the majority in number being paid at £200 per week. They were paid to workers in both telecoms and overhead power lines, albeit that they were not provided for by all clients, eg Client D did not pay these amounts to EE139 to be paid to employees. These amounts should have been treated as taxable, and failing to report these amounts as taxable income in the Returns constituted an inaccuracy which amounted to or led to an understatement of tax.

EE139 was processing claims made by some employees which were not allowable expenses. We do not refer here to the absence of receipts, rather claims for a type of expenditure which was not incurred wholly, exclusively and necessarily for the duties of the employment, eg personal clothing.

Mileage allowance payments are amounts paid to an employee for expenses related to the employee’s use of a car or van for business travel (s229(2)).

Mileage allowance payments are approved if, or to the extent that, for a tax year, the total amount of all such payments made to the employee for the kind of vehicle in question does not exceed the approved amount for such payments applicable to that kind of vehicle (s229(3)). As stated above, the amounts are 45p per mile for the first 10,000 miles (40p per mile for the tax year 2010-2011) and 25p thereafter for cars.

Section 229(1) does not apply if the vehicle is a company vehicle (s229(4)). Section 236(2) provides that a vehicle is a “company vehicle” for this purpose if it is made available to the employee by reason of the employment and is not available for their private use, or the cash equivalent of the benefit is to be treated as earnings by certain provisions.

There is no liability to income tax for approved passenger payments made to an employee for the use of a car (whether or not it is a company vehicle) if the employee receives mileage allowance payments and (if the car is made available to the employee by reason of the employment) the cash equivalent of the benefit of the car is treated as earnings. Passenger payments are amounts made to an employee for carrying one or more passengers who are also employees for whom the travel is business travel.

We have found that some of the claims for AMAPs were for distances in excess of those that were actually travelled, and, separately, we have found that some (albeit very few) employees used their own vehicle for all journeys (ie home to work and throughout the working day, travelling between the depot and any sites). It could theoretically be the case that those two findings overlap, such that an employee in their own car was claiming and being paid AMAPs for distances that they had not travelled. However, on the facts we were not persuaded that this was the case in respect of any of the particular employees or claims before us. In view of this, we conclude that HMRC have not established that there was any inaccuracy based on payment of AMAPs (or passenger payments) being made to employees who were using their own car for all journeys.

There were inaccuracies to the extent that AMAPs (and passenger payments) were paid to umbrella employees who were provided with a vehicle by a client for use for all journeys (ie home to work as well as between the depot and sites), irrespective of whether or not fuel was also provided. No payments of AMAPs should have been made in these circumstances. This situation was not confined to a single client, or single sector, but it was a relatively small percentage of employees, which we conclude to be 10% of employees, but for whom the entirety of the payments should have been treated as taxable.

There were inaccuracies to the extent that AMAPs (and passenger payments) were paid to umbrella employees who were provided with a vehicle for use for journeys between the depot and sites during the day but whose distances claimed included both distances travelled in their own vehicle from home to work and also the distance travelled in the vehicle provided by the client and, in some instances, additional distances which we concluded was not travelled at all. This was the vast majority of employees, and we are satisfied that the same percentage should be applied throughout the relevant period, as these inaccuracies result not only from payments to employees working on overhead power lines (eg Client N and Client S) but also for those working for SDH, EE139’s first client. Based on all of the evidence, we conclude that 85% of EE139’s employees were in this situation. The difficulty is that on the basis of our findings of fact, some part of the distance claimed to have been travelled by these employees was for home to work travel in their own vehicles (and for the avoidance of doubt we do not find that the mileage claimed only purported to relate to home to work travel in their own vehicle); they are entitled to AMAPs for this amount. Our interpretation of the legislation is that where payment is made for a claim for AMAPs for, say, 100 miles but we conclude that the valid claim (ie for home to work travel) was for a lesser distance, then the claim was valid to that lesser extent. It is not “all or nothing” as regards validity. Whilst we have reached a conclusion that 85% of employees were in this factual situation (and have taken account of Mr Ripley’s and Mr Firth’s submissions as to the size of the sample, HMRC’s failure to ask questions of employees about mileage and lack of direct evidence from employees in so doing and being wary of what they submit would be effectively reversing the burden of proof), we have concluded that these evidential issues have not been overcome to any significant extent by HMRC for the purpose of satisfying us as to the amount of the AMAPs (and passenger payments) that should be treated as taxable. We considered that there were various potential questions arising from the evidence before us, eg:

We did have some evidence as to the possible length of journeys from home to work; and we have concluded that these employees (ie those who used their own car for these journeys but a company vehicle during the working day) were claiming for distances in excess of this. We are satisfied that at least 50% of the mileage claimed by these employees was for journeys in company vehicles and was not eligible for AMAPs (or passenger payments). We have considered carefully whether the evidence supports a conclusion that a higher percentage should be treated as taxable; but whilst it does provide some support, the burden is on HMRC and they have not met that burden.

