Sharon Suttle v The Commissioners for HMRC

Section 97 and Schedule 24 FA 2007 (“Schedule 24”) introduced the relevant penalty regime. Section 97 states:

“97 Penalties for errors

(1)

Schedule 24 contains provisions imposing penalties on taxpayers who –

(a)

make errors in certain documents sent to HMRC, or

(b)

unreasonably fail to report errors in assessments by HMRC.”

Paragraph 1 of Schedule 24 states:

“1 Error in taxpayer’s document

(1)

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

(a)

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

(b)

Conditions 1 and 2 are satisfied.

(2)

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

(a)

an understatement of a liability to tax,

(b)

a false or inflated statement of a loss, or

(c)

a false or inflated claim to repayment of tax.

(3)

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

(4)

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

Documents listed in that table include any return for the purposes of the PAYE Regulations and any document which is likely to be relied upon by HMRC to determine, without further inquiry, a question about a person’s liability to tax.

Paragraph 1A provides:

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

(1)

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

(a)

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

(b)

the document contains a relevant inaccuracy, and

(c)

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.

(2)

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

(a)

an understatement of a liability to tax,

(b)

a false or inflated statement of a loss, or

(c)

a false or inflated claim to repayment of tax.

(3)

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.”

Paragraph 3 deals with degrees of culpability:

“3 Degrees of culpability

(1)

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

(a)

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

(b)

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

(c)

“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).

(2)

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 –

(a)

discovered the inaccuracy at some later time, and

(b)

did not take reasonable steps to inform HMRC.”

The amount of an inaccuracy penalty is then dealt with as follows:

“4

(1)

This paragraph sets out the penalty payable under paragraph 1.

(2)

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

(a)

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

(b)

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

(c)

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

…

(5)

Paragraph 4A explains the 3 categories of inaccuracy.

4A

(1)

An inaccuracy is in category 1 if –

(a)

it involves a domestic matter,…

(6)

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

(a)

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

(b)

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

…

5

(1)

“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.

(2)

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

(a)

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

(b)

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

…

6

(1)

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 –

(a)

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

(b)

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

(2)

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.

(3)

In sub-paragraph (2) –

(a)

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

(b)

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

(4)

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

(a)

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

(b)

careless understatements,

(c)

deliberate but not concealed understatements, and

(d)

deliberate and concealed understatements.

(5)

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).

…”

The provisions relating to reductions for disclosure, special circumstances, assessment and appeals were:

“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.

(1)

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

(a)

telling HMRC about it,

(b)

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

(c)

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.

(2)

Disclosure –

(a)

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

(b)

otherwise, is “prompted”.

(3)

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

10

(1)

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.

(2)

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

(a)

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

(b)

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

STANDARD %	MINIMUM % FOR PROMPTED DISCLOSURE	MINIMUM % FOR UNPROMPTED DISCLOSURE
30	15	0
45	22.5	0
60	30	0
70	35	20
105	52.5	30
140	70	40
100	50	30
150	75	45
200	100	60

11 Special reduction

(1)

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

(2)

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

(a)

ability to pay, or

(b)

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

(3)

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

(a)

staying a penalty, and

(b)

agreeing a compromise in relation to proceedings for a penalty.

…

13 Procedure – assessment

(1)

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

(a)

assess the penalty,

(b)

notify the person, and

(c)

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.

(2)

An assessment –

(a)

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),

(b)

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

(c)

may be combined with an assessment to tax.

(3)

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

(a)

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

(b)

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

(4)

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

(a)

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

(b)

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

(5)

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

(a)

an appeal could be brought, or

(b)

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

(6)

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.

(7)

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

(1)

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

(2)

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

...

16

(1)

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).

(2)

Sub-paragraph (1) does not apply –

(a)

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

(b)

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

17

(1)

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

(2)

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

(a)

affirm HMRC's decision, or

(b)

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

(3)

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

(a)

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

(b)

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)).

(6)

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

…”

Paragraph 19 sets out the circumstances in which officers of a company may be liable for a penalty which had been issued to a company:

“19 Companies: officers' liability

(1)

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.

(2)

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

(3)

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

(a)

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

(aa) a manager, and

(b)

a secretary.

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

(4)

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

(a)

a director,

(b)

a manager,

(c)

a secretary, and

(d)

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

(5)

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

(a)

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

(b)

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,

(c)

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

(d)

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),

(e)

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

(f)

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

(6)

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.

…”

The relevant provisions of the PAYE Regulations provide as follows:

“80 Determination of unpaid tax and appeal against determination

(1)

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 –

(a)

paid to the Inland Revenue, nor

(b)

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 –

(a)

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

(b)

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).

(2)

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

(3)

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.

(4)

A determination under this regulation may–

(a)

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

(b)

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 –

(i)

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

(ii)

one or more named employees specified in the notice.

(5)

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

(a)

the determination were an assessment, and

(b)

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

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

...”

The relevant provision of SSC Act 1999 provides as follows:

“8 Decisions by officers of Board

(1)

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

…

(c)

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, …”

The obligation to file the various returns is contained in Regulation 73 of the PAYE Regulations:

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

(1)

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

(2)

The information is –

(a)

the tax year to which the return relates,

(b)

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

(c)

the total net tax deducted in relation to those payments.