There is then the possibility that employees, who were provided with vehicles (whether for all journeys including home to work or just for use between the depot and sites) but not with fuel, were incurring the costs themselves of buying fuel. If this had occurred, then they would have been entitled to claim reimbursement of these amounts as expenses incurred in the performance of their duties (but not for AMAPs). This scenario was alluded to by the parties, but none of the parties put forward detailed submissions, or indicated evidence on which we may seek to make findings on such a basis. We take no account of this possibility.

as set out above, there are inaccuracies in the Returns which amounted to or led to an understatement of tax; but

HMRC have not established that the inaccuracies were such that 90% of the non-taxable payments made to employees should be disallowed and treated as additional earnings, ie that the additional amount of tax due by EE139 is the amount of the Assessments.

The Appellants knew of the deficiencies in EE139’s system, that they did not know the hours or mileage of their employees, that expenses were not being properly checked, yet they continued submitting documents to HMRC with that knowledge. There was an intention to mislead. If they had checked, they would not have been able to obtain the level of growth in the business that they achieved. Even when notified of the problems, EE139 continued to pay out the carried forward expenses, and did not remedy the issues identified (eg EE139 referred to introducing new expenses claim forms which required more detail, but did not require these to be used and still accepted claims on the old forms, and EE139 did not obtain confirmations from the end clients about the vehicle ownership). What HMRC submit were large false and substantiated expenses claims were added to the wages sum (calculated on the basis of NMW) to give a total figure which equated to the charge-out rate being paid by the end client to EE139.

The Returns include a declaration of truth, and it is not enough for EE139 to say that the information provided to HMRC matched that which had been paid as taxable pay to employees on Merit. The legal obligation is to ensure the information is accurate by reference to what was properly claimable and payable as expenses. By declaring to HMRC that the information provided was accurate, this was both deliberate and concealed.

Deliberate includes both actual knowledge and blind-eye knowledge, relying on various decisions including, eg, Martyn Arthur and Denise Arthur v HMRC [2022] UKFTT 216 (TC). Whilst HMRC submitted that EE139 had actual knowledge of the inaccuracies, in the alternative they submitted that EE139 had blind-eye knowledge of the inaccuracies.

The re-categorisation of wages as payments for supposed expenses was concealment. Furthermore, relying on the facts asserted by HMRC, this behaviour was dishonest.

Alternatively, HMRC submitted in their written closing submissions that recklessness amounts to deliberate behaviour. We address the timing of this alternative pleading below, but at this stage simply record that HMRC’s submission was that if a taxpayer does an act which in fact creates an obvious risk that an inaccurate document will be submitted, and either has not given any thought to the possibility of there being any such risk or has recognised that there was some risk involved and nonetheless gone on to do it, that is deliberate behaviour (ie this is an objective test).

The Appellants were the sole directors of EE139 and the deliberate inaccuracies should be attributed to both of them (50% each).

To the extent that incorrect claims were made by EE139’s workers, EE139 was unaware. HMRC have failed to have regard to the facts that EE139 was a new business with a small number of office staff, Ms Suttle had no experience of processing expenses and was heavily reliant on external advisers, they took advice from Accountax (who advised that self-certifying employees would be responsible for ensuring the accuracy of their expense claims), Ms Suttle had various responsibilities within the business and was not solely focused on expense claims, employees were informed about the correct approach to expenses, Ms Suttle did disallow some expenses, and neither Ms Suttle nor Mr Jaekel stood to gain directly from any reductions in tax liabilities of the umbrella employees.

Matters raised by HMRC as regards inaccuracies (eg reliance on a six-hour day, insufficient detail in claims) do not support a conclusion that the conduct was deliberate.

There is no direct evidence of a concerted attempt by EE139 to inflate the expenses of its employees, and there is no recognisable pattern to the inaccuracies alleged by HMRC. The examples given by Officer McConnell (if proven) are consistent with flawed internal controls or procedures within EE139.

Furthermore, the explanation of a “deliberate inaccuracy” at [63] of Auxilium Project Management Ltd v HMRC [2016] UKFTT 249 (TC), which has been approved by the Upper Tribunal in CF Booth Ltd v HMRC [2022] UKUT 217 (TCC), is inconsistent with any objective notion of recklessness or blind-eye knowledge which are based not on the most common meaning of “deliberate” but instead on objective standards of what the taxpayer should have done but did not. The Tribunal decisions relied upon by HMRC pre-date the Upper Tribunal’s decision in CF Booth.

HMRC’s approach to attribution fails to take account of the fact that it was the employees who submitted the claims for expenses and have benefitted from any inaccuracies.

Allegations of deliberateness must be properly particularised so that the Appellants know what case they have to meet, including the facts, matters and circumstances relied upon. HMRC’s submissions must be assessed by reference to their pleaded case. Mr Jaekel has made clear since July 2018 that they consider HMRC’s pleaded case to be inadequate. HMRC’s approach to the inaccuracies on which they seek to rely is significant in this context – HMRC relies on generalities, yet how can the Tribunal consider whether an error is deliberate if it is not shown what the particular error is said to be.

Pleadings that EE139 should have known of actual hours worked do not support a finding of deliberate behaviour. There is no evidence that any particular expense claim was reviewed, identified as being false but nevertheless processed.

HMRC had not pleaded recklessness, and did not assert a case on recklessness in HMRC’s Skeleton or in opening. They cannot seek to raise such an argument in closing.

Any deliberate inaccuracy could not be attributed to Mr Jaekel, as he did not have the required knowledge and intention. He was not involved in the processing of expenses. HMRC’s approach fails to recognise the culpability of employees submitting expenses claims.

HMRC pleaded in the SoCs that what it said was the deliberate and concealed behaviour of EE139 was dishonest.

In CF Booth Ltd the meaning of “deliberate”, and its relationship to dishonesty, was considered by the Upper Tribunal at [38]-[41] as follows:

It is clear from this decision of the Upper Tribunal that the test of deliberate conduct in Schedule 24 does not require HMRC to plead or prove dishonesty. Whilst HMRC have pleaded dishonesty in these appeals, we do not make any findings or reach any conclusions in relation thereto.

Separate from the Appellants’ submissions as to whether blind-eye knowledge can amount to deliberate conduct, Mr Firth submitted that in any event HMRC have not pleaded blind-eye knowledge of particular facts or the basis for a finding of blind-eye knowledge. (These submissions have been made throughout on behalf of Mr Jaekel, not only in the written skeleton before the hearing but also during the hearing, in written closing and referred to in the further written submissions after the hearing.) We consider that it is clear from the SoCs that HMRC were seeking to rely on the blind-eye knowledge of both Appellants:

We take account of the submissions relevant to the adequacy of this pleading, and the matters relied upon by HMRC, in the context of our discussion of blind-eye knowledge as deliberate behaviour when applying the relevant principles to the facts in these appeals.

In their written closing submissions (which were handed up on 14 December 2022), HMRC argued that EE139 had been reckless as to whether the Returns were inaccurate, and that this of itself can constitute deliberate behaviour. Mr Firth submitted that this had not been pleaded by HMRC, and that it was far too late to seek to rely on this in written closing submissions, after all of the evidence has been heard. In this regard:

In our view, a 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. This is a subjective test. The question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time.

The test of deliberate inaccuracy should be contrasted with that of careless inaccuracy. A careless inaccuracy occurs due to the failure by the taxpayer to take reasonable care (see paragraph 3(1)(a) of Schedule 24 Finance Act 2007 and Harding v HMRC [2013] UKUT 575 (TCC) at [37]).”

[…] It is sufficient to say (not least because it was a dictum about the contextual meaning of wilful rather than deliberate) that it offers no assistance on the true construction in this very different context of the phrase "deliberate inaccuracy" in section 118(7). The question is whether it means (i) a deliberate statement which is (in fact) inaccurate or (ii) a statement which, when made, was deliberately inaccurate. If (ii) is correct, it would need to be shown that the maker of the statement knew it to be inaccurate or (perhaps) that he was reckless rather than merely careless or mistaken as to its accuracy.

We have no hesitation in concluding that the second of those interpretations is to be preferred, for the following reasons. First, it is the natural meaning of the phrase "deliberate inaccuracy". Deliberate is an adjective which attaches a requirement of intentionality to the whole of that which it describes, namely "inaccuracy". An inaccuracy in a document is a statement which is inaccurate. Thus the required intentionality is attached both to the making of the statement and to its being inaccurate.

Secondly, "deliberate inaccuracy" is the gateway to the taxpayer's exposure to a 20-year period for the making of a discovery assessment, because of the importation of that phrase from section 118(7) into section 29(4). If the first interpretation were to be preferred the taxpayer could incur that exposure by making an honest but in fact inaccurate statement, even after taking reasonable care as to its truth or falsehood. The taxpayer would not even need to be careless, and yet would incur a much longer exposure than if he had been.

Thirdly, the penalty scheme in Schedule 24 to the Finance Act 2007 had, shortly before the relevant amendments were made to section 29 (including section 118(7)), used the same concept of deliberate inaccuracy for the purpose of triggering penalties more serious than those arising from carelessness, at altogether higher levels of blameworthy conduct (even though subdivided by reference to the presence or absence of concealment). It seems inconceivable that Parliament would have chosen the same language to serve as the gateway to the longest available period of exposure to a discovery assessment, if the phrase was to be interpreted as meaning only that the statement was intentionally made.

Fourthly, as already noted, the phrase was introduced at the same time as a substantial shortening of the exposure period for carelessness, which leads to the clear inference that Parliament must have regarded "deliberate inaccuracy" as conduct substantially more blameworthy. It is to be noted that, as Ms McCarthy submitted, there are other triggers for a 20-year time limit for an assessment which do not necessarily lie on a scale of blameworthiness between carelessness and fraud, but their existence does not displace the powerful inference as to Parliament's intention already described.

It may be convenient to encapsulate this conclusion by stating that, 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.”