(3)

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

(4)

The supporting information is –

(a)

the employee's name,

(b)

the employee's address, if known,

(c)

either –

(i)

the employee's national insurance number, or

(ii)

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

(d)

the employee's code,

(e)

the tax year to which the return relates,

(f)

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

(g)

the total net tax deducted in relation to those payments.

(5)

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

(6)

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

(a)

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,

(b)

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

(c)

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

(d)

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

(7)

The return must include –

(a)

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

(b)

a certificate showing –

(i)

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

(ii)

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

during that tax year.

(8)

The statement and declaration and the certificate must be –

(a)

signed by the employer, or

(b)

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

With effect from 6 April 2012, Regulation 67B of the PAYE Regulations introduced a requirement for Real Time Information employers, before making a “relevant payment” to an employee, to deliver to HMRC the information specified in Schedule A1 thereof.

The obligations in these provisions relate to “relevant payments”. Regulation 4 provides that any reference to relevant payments means payments of, or on account of, “net PAYE income” (except certain specified payments). By virtue of Regulation 2, “net PAYE income” has the meaning given in Regulation 3, namely PAYE income less any allowable pension contributions and allowable donations to charity. PAYE income has the meaning given in s683 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”), which provides that PAYE income consists of PAYE employment income, PAYE pension income and PAYE social security income. PAYE employment income means income which consists of any taxable earnings from an employment in the year and any taxable specific income from an employment for the year.

ITEPA 2003 provides for “earnings-only exemptions” and “employment income exemptions”, preventing liability to tax arising in respect of certain specified payments.

One such exemption is for approved mileage allowance payments (“AMAPs”). The relevant provisions are:

“229 Mileage allowance payments

(1)

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

(2)

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)).

(3)

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).

(4)

Subsection (1) does not apply if –

(a)

the employee is a passenger in the vehicle, or

(b)

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

230 The approved amount for mileage allowance payments

(1)

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.

(2)

The rates applicable are as follows –

Kind of vehicle Rate per mile

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

25p after that

Motor cycle 24p

Cycle 20p

(3)

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

(1)

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

(a)

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

(b)

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.

(2)

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

(a)

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

(b)

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

(3)

Subsection (1) does not apply if –

(a)

the employee is a passenger in the vehicle, or

(b)

the vehicle is a company vehicle.

…

233 Passenger payments

(1)

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 –

(a)

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

(b)

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).

(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.

(3)

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.

(4)

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).

(5)

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

(1)

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 –

(a)

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

(b)

in respect of which passenger payments are made;

R is a rate of 5p per mile.

…

235 Vehicles to which this Chapter applies

(1)

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

(2)

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

(a)

a goods vehicle,

(b)

a motor cycle, or

(c)

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

(3)

“Van” means a mechanically propelled road vehicle which –

(a)

is a goods vehicle, and

(b)

has a design weight not exceeding 3,500 kilograms,

and which is not a motor cycle.

(4)

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

(5)

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

(6)

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

(1)

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).

(2)

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

(a)

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

(b)

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 –

(i)

section 120 (benefit of car treated as earnings),

(ii)

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

(iii)

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

(c)

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

(d)

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.

(3)

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).”

ITEPA 2003 then provides for deductions to be allowed from earnings. Section 333(1) provides that a deduction from a person’s earnings for an amount is allowed if the amount is paid to the person. Section 336 then provides:

“336 Deductions for expenses: the general rule

(1)

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

(a)

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

(b)

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

(2)

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

(3)

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

The parties did not agree as to the burden of proof or the issues to be determined by this Tribunal.

The PLNs were issued under paragraph 19 Schedule 24 and this involves consideration of:

HMRC had also pleaded that what they allege was the deliberate and concealed behaviour of EE139 was dishonest, and specified this as an issue to be determined. Mr Ripley and Mr Firth both denied dishonesty on behalf of the Appellants, but also took the position that this was not an issue to be determined in any event. We address this in the Discussion.

Whilst the issues as set out at [40] above are based on the requirements of paragraph 19, HMRC and the Appellants did not agree as to where the burden of proof lies (all acknowledging that the standard of proof throughout is the balance of probabilities) or the extent to which (if at all) issues (1) and (2) are open to be determined by this Tribunal. These matters are addressed at [46] to [97] below.

Ms Suttle’s and Mr Jaekel’s grounds of appeal are different; but they nevertheless both challenge HMRC’s position in relation to inaccuracies in the Returns, whether any inaccuracies were deliberate and concealed, the calculation of the penalty including the credit given for the co-operation provided by EE139 and how much, if any, of the penalty is attributable to each of them:

Paragraph 15 of Schedule 24 sets out the powers of the Tribunal in a matter where, as here, the Appellants have appealed against both whether a penalty is payable and the amount of the penalty. We have an appellate jurisdiction in this regard, save in respect of considering whether there are special circumstances. We make this point as Ms Suttle and Mr Jaekel have both criticised the investigation undertaken by Officer McConnell in different respects. We do consider the process of that investigation so far as we consider it is relevant to making findings of fact and the calculation (and mitigation) of the penalty; but we do not address the reasonableness of the decision-making process.