The parties referred us to the authority cited by the Upper Tribunal in CPR Commercials, Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd [2001] UKHL 1 and in particular the judgment of Lord Scott:

The meaning of blind-eye knowledge has more recently been considered by Sir Geoffrey Vos MR in Stanford International Bank Ltd (in liquidation) v HSBC Bank Plc [2021] EWCA Civ 535, where the appellant had pleaded that HSBC dishonestly and/or recklessly assisted Mr Stanford in the perpetration of the fraud by providing and continuing to operate the bank accounts. Sir Geoffrey Vos MR gave judgment as follows:

Although the concepts of blind-eye knowledge and recklessness as to the truth or falsity of a statement may intersect, they are clearly not identical. As we have already stated, HMRC did not ask us to consider whether an inaccuracy is deliberate where a taxpayer is reckless as to whether the document contains any errors. In the absence of any argument on the point from HMRC, and because it is not necessary for the purposes of this decision, we do not consider whether recklessness is a sufficient basis for determining that an inaccuracy is deliberate further in this decision, and make no comment either way.”

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 – this is a subjective test and we refer to it here as involving actual knowledge; and

where a taxpayer suspects that a document contains an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC, similarly with the intention that HMRC should rely upon it as an accurate document; we refer to this as involving blind-eye knowledge. The authorities establish that the suspicion must be more than merely fanciful – it must be firmly grounded and targeted on specific facts. The deliberate decision in this scenario must be a decision to avoid obtaining confirmation of facts in whose existence the taxpayer has good reason to believe.

EE139 had been told by Accountax in 2006 that the onus was on workers to self-certify their expenses, but Accountax did suggest that EE139 performed random route planner checks on mileage distances. From the outset, EE139 had thus questioned whether workers might lie on expenses forms; this was raised by Ms Crowther, but both Appellants were at the meeting. They were told that it was only workers who would be liable. We consider that this single piece of advice, from one meeting in 2006, permeated the approach which EE139 took to its business in the years thereafter.

EE139 did not take any detailed advice thereafter which addressed its responsibilities when dealing with claims submitted by umbrella employees, or to test whether the processes which they adopted (including the level of detail on forms, whether to ask questions, spot-checking) met objective standards of good practice for employment intermediaries. The advice they took was ad hoc and related to questions arising from particular claims, eg allowability of visa fees.

EE139 knew the way in which amounts received from clients were paid to employees, and how they were split between taxable pay and non-taxable expenses. This knowledge was precise in the RTI Years, as it was set out on the face of each of the Returns. They also knew the broad picture during the first four tax years in the Relevant Period. Ms Suttle oversaw the generation and submission of all of the Returns; Mr Jaekel did not, but he knew the methodology used and we are satisfied that he knew taxable pay was generally based on NMW for six hours per day and was generally aware of the level of payments being made as expenses.

We have made findings as to how umbrella employees were sourced by EE139. There was no evidence that EE139 told either its clients or the umbrella employees to inflate their claims for expenses, or, if different, to submit false claims. Indeed, the introductory email sent to umbrella employees told them only to claim for expenses that were wholly and exclusively incurred whilst working on their jobs.

EE139 did not check the vast majority of expense claims. Spot-checking focused on the provision of receipts for non-mileage related claims; that workers were working on the days for which they were claiming expenses and, after mid-2015, on postcodes having been provided for journeys.

The Expense Claim Forms contained declarations by workers that expenses were incurred wholly, exclusively and necessarily in the performance of their duties, refer to the vehicle as being “my car” and refer to EE139’s duty to ensure that only legitimate claims are processed. Employees were thus declaring to EE139 that they were submitting their expenses claims correctly. EE139 was entitled to take some comfort from this declaration by employees.

We are not satisfied that it would have been clear to employees that, if they were provided with a vehicle by the client, then they were not entitled to claim AMAPs. The references to “my car” do not necessarily equate to ownership – and indeed a person could be using a family member’s car, or a car they had leased, and still be entitled to AMAPs. Whilst guidance was given to employees about expenses, it was brief and did not set out clearly that AMAPs were not available for miles driven in a “company vehicle” or what this meant. EE139 should have known of this requirement, and we infer that Ms Suttle was aware, on the basis of her evidence in relation to her knowledge about SDH and the number of vehicles provided by SDH to employees, and her evidence that if she knew someone was provided with a vehicle and fuel, she would have recommended they use the PAYE model. Ms Robson’s evidence, which we accept, was that she was not aware of this requirement until after it was raised by Officer McConnell. We consider that the lack of detailed guidance and understanding around vehicle ownership requirements limits the weight which can reasonably be placed on the declarations by employees (that their claims were correct) in this regard (but we recognise that, when assessing knowledge, it is the subjective knowledge of EE139 which needs to be assessed and not whether this was objectively reasonable).

There was no evidence of any client telling EE139 that they were providing vehicles to the umbrella employees in circumstances where those employees were claiming, and being paid, AMAPs.

There was evidence, which we accept, that office staff were not in a position to know the work sites of umbrella employees, or the actual distances travelled by umbrella employees in any particular week. Ms Suttle’s evidence included that junior office staff who did not drive themselves would not necessarily be familiar with possible travel times for various distances. This hearsay evidence was speculative, and did not relate to Ms Suttle’s knowledge of the position of any particular member of office staff, and we place minimal weight on this point.

Many of the Expense Claim Forms, and emails claiming expenses, do raise questions on their face, from the failure to provide requested details (vehicle registration, separation of journeys, destinations) to the high levels of mileage claimed to be travelled, and also to the totality of amounts being claimed. We have detailed at [285(6)(b)(iii)] above the claims made by AT at Client D; this is not an isolated example, either for AT or for other umbrella employees.

EE139 had set up the Merit software on the basis of a six-hour working day. We accept EE139’s explanation as to why the system was initially set up on this basis. However, they were not receiving, as standard, details of hours worked by each umbrella employee for clients. Documents from clients often recorded the number of days rather than hours. This, coupled with the lack of information from employees, meant that EE139 knew they did not have precise records and were relying on generalisations. This was in circumstances where EE139 knew that some workers were working different hours; this was known not to be accurate for workers on overhead power lines by July 2014, and could be seen not to be invariable for telecoms either (eg where Client D provided timesheets for specific employees).

We are not satisfied that EE139 paid any identified worker on the basis of a six-hour working day in circumstances where EE139 had received a timesheet or other document recording that such person was working more hours.

By February 2014, EE139 had identified that there were significant deficiencies in its approach to the processing of expense claims. From the July 2014 Meeting, Officer McConnell made it clear that he was challenging the correctness of the position being taken by EE139, and the issues he was raising were those which have been pleaded by HMRC throughout (albeit that we recognise that the question of vehicle ownership, which was the factor used by HMRC to calculate the amount of the additional taxable income, was only raised in July 2015). Whilst that meeting was not immediately followed by assessments being issued to EE139, there was nothing said by Officer McConnell which could have led EE139 to conclude that the matters being identified, if they involved false claims being submitted and processed, would not be their responsibility.

There was a very slow response by EE139 to these challenges. We are not referring to the way in which the correspondence between Chartergates and HMRC was conducted, rather the way in which EE139 reacted to test the accuracy or otherwise of the points being made by Officer McConnell. Officer McConnell told EE139 at the first meeting that Client S said workers were working ten-hour days, yet there was no documentary evidence that EE139 raised this with Client S or the workers they used. This was against the background that:

EE139 thus had the means to find out more information about the matters which Officer McConnell was questioning – as to hours worked, vehicles used, and also more information about journeys. There would have been a risk that the responses they received were not completely clear (eg may not be sufficient to distinguish between distances travelled in circumstances where workers used their own vehicle for home to work but company vehicles for travel between the depot and sites), or may not have been completely accurate.

EE139 did seek to make some improvements to its processes. It corrected its treatment of holiday pay, and, from the beginning of 2016, treated payments of agency expenses as taxable income unless the employee had submitted receipts for expenditure incurred. However, where expense claims were spot-checked, EE139 focused on checking for receipts and allowable expenditure. They were very slow to grapple with the substance of the points Officer McConnell was making about mileage (in circumstances where payments of AMAPs represented the majority of expenses being paid) – even after October 2014, EE139 was processing claims with minimal information on distances, and whilst they did start to refuse claims that were submitted by email rather than on the Expense Claim Form, it is significant that there was no documentary evidence before us of any claim for AMAPs having been questioned by EE139 before it was processed either as to the number of miles claimed or ownership of the vehicle used.

The way the carry-forward of expenses worked meant that those balances comprised “excess” expenses which had been processed by EE139 (ie accepted as valid claims) but not paid out. The issues and problems identified by HMRC were effectively built-in to these amounts, but EE139 continued to pay them out throughout the Relevant Period without scrutinising the balances in the light of the concerns being identified by Officer McConnell.

We considered that the Appellants had not fully understood the responsibilities and obligations upon EE139 to ensure that it was operating payroll correctly (relying on the initial advice from Accountax, without challenging it or asking for detailed guidance). Whilst they were aware of the steps involved in calculation of basic pay, and the impact on this (and the resulting calculation of tax liability for each employee) of processing expense claims (including for large amounts), we were not satisfied that they fully considered the implications of the decisions which had been taken in 2009-2010 about setting up six hours per day as a default setting. This conclusion has affected our consideration of all the facts as found in relation to the matters which gave rise to inaccuracies in the Returns, and whether there was actual knowledge of them.

HMRC submitted that the growth in EE139’s business (with the resultant increase in its profit given that the margin received by EE139 was calculated as a percentage of amounts paid by clients) was an incentive on EE139 to understate hours and/or accept inflated expense claims such that its operating model was more attractive to potential clients and employees, and we have found that there was such a growth and increase in profits. However, this factor does not require this conclusion. We took this into account as a possibility but ultimately were not persuaded by HMRC’s submissions.

Whilst we have not accepted Mr Firth’s submission that HMRC can only satisfy the burden upon them by taking us to what is said to be each inaccuracy and establishing (to the required standard) that it was deliberate – which he submitted HMRC had not even sought to attempt given the number of the Returns and that most were not in the bundles before us – we have paid close attention to the information provided on the various Returns (at least, those that are before us) and the evidence relevant to whether or not EE139 knew that the figures set out in the various boxes were inaccurate for the purposes of Schedule 24. We consider that such an approach is required by the language of Schedule 24, which makes it clear that the conduct is not to be assessed in isolation but is intrinsically linked to what is said to be the relevant inaccuracy.