We had the benefit of skeleton arguments from all parties ahead of the hearing, oral submissions during the hearing, written closing submissions from all parties and, following a request by the Tribunal, further written submissions from all parties in July 2023. We found all of these submissions to be very helpful (and record our thanks to all counsel instructed in these appeals) and have taken them all into account in reaching our decision, but have not found it necessary to refer to all matters raised in those submissions.

The administrators of EE139 did not appeal against the Assessments to the Tribunal. The administrators did appeal against the penalty, on 23 February 2017, but that appeal was later withdrawn.

HMRC submitted that for the Appellants to re-litigate EE139’s liability in these appeals is an abuse of the Tribunal’s process which should not be permitted. It was HMRC’s position that this applied to the amount of the Assessments and the penalty which had been issued to EE139. This therefore included the fact of the inaccuracies in the Returns and also that the behaviour was deliberate and concealed (as that was the basis on which the penalty had been issued to EE139). HMRC drew attention to the following:

The Appellants disagreed, submitting that there was no abuse of process:

All parties agreed that Article 6 of the European Convention on Human Rights (“ECHR”) applies to these proceedings as the PLNs amount to criminal penalties for these purposes and that the doctrine of abuse of process applies to proceedings before the Tribunal.

Article 6 ECHR provides as follows:

“(1)

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.

(2)

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

(3)

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

(a)

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

(b)

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

(c)

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;

(d)

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;

(e)

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

The doctrine of abuse of process has been considered extensively in the authorities, and we gratefully adopt the exposition by Judge Berner in Hackett v HMRC [2016] UKFTT 781 (TC):

“33.

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.””

The authorities to which we were taken by the parties included Hackett and Galvin v HMRC [2016] UKFTT 577 (TC).

In Galvin, HMRC had issued assessments to Reddrock Ltd (“Reddrock”), a company of which Mr Galvin was the sole director. Reddrock had appealed to the Tribunal, but the Tribunal had dismissed the appeal, and the Tribunal’s findings included that Mr Galvin was an unsatisfactory and unreliable witness. HMRC then issued a penalty to Reddrock and also apportioned the penalty to Mr Galvin (under s61 Value Added Tax Act 1994) as its director. Mr Galvin and Reddrock appealed. Both appeals were struck out for failure to comply with Tribunal directions. Reddrock went into liquidation, and Mr Galvin applied for his appeal to be reinstated.

The Tribunal refused to reinstate the appeal. The Tribunal followed the approach in Denton v TH White Ltd [2014] EWCA Civ 1537 in refusing the application, considering the seriousness and significance of Mr Galvin’s failure to comply with directions, the reason for the default and all the circumstances of the case. The Judge recognised that the imposition of penalties were criminal proceedings for the purposes of Article 6 ECHR. The Tribunal had made findings of fraud or dishonesty in Reddrock’s appeal. The Judge concluded that it did not make any difference that it was Reddrock (and not Mr Galvin) that was party to the original appeal – he was the sole director and entered into each of the transactions in question. Any fraud perpetrated by Reddrock could only have been undertaken by and through Mr Galvin.

In Hackett, Mr Hackett was the sole director of Intekx Ltd (“Intekx”). HMRC had denied repayment of input VAT of £12 million in various decisions, some on the basis of MTIC fraud, others on the basis of failure to provide accounting records to substantiate the input tax claimed, and Intekx appealed against those decisions to the Tribunal. Some of the MTIC appeals were heard by the Tribunal and were dismissed. The appeal against the remaining MTIC decisions was withdrawn by Intekx, as was its appeal against denials on the basis of failure to provide accounting records. HMRC issued a deliberate inaccuracy penalty assessment to Intekx and a PLN to Mr Hackett. Mr Hackett appealed the PLN.

HMRC had applied for the appeal against the PLN to be struck out, on the basis that Mr Hackett was seeking to re-litigate issues which they said were determined by the decision of the Tribunal in Intekx’s first appeal and its withdrawal of the other two appeals, and that to permit him to do so would be an abuse of process.

The Tribunal refused:

Whilst the circumstances which have previously been considered by other compositions of this Tribunal are very fact-specific, we adopt the approach taken by Judge Berner in Hackett – where he had regard, in relation to the company’s appeal, to whether there was a hearing of the substantive appeal, offering the director the ability to give evidence, and still recognised that other circumstances may be relevant to justify the director having the right to pursue an appeal of those same issues, contrasting this with a situation where there had been no determination by the Tribunal – and consider the facts and circumstances before us in these appeals.

The facts and circumstances in these appeals include:

Taking account of all of the relevant facts and circumstances, we have concluded that it is not an abuse of process for all of the facts and issues relevant to the validity and amount of the PLNs to be determined by us. Whilst HMRC’s submissions as to abuse of process were framed in terms of EE139’s liability being re-litigated, there has been no substantive hearing of any of these matters before an independent tribunal (in respect of the liability of EE139 or the Appellants), and the fact that the administrators of EE139 conducted a review before deciding how to proceed in respect of EE139’s liability to HMRC is not a basis for concluding that the Appellants should be denied such a hearing. Whilst we recognise that the review involved a sample of 35 employees and reached a conclusion that there were significant inaccuracies, that review was conducted without hearing detailed evidence from the Appellants on which they could be cross-examined. In short, we have concluded that the review by the administrators cannot serve as an adequate substitute for a hearing by an independent tribunal.

Furthermore, we consider that the administrators were primarily concerned with HMRC’s decisions on whether there were inaccuracies in the Returns and the Assessments which had been issued, whereas before us HMRC sought to contend not only that the inaccuracies should not be “re-litigated” but also that HMRC’s conclusion that the behaviour was deliberate and concealed (this being the basis on which the penalties were issued to EE139) should be final. The administrators had not expressed any conclusions on whether the behaviour was deliberate; and this reinforces our conclusion that it is not an abuse of process for this issue to be argued before us and determined by us.

We have concluded that the Appellants can challenge whether there were inaccuracies in the Returns that amounted to, or led to, an understatement of liability to tax and whether such inaccuracies were deliberate (or deliberate and concealed).

HMRC had served a Statement of Case in respect of the appeal by each Appellant – initially on 11 May 2018 and then an amended version (again, for each Appellant) on 17 February 2021 (these amended Statements of Case being, together, the “SoCs”). In those SoCs, HMRC had accepted that they bear the burden of proof in respect of all of the issues in these appeals. HMRC’s position was set out as being (at [44] and [50] for Ms Suttle and Mr Jaekel respectively):

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

(1)

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;

(2)

That such inaccuracies were deliberate and concealed;

(3)

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

(4)

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

HMRC’s Skeleton for these appeals was served on 21 November 2022, and was a combined skeleton dealing with both appeals. That document repeated the above at [10] (with some additional details and an additional pleading (if considered relevant) of dishonesty), and reiterated this burden at [12] thereof. HMRC’s Skeleton then set out HMRC’s position on abuse of process and then stated:

“28.

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].”

There was nothing further in HMRC’s Skeleton on this point.

The Appellants served their (separate) skeleton arguments on 28 November 2022. Mr Ripley and Mr Firth both submitted that, having accepted the burden of proof throughout the course of this appeal, it was now far too late for HMRC to seek to resile from this by reference to this decision in HMRC v Zaman [2022] UKUT 252 (TCC). Their submissions included that the Appellants had prepared for the hearing on the basis that HMRC would discharge the evidential burden that it had accepted, HMRC were using the size of the adjustments made in Assessments as support for treating the inaccuracies as deliberate, which is an issue in relation to which HMRC still accept that they bear the burden, and, in contrast to the position stated by HMRC at [28] in HMRC’s Skeleton, the Appellants are not seeking to litigate the underlying Assessments issued to EE139, they are appealing the issue and the amount of the PLN.

We heard oral submissions from all parties on the question of the burden of proof, the potential significance of the decision in Zaman and the timing of this issue being raised by HMRC at the beginning of the hearing. All parties addressed this again in their closing submissions (written and oral). None of the parties made any application (either formally described as such or otherwise) for the hearing to be adjourned for further submissions or further evidence. We have taken account of all of the submissions made, but the approach taken by counsel may be summarised as follows:

The SoCs and HMRC’s Skeleton do refer to HMRC having reduced the penalty in accordance with paragraph 9 of Schedule 24 to reflect HMRC’s view of the quality of the disclosure. The level of this reduction was not listed as one of the issues to be determined in the context of HMRC’s position on the burden of proof. It is clear from the grounds of appeal of both Appellants that they take the position that a greater reduction should have been applied, and their submissions recognised that the Appellants bear the burden of proof on this matter. That the Appellants bear this burden was not in dispute between the parties, and is unaffected by the discussion which follows.

HMRC had not made an application to amend their SoCs, but when assessing whether HMRC has changed its pleaded case and whether to permit such a change, we have approached the matter as if HMRC’s Skeleton had included such an application, ie applied to rely on [28] of HMRC’s Skeleton.

The Tribunal has power to allow the making of such an amendment by rule 5 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the “Tribunal Rules”). Rule 5 provides:

“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.

(2)

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.

(3)

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

(a)

…

(c)

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

Under rule 2(3) of the Tribunal Rules the Tribunal must, when exercising any power under the rules, “seek to give effect to the overriding objective” to deal with cases “fairly and justly”. Rule 2(2) provides that so dealing includes:

“(b)

avoiding unnecessary formality and seeking flexibility in the proceedings,

(c)

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

Rule 25 provides that HMRC must deliver a statement of case which sets out the legislative provisions under which an appealed decision was made and their position in relation to the case.

The principles to be applied in considering an application to amend were summarised by Carr J in Quah Su-Ling v Goldman Sachs International [2015] EWHC 759 (Comm) as follows:

“36.

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.

37.

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.

37.

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.”

These principles apply equally to an application by HMRC to amend its statement of case. The Upper Tribunal has considered this scenario more recently in HMRC v Ritchie [2019] UKUT 71 (TCC), where one of the grounds of appeal was whether the Tribunal had erred in its conclusion because of the way it dealt with the carelessness issue, and whether HMRC had pleaded that two advisers to the taxpayers were careless and acting on the taxpayers’ behalf. The Upper Tribunal cited the relevant provisions of the Tribunal Rules and then continued:

“36.