We have already set out that we are not satisfied that EE139 told employees to inflate expenses claims, or calculated taxable pay on the basis of six hours per day where they had timesheets showing that the relevant employee had worked more hours. We have thus focused on the appropriate inferences and conclusions to be drawn from the findings we have made.

Whilst we have identified areas of inaccuracies, we do not consider that our findings are sufficient to support a conclusion of actual knowledge of inaccuracies in any Return. We have found it straightforward to reach this conclusion in relation to the payment of non-allowable expenses and AMAPs (including those that became part of the carried-forward expenses). We have made findings relevant to the lack of checking, but that is very different from concluding that EE139 knew that the expenses which it was reimbursing, or AMAPs it was paying, were not allowable, or were invalid. We have found the position more difficult in relation to hours worked, and the payment of tax-free round sum agency expenses, but nevertheless we have concluded that HMRC have not established, on the basis of the facts as found, that EE139 had actual knowledge that any Return was inaccurate. In particular:

the principal focus of the Upper Tribunal in CPR Commercials was in setting out the boundaries to blind-eye knowledge by reference to the authorities, citing the factors laid out in Manifest Shipping:

The decision in CPR Commercials concerned whether the taxpayer had submitted VAT returns with deliberate inaccuracies and (in particular) whether the taxpayer knew it had insufficient evidence to zero-rate exports of goods. The Upper Tribunal in CPR Commercials did not accept that there had been blind-eye knowledge of an inaccuracy despite the following facts having been found by the Tribunal:

Accordingly, for blind-eye knowledge to be relevant in any case, there needs to be a specific allegation satisfying each of the elements identified by the Upper Tribunal. In the present case, a general allegation that EE139 took insufficient care or had inadequate regard for its compliance responsibilities (however unreasonably) is not the foundation for a case that there was a deliberate inaccuracy, let alone that all possible inaccuracies were deliberate.

The decision of the Upper Tribunal in CPR Commercials did not advance matters. HMRC had neither pleaded nor particularised a case of blind-eye knowledge such that the issue did not properly arise for consideration. Nothing in CPR Commercials allows HMRC to get around that failure. Furthermore, the legal propositions confirmed by the Upper Tribunal were in any event based on recent binding Court of Appeal authority.

The Upper Tribunal decision is useful in confirming that there is a difference between recklessness and blind-eye knowledge and that is illustrated by the facts of that case.

The Tribunal had concluded that the taxpayer was reckless in relation to the later periods that were assessed which, logically, means that the Tribunal concluded that the taxpayer was subjectively aware of at least a general risk that it did not hold sufficient evidence of export such that it would be inaccurate to zero-rate the supplies and, equally, did not take reasonable steps to avert the risk. Nevertheless, there was no finding (based on the evidence) of a deliberate decision by the taxpayer not to investigate whether it had obtained sufficient evidence of export because it wanted to avoid confirmation of its suspicion (targeted at specific facts) that the evidence held was insufficient. This is an essential element of a finding of blind-eye knowledge, in contrast to recklessness, and explains why the finding of recklessness did not lead to or justify a finding of blind-eye knowledge.

Not only was blind eye knowledge not pleaded (and particularised) in these appeals, but HMRC did not come close to proving that each of the elements of that test was satisfied in relation to EE139 or the individual Appellants.

CPR Commercials accords with their position in relation to the meaning of deliberate and the relevance of blind-eye knowledge as set out in their written closing, referring in particular to [23] of the Upper Tribunal decision.

Both Appellants had knowledge of the problems with their accounting systems and expenses processing, but nonetheless chose to continue submitting documents to HMRC without making checks of the expenses. This behaviour was deliberate because it involved an intention to mislead.

The factors identified by the Upper Tribunal which are required to make a finding of blind-eye knowledge (and which had been set out by Mr Ripley) are met in this case.

“[] The company’s clients and employees have provided documents to HMRC and identified systems which show that the company would have or should have known the actual hours worked by the employees. The company ignored these.

[] The company accepted mileage claims with little or no detail. Evidence from third parties has confirmed that the vast majority of workers did not perform their duties in their own vehicles.

[] The company selected an arbitrary 6 hours a day which when multiplied by the minimum hourly wage resulted in excessively low wages. Large false expense claims were then added to this sum to give a total figure which equated to the charge out rate. This was indicative of contrivance to re-categorise wages as payments for supposed expenses. In the circumstances the company must have known that its [Returns] were significantly wrong.”

The possibility of umbrella employees lying on their claim forms was raised at the outset by Ms Crowther in the meeting with Accountax in 2006. EE139 was thus aware that there was a risk that claims would be made for false or non-allowable expenses.

Whilst the spot-checking of claims was minimal, it was apparent from claims that were spot-checked that the claims for non-mileage related expenses would include non-allowable expenses.

We have made findings as to the knowledge of EE139 about hours worked by umbrella employees, which show that EE139 should have known that the default approach of calculating taxable pay based on six-hour days would not always be correct.

Some umbrella employees were claiming for high levels of mileage on a regular basis, in circumstances where EE139 did not have direct knowledge of their daily travel between sites and minimal information was provided by the employees making the claims. Some of the distances being claimed to be travelled were sufficiently high that they would take several hours per day.