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."

37.

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.

38.

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.

39.

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.

40.

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.

41.

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.

42.

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.

43.

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.”

These authorities thus set out the principles which we should consider when exercising our discretion, emphasising a range of factors including the prospects of success, fairness and prejudice, timing, and the public interest in taxpayers paying the right amount of tax. They also clearly envisage that there may well be circumstances where it is simply too late for a point to be raised. From the context, we consider this must apply to arguments which may, on closer analysis, prove to be very good arguments.

We were mindful from the outset that the position being put by HMRC does not involve the making of a new argument about the expenses (eg that some of the employees were office staff working in EE139’s offices, with a permanent workplace and not entitled to claim reimbursement for home-to-work travel), but about the burden of proof which forms the very basis for this Tribunal’s fact-finding. We have some concern about approaching this issue as a question of whether to exercise judicial discretion such that we could be proceeding on a basis which is simply wrong in law. Against this, we recognise that in Zaman the appeal was remitted by the Upper Tribunal to the Tribunal to re-make the relevant findings of fact, self-evidently after the hearing, in circumstances where the extent to which the issue had been canvassed before or at the time of the first hearing was not clear. Nevertheless, we have considerable sympathy with the position as put on behalf of the Appellants that they had relied on HMRC having accepted the burden of proof and we should not be required to abandon principles of procedural fairness when dealing with new authorities.

To seek to address this concern, and crucially to decide how to proceed in these appeals, we have considered the underlying legal issue (ie the significance of Zaman, and what it means), which itself involves consideration of the authorities on which the Upper Tribunal relied, and the timing of HMRC’s application in the light of all surrounding information about these appeals. We deal with the latter point first.

We have set out how this issue arose at [63] to [66] above. As to this:

We accept 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. One area where (we accept) this has affected the approach taken by the Appellants is in relation to the calling of witnesses. As discussed further below (under Evidence), both Appellants gave evidence as witnesses, as did a former employee of EE139 (a member of the office staff rather than an umbrella employee). None of the parties called evidence from clients of EE139 or umbrella employees whose expense claims and pay were (indirectly) within the subject-matter of these appeals. HMRC criticised this approach of the Appellants, inviting the Tribunal to draw adverse inferences from the absence of such witnesses, whereas Mr Firth submitted it was open to HMRC to have called such witnesses if it wished to rely on their evidence. We consider that this choice of witnesses was a clear illustration of one way in which the Appellants have prepared for this hearing in reliance on HMRC needing to prove its case.

We now turn to the decision of the Upper Tribunal in Zaman.

Zaman also concerned an appeal against a PLN which had been issued to Mr Zaman following an assessment being issued to Zamco Limited (“Zamco”) (of which Mr Zaman was the sole director) in respect of under-declared VAT. The assessment was issued on the basis that Zamco’s supplies of alcohol took place in the UK and were therefore subject to VAT. The Upper Tribunal recorded the agreed issues before the Tribunal as having included whether Zamco’s VAT returns in the relevant period contained inaccuracies, which itself turned on whether all Zamco’s supplies were in the UK for the VAT purposes (at [6]). The Tribunal had concluded that it had not been proven that the goods were removed to the UK and so it was not proved that the place of supply was the UK – and given the burden of proof on HMRC this meant that they had to allow the appeal.

Permission to appeal was granted on two grounds, one of which was whether the Tribunal erred in its approach to the burden of proof because it held that the burden rested solely with HMRC. It is not clear from the Upper Tribunal’s decision, or from the decision of the Tribunal (at Zaman v HMRC [2021] UKFTT 228 (TC)), how HMRC had presented its case on burden of proof to the Tribunal (either in its written pleadings or at the hearing).

The Upper Tribunal approached its decision as follows:

This decision does not contain additional guidance on what needs to be shown in order to establish whether a PLN is validly issued. The Upper Tribunal does clearly reference at [23] that the “sole ground” of challenge to the PLN in that appeal was that the underlying assessment (which had been issued to Zamco) was wrong. The Upper Tribunal did not set out the legislation imposing the penalties or PLN, but does reference at [4] that the penalty had been imposed under paragraph 1 of Schedule 24, ie the same provision as that relied upon by HMRC for the penalty issued to EE139.

We also considered the authorities to which the Upper Tribunal had referred in Zaman, to assess the timing of HMRC’s reliance upon that decision before us – those authorities would also be binding upon us, and the judgments were several years old – and to gain a fuller understanding of the relevant issues.

Award Drinks and Brady concerned appeals against assessments to tax (VAT and direct tax respectively) and accordingly do not address the consequences for the burden of proof in a penalty appeal of a challenge to the underlying assessments. We did not find them of particular assistance in the light of the issue before us.

Khan did include an appeal against penalties – Mr Khan had appealed against a decision to register him compulsorily for VAT, an assessment to VAT of £20,793 and a penalty of £12,759, which had been calculated by reference to the amount of the VAT assessed (with mitigation allowed). Penalties had been imposed under s60 Value Added Tax Act 1994 (“VAT Act 1994”), which provided:

“(1)

In any case where −

(a)

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

(b)

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

…

(7)

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

There could thus be no dispute that Customs bore the burden of proving both that Mr Khan had acted or omitted to act for the purpose of evading VAT, and that his conduct involved dishonesty. Mr Young (representing Mr Khan) submitted before the Court of Appeal that the Tribunal had failed to appreciate that the burden of proof was on Customs to show that the VAT threshold had been exceeded and, for the purposes of the penalty calculation, that the best of judgment assessment (by reference to which the penalty was calculated) was correct.

Hart J had accepted that the burden lay on Customs to show that the VAT threshold had been exceeded, but regarded the point as academic in that appeal, referring to the fact that Mr Khan had chosen not to adduce evidence himself. Hart J said that in practice Customs both assumed and discharged the burden of showing Mr Khan had been trading above the VAT threshold.

Counsel for Customs conceded that the burden lay on them to show that Mr Khan had exceeded the VAT registration threshold and to establish the quantum of tax evaded, and agreed with Hart J that “in a case such as this, where the tribunal is also considering the quantum of the assessment to which the penalty is referable, the effect of that burden is likely to be academic”.

Carnwath LJ, in a judgment with which Lloyd LJ and Buxton LJ agreed, stated at [68] that he found some difficulty with that analysis and was reluctant to allow the judgment to rest on concessions, whilst acknowledging that the issues may not have been fully argued. He referred to the well-established principle that on an appeal against a “best of judgment” assessment, the burden lies on the taxpayer to establish the correct amount of tax due. He added that this burden does not change merely because of allegations of fraud (citing Brady). Carnwath LJ stated the general principle at [70] that when a statute gives a right of appeal against enforcement action taken by a public authority, the burden of establishing the grounds of appeal lies on the person appealing. At [71] Carnwath LJ referred to the principle that the burden of establishing the grounds of appeal lies on the person appealing as also being well-established in other statutory contexts, particularly where the facts are peculiarly within the knowledge of the person appealing. At [73] he stated that the ordinary presumption is that it is for the appellant to prove his case, and that this is the correct starting-point for all categories of appeals in that case, including the appeal against the civil penalty, except where the statute has expressly or impliedly provided otherwise. Then, “as to the precise calculation of the amount of tax due, in my view, the burden rests on the appellant for all purposes", and continued:

“[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 Court of Appeal in Khan thus clearly concluded that, in an appeal against VAT penalties imposed under s60 VAT Act 1994, the burden was on the appellant as regards the calculation of the amount of tax due, and explained the considerations reinforcing this conclusion, albeit acknowledging that the concession by Customs meant the point had not been fully argued before them.

As a matter of principle, we would see no reason to differentiate between the position for VAT and for direct taxes. However, we recognise that there is a difference in the drafting of the penalty provisions at issue, namely between the approach in s60 in Khan (which refers to actions taken by a person in general terms) and that in Schedule 24 in Zaman and these appeals (which is based on whether there is a relevant inaccuracy in a document and the categorisation of that inaccuracy). We refer to this further below. Nevertheless, whilst HMRC rely on Zaman for their submissions as to burden of proof, and could not have referred to Zaman in the SoCs, it was open to them to express the principle as set out at [28] of HMRC’s Skeleton by reference to the decision of the Court of Appeal in Khan. That is not to say that HMRC’s pleadings would have been agreed in this respect; rather that they could have made it clear that this was part of their case. Conversely, it is not the case that this amendment to HMRC’s pleadings in these appeals has no real prospect of success – HMRC are relying on recent Upper Tribunal authority, addressing the imposition of a PLN, and such a decision is binding upon this Tribunal albeit that its ratio would need to be ascertained in light of the grounds of appeal in that case and its reliance on Court of Appeal authority based on a different statutory provision.

Considering how to proceed in the present appeals:

In the light of all of the facts and circumstances, we have decided it is not in accordance with the overriding objective to permit HMRC to introduce in HMRC’s Skeleton a different approach to the burden of proof to that which had been maintained in the SoCs; and that [28] of HMRC’s Skeleton is such a different approach (notwithstanding our identification of a potential “leap” within the pleadings) on the basis that HMRC had not previously referred to the Appellants as bearing the burden of proof on any issue.

We add the following, primarily in case this is relevant on any appeal:

In the light of all of the above, the approach we adopt in this decision is as follows (and we set this out here to make it completely clear in the event of an appeal):

We had witness statements from Ms Suttle, Mr Jaekel, Alexandra Robson (a former employee of EE139), Officer McConnell (who had conducted the investigation into EE139, and issued the various decisions and penalties) and Officer Mark Carbery. Officer McConnell has retired from HMRC and did not attend the hearing to be cross-examined on his witness statements. Officer Carbery had adopted Officer McConnell’s witness statement, and did give evidence. There were extensive exhibits and additional documents in the hearing bundles to which we were taken by the parties.

We heard evidence from Ms Suttle, Mr Jaekel, Ms Robson and Officer Carbery. The parties made submissions as to the reliability of that evidence, which we consider below. There are three additional evidential matters on which we heard submissions which are also addressed below, namely the admissibility of, or weight to be placed on, matters of opinion, whether adverse inferences should be drawn from the absence of witness evidence from others, namely end clients and former employees of EE139, and the weight to be placed on the witness statements of Officer McConnell.