The information that the Appellants were told by Officer McConnell about his discussions with clients should have raised concerns about the processes they were following (as regards hours worked and expenses claims, including AMAPs). This information was the only source of any suspicion as regards vehicle ownership – we have not found that EE139 otherwise knew that some clients were providing vehicles in circumstances where the employees were then claiming AMAPs.

As regards the suspicion, whilst there was more than a “vague feeling of unease”, we nevertheless conclude that it was not sufficiently targeted in the light of the nature of the inaccuracies in the Returns.

As regards the decision not to obtain confirmation of the facts, we conclude that from the beginning of the Relevant Period until around February 2014, any decision was simply based on EE139’s view that any deficiencies were not their problem or responsibility. They relied on the advice from Accountax (which was pertinent to expenses) and as regards any issues with hours, we consider that there was a failure on the part of the Appellants to understand the significance and implications of the approach which they were adopting. Their position was not reasonable; but that is not the test. Later in the Relevant Period, we consider that delays were a combination of lack of resources and a failure again to appreciate the importance of the points being made. This was not a case where the decision not to obtain additional information was to avoid being told facts which they had good reason to believe existed.

“3 Degrees of culpability

For the purposes of a penalty under paragraph 1, inaccuracy in a document given by P to HMRC is –

…

“deliberate but not concealed” if the inaccuracy is deliberate on P’s part but P does not make arrangements to conceal it, and

“deliberate and concealed” if the inaccuracy is deliberate on P’s part and P makes arrangements to conceal it (for example, by submitting false evidence in support of an inaccurate figure).”

Knowingly submitting the Returns which contained inaccuracies is deliberate behaviour and conceals the inaccuracies. EE139 operated a system which misrepresented remuneration as non-taxable expenses. This led to true employee hours and wages being concealed, leading to an understatement of liability to tax as EE139 did not pay the correct amount of PAYE properly due or NICs (at [14] of HMRC’s Skeleton)

In the context of their pleading of dishonesty, but which was also relied upon for concealment, (at [102] of HMRC’s Skeleton), HMRC submitted that EE139 operated a system which misrepresented remuneration as non-taxable expenses; this was concealment. Over a lengthy period EE139 operated a scheme of systemic concealment.

In their written closing, at [76], HMRC submitted that “Indeed, the fact that [EE139] continued to provide inaccurate information, and failed to implement changes to any systems such that inaccurate information was produced, is evidence of the concealment of the inaccuracy itself.”

to state that which is obvious, an inaccuracy may be deliberate but not concealed, ie submitting a return which is known to contain an inaccuracy which amounts to or leads to an understatement of tax with the intention that HMRC relies upon it constitutes deliberate behaviour; concealment requires something else; and

the example which is given of deliberate and concealed behaviour is of submitting false evidence in support of an inaccurate figure. This is only an example, but is one illustration of what the something else might involve.

For the first two years of the Relevant Period, EE139 was filing P35s and P14s. Those forms require an employer to declare the taxable pay (and the amount of PAYE deducted that is to be paid to HMRC). There is no box for declaration of the amount of non-taxable payments being made.

Once EE139 filed RTI returns, EE139 reported the taxable pay and amounts it was paying as non-taxable payments. Whilst we did not accept Ms Suttle’s attempt to argue in the course of her evidence that there was no inaccuracy (her position being based on the non-taxable payments declared to HMRC being a correct declaration of the amounts shown on Merit that were used for payroll purposes), the RTI returns were a straightforward and clear statement by EE139 of the payments it was making to employees.

There was no requirement that EE139 provide additional information at the time it submitted the Returns.

Once Officer McConnell started his investigation into EE139:

the factual position that records were being handed over which showed how expense claims were made (ie on the Expense Claim Forms and by email), illustrated the level of detail which was being provided by umbrella employees, and that payslips record taxable pay calculated at the NMW; and

Officer McConnell was speaking directly to various of EE139’s clients. He did refer to some, but not all, of what he was told by them when he met with and wrote to EE139, but did not provide the contemporaneous records to EE139 until November 2016. Whilst we have found that EE139 could have asked more questions, more quickly, of its clients, HMRC have not established that those clients had given the same information or explanations to EE139 by the time that EE139 was dealing with HMRC’s investigation and Officer McConnell’s questions.

telling HMRC about it,

giving HMRC reasonable help in quantifying the inaccuracy, the inaccuracy attributable to the supply of false information or withholding of information, or the under-assessment, and

allowing HMRC access to records for the purpose of ensuring that the inaccuracy, the inaccuracy attributable to the supply of false information or withholding of information, or the under-assessment is fully corrected.”

Telling us about it – 5% – Although EE139 has accepted that the employees may have worked more than six hours a day it states that any error was made in good faith. There has been no admission that EE139 knew that the expenses were wrong;

Helping us understand it – 10% – EE139 has not volunteered any information or actively worked with HMRC to quantify the inaccuracy. EE139 has yet to accept there is a liability. It has declared the non-taxable payments on RTI returns enabling HMRC to produce estimated determinations; and

Giving us access to records – 15% – The majority of the information and documents requested at the start of the enquiry were provided on time. EE139 has provided additional information during the review but has failed to produce evidence to substantiate the hours or expenses claimed.

The Appellants first met with HMRC when requested in July 2014, providing Officer McConnell with records in relation to his sample of employees, providing them for a three-month period when Officer McConnell identified that the snapshots initially provided were not sufficient for him to follow through the claims which were made into payslips.

They instructed Chartergates in relation to the investigation, who then provided some further explanations and records. The description of the communications demonstrates that there were various delays during the engagement with HMRC. Some of these delays were as a result of absences of Chartergates personnel, but the responsibility remained with EE139.

Looking at whether EE139 provided material to HMRC to enable them to quantify and assess the inaccuracy:

We will address the legal test first. The UT’s decision in Edwards made clear there was no reason to add any gloss to the phrase “special circumstances”. It endorsed the discussion of the interpretation of that phrase in Advanced Scaffolding (Bristol) Limited v HMRC [2018] UKFTT 0744 (TC) (at [72]- [74]) that:

“…The only restriction is that the circumstances must be “special”. Whether this is interpreted as being out of the ordinary, uncommon, exceptional, abnormal, unusual, peculiar or distinctive does not really take the debate any further. What matters is whether HMRC (or, where appropriate, the Tribunal) consider that the circumstances are sufficiently special that it is right to reduce the amount of the penalty.”

The UT also agreed that “special circumstances may or may not operate on the person involved but what is key is whether the circumstance is relevant to the issue under consideration”.”

…

Edwards ultimately confirmed that HMRC, and where appropriate the FTT, simply need to focus on the term used in the legislation. Beyond being relevant to the issue under consideration, the circumstances must be "special” – no more and no less. There is nothing special about the term “special”. Although the test HMRC used was expressed in different terms, we consider it reflected the substance of the applicable test. HMRC referred to the circumstances being “uncommon or exceptional”. Those terms, as pointed out by the FTT in Advanced Scaffolding, did not “really take the debate any further”. In other words those terms did not add anything; neither did they detract from the term “special”. In so far as HMRC referred, by reference to Hesketh, to the circumstances not being ones which amounted to a reasonable excuse, that was not relevant as HMRC had not accepted that any of the circumstances amounted to a reasonable excuse. To the extent HMRC had in mind the suggestion in Hesketh that to be special the circumstance had to render the penalty “…in whole or part significantly unfair and contrary to what Parliament must have intended when enacting the provisions” we would note that there is plainly a great deal of overlap between that and the circumstances which HMRC or the tribunal might consider to be special. The appellant does not identify in what respect this imposed a more stringent requirement.”

Claims were being submitted by umbrella employees, and that there was no submission that EE139 had fabricated claims. EE139 had been advised in 2009 that as employees were self-certifying, they (ie the employees) were the only ones who would be liable (we infer, for invalid claims). Yet EE139 had the ability to ask further questions, but did not do so. Further, EE139’s own approach to the calculation of taxable pay based on six hours per day was what provided scope for higher levels of expenses to be paid from the contract amounts.

Any understatements of tax (be it PAYE or NICs) had the effect of increasing the net pay of umbrella employees. However, save where it is alleged that an employment intermediary has been fraudulent, this is typically the fact pattern in respect of understatements of taxable pay by such intermediaries.

Mr Jaekel had previous experience of the payroll industry, was involved with training the office staff on expenses and met with clients, discussing their businesses with them; and

Ms Suttle was based in the office and supervised the processing of the expenses claims and payroll.

Ms Suttle and Mr Jaekel were the directors of EE139 throughout; they were thus officers of the company and potentially liable to a penalty under paragraph 19. We agree with the Appellants that it is not necessarily enough to say that where there is a penalty for deliberate behaviour then responsibility must sit entirely with the Appellants as directors.

Whilst Ms Suttle was primarily responsible for the office staff who processed the expenses and filed the Returns, Mr Jaekel was aware of the way in which expenses were processed.

They were both responsible as directors for the guidelines given to umbrella employees about claiming expenses, but also the guidance, or lack thereof, given to office staff about checking and processing expenses.

Both Appellants had relevant knowledge as to the hours worked. Both Appellants had the means of obtaining additional information from clients about the concerns identified by HMRC and did not do so.

Umbrella employees made claims for expenses to which they were not entitled to be paid as tax-free amounts. Those employees did thus receive a benefit from the claims they made (in their Expense Claim Forms or otherwise). These forms (or other documents forming their claims) were not themselves the Returns for the purpose of Schedule 24. Viewed in this light, the finding that employees made invalid expense claims, which were then acted upon by EE139, does not necessarily mean that the directors of EE139 should not be responsible for deliberate inaccuracies in the Returns – they are different documents, not all inaccuracies can be explained by reference to the claims made by employees (eg the approach to agency expenses), and there were failures of EE139 in the way it processed and paid claims which resulted in inaccuracies in the Returns.

We agree with the Appellants that paragraph 19 does not require that the amounts attributed to officers aggregate to 100% of the amount of the penalty which was issued to EE139.