By way of overview of the evidence given by the Appellants:

Our conclusions as to the reliability of Ms Suttle’s evidence were somewhat mixed. There were areas (eg the background to the establishment of EE139, its client base, their initial approach to processing of expenses claims) where we considered that her evidence was reliable; it was supported by some documentation and other witness evidence. Ms Suttle did acknowledge some areas where mistakes had been made and compliance was deficient, eg where holiday pay had been treated as non-taxable, and where further information was not requested or required in relation to some mileage claims. As noted above, her evidence as to Mr Jaekel’s role was broadly consistent with his explanations, a factor which supports the reliability of her evidence (as well as that of Mr Jaekel, addressed separately below).

However, there were some matters where we were not satisfied as to the accuracy of her evidence, eg the steps taken by EE139 to verify vehicle ownership with end clients (referring to a questionnaire, which was not produced, nor any emails to clients in relation to this), changes which were made to the expense claim forms in the light of HMRC’s investigation (where there were no examples of such forms, and the bundle showed that even in mid-2016 employees were still using the “old” form). In these areas the conclusion we reached was that Ms Suttle was describing what had happened over a period of time, which extended beyond the Relevant Period and was sometimes vague as to the timing of particular events. One difficulty which pervades the evidence of Ms Suttle relates to the various expense claim forms and payslips relied upon by HMRC – these were from several years ago (most of those to which we were taken were from 2014, although there were many from 2016 as well), Ms Suttle had not reviewed or processed them herself at the time, and was thus seeking to explain (sometimes by reference to screenshots from Merit) what would or could have happened, or if some claims would have been rejected, without clear documentary records to assist (eg an email informing the employee that a claim had been rejected). This means that we have approached with caution assertions as to what would have happened, as we were not satisfied that this would have been within Ms Suttle’s own knowledge and she was in part putting to us her own conclusions based on the documents that were before us. This is far from saying that we reject her evidence; we do not, we generally found her to be a credible witness, doing her best to assist the Tribunal.

We have already referred to Mr Jaekel’s evidence as being much less detailed. Mr Jaekel was not able to answer questions about specific employees, particular expense claims or payslips. That is understandable. Mr Jaekel also refused to speculate where he did not know the answer to questions put to him by Ms Goldring. Again, that is understandable. The difficulty we have is that we considered there were some key areas where we would have expected Mr Jaekel to be able to provide clear, specific evidence, in particular in relation to the actions taken by EE139 in response to concerns identified by Officer McConnell in the context of expenses claimed by employees working for a few key clients, but he did not do so. Mr Jaekel’s own evidence was that he sought to develop relationships and understand these clients’ business activities; he travelled to meet with them; he had contacts there (and these were often owner-managed businesses, with only a handful of their own staff) and he was well-placed to obtain information from them. However, having regard to all of the evidence before us we concluded that this is not a criticism of the reliability of his evidence, or its accuracy, rather it is a conclusion as to the fact that questions were not asked and actions were not taken by him at the time (which is potentially relevant to whether any inaccuracies were deliberate).

Ms Robson had joined EE139 in February 2007 as a part-time administrative assistant – she was 16 at the time, and worked about four hours per week. In around 2010 her hours increased to 26 hours per week, and whilst Ms Suttle was on maternity leave (in 2010-2011) Ms Robson was responsible for processing payroll and expenses. She became team leader by around 2012. Ms Robson’s evidence mainly addressed the training given to office staff and the processing of expense claims. We accept that her evidence was given honestly, to the best of her recollection. There were some areas where her evidence was not consistent with that of Ms Suttle, in particular in relation to the status of expenses shown on the Merit software (as to whether the line items had been processed and accepted as valid claims). We address this in the context of making our findings of fact on expense claims and processes.

Officer Carbery has been employed by HMRC since May 1991, and has worked as a compliance investigator since February 2015. His witness statement states that prior to the PLNs being issued he had been aware of the case, being a member of the same team as Officer McConnell. However, he had not been involved in any aspect of the decision-making process. Once Officer McConnell retired, Officer Carbery acted as a liaison between Solicitor’s Office and the Fraud Investigation Service, giving instructions when required, and assisted with enabling Officer McConnell to prepare his witness evidence, eg by facilitating his return to the office. He goes on to state that he had conducted a thorough review of Officer McConnell’s witness statements and exhibits and was content to adopt them as his own, with one exception. The exception is that he had identified that one of the exhibits was not that which had been intended (and duplicated another exhibit) and provided the intended exhibit.

Officer Carbery’s witness statement was thus short and clear. Giving evidence at the hearing, Officer Carbery expanded upon this as follows:

We accept that Officer Carbery was an honest witness, seeking to assist the Tribunal. We also accept that, in preparing his own witness statement and to be in a position to adopt the witness statements of Officer McConnell, he had conducted a thorough review of those witness statements and exhibits. Nevertheless, he was not able to add anything to the evidence set out in Officer McConnell’s witness statements.

It is clear from rule 15(2) of the Tribunal Rules that this Tribunal may admit evidence whether or not the evidence would be admissible in a civil trial in the UK. That includes evidence of opinion, and also hearsay evidence.

The submissions from the parties on opinion evidence focused in particular on two parts of the evidence, namely the witness statements of Officer McConnell which included his opinions and the conclusions reached by the administrators of EE139 (and their advisers) as to whether or not to pursue appeals against the assessments and penalties issued to EE139, which were set out in the letter dated 2 October 2017 from Armstrong Watson to the administrators.

The simple point to our mind is that this evidence of opinion is admissible, but we need to consider the weight (if any) to be placed upon it. In the present appeals, we did not hear directly from Officer McConnell or from those at Armstrong Watson who gave advice to the administrators, the latter of whom were not expert witnesses to this Tribunal (or indeed witnesses at all). We place no weight on these opinions when making our findings of fact.

The documentary evidence before us included communications between Officer McConnell and four clients of EE139 (meeting notes, notes of phone calls and email exchanges) and copies of some expense claims submitted by employees of EE139 and some correspondence between EE139 and those employees (as well as vast amounts of other material). All parties drew attention to the fact that there was no witness evidence from any client of EE139 or from employees of EE139 who had claimed expenses during the Relevant Period (Ms Robson being a member of the office staff).

HMRC invited us to draw adverse inferences from the absence of such evidence. HMRC’s position was that Ms Suttle and Mr Jaekel have sought to suggest that the evidence of meeting notes and conversations exhibited by HMRC cannot be relied upon and/or are open to a different interpretation. HMRC submit that such evidence is clear on its face in terms of both hours worked by employees and also the provision of vehicles. Ms Suttle and Mr Jaekel have not sought to call live witness evidence from the end clients to support their assertions that this evidence is unreliable or bears a different meaning to that obvious on its face. Other than Ms Robson, they have not sought to call any other employees who could give evidence about Merit, and the processing of timesheets and expenses generally. This is despite the obvious relevance of the evidence that any of those other individuals might give. HMRC invited the Tribunal to draw adverse inferences from Ms Suttle and Mr Jaekel’s failure to call anyone involved in the way in which the claims were processed, other than Ms Robson, or who could have spoken about issues in dispute in line with the ordinary principles for so doing. HMRC then referred to the relevant principles as being set out in Lord Sumption’s speech in the Supreme Court in Prest v Prest [2013] 2 AC 415 at [44], and in Wisniewski v Central Manchester Health Authority [1998] PIQR P324. Morgan J has summarised the principles in British Airways PLC v Airways Pension Scheme Trustee Ltd [2017] EWHC 1191 (Ch) at [141-143] (which we set out below).

HMRC then put it as follows in their written closing:

“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.”

Mr Ripley and Mr Firth were also critical of the evidence before us, observing:

The relevant principles were summarised by Morgan J in British Airways as follows:

“141.

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:

(1)

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.

(2)

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.

(3)

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.

(4)

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."

142.

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].

143.

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:

(1)

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

(2)

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

(3)

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?

(4)

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

(5)

what inference should I draw?”

We start from the position that clients and former employees of EE139 would be able to give relevant, material, evidence in relation to various of the issues before us – including as to ownership of vehicles, distances travelled in fact, hours worked and use of timesheets. We understood this to be common ground between the parties, but we so find in any event.

Mr Ripley and Mr Firth, whilst critical of the absence of this evidence, did not invite us to draw specific inferences, rather their submissions went to HMRC not having established the facts on which they seek to rely. HMRC did, however, invite us to draw adverse inferences, and did, in somewhat general terms, suggest the inferences they wished us to draw.

We have considered the principles as set out by Morgan J, and refuse to draw any adverse inferences. Whilst we recognise that the documentary evidence before us does provide some support for the suggested inferences (although we put it no higher than that and consider the documentary evidence very carefully in its entirety when making our findings of fact), we are completely satisfied by the reason for the Appellants’ failure to call evidence from these potential witnesses, namely that they do not rely on the matters set out, and they had approached the hearing of the appeals on the basis that it is for HMRC to prove its case. We accept it would have been open for the Appellants to choose to call these witnesses; they had decided not to do so. That was a choice that was open to them.

We do have the various documentary evidence in relation to the communications with end clients and the expenses claimed. We have had regard to that evidence when making our findings of fact, assessing it carefully in the light of all of the evidence available to us.

Officer McConnell had sworn two witness statements, which detailed his investigation, the sampling of expense claims, communications with EE139 and four clients, and setting out his conclusions. Those witness statements exhibited a significant amount of documentation to which he had referred.

Officer McConnell did not attend the hearing and was not available to be cross-examined on his evidence. The witness statements were admitted in evidence. We have considered them in detail and take the following position:

Taking account of these matters, we consider that the witness statements themselves are hearsay evidence and we have discretion as to the weight which we attach to them. When making our findings of fact we have paid careful attention to the documents exhibited by Officer McConnell and our interpretation thereof. We have assessed this evidence by reference also to the evidence given by Ms Suttle, and in particular her evidence in relation to Officer McConnell’s exhibits and to the documents which she had exhibited.

We have made findings of fact below in relation to:

We refer throughout to the Appellants by name (or as the Appellants), and have identified Ms Robson, Mr Hulin and some office staff. We have also named some of the clients of EE139, but refer to the four clients who provided information to Officer McConnell as Clients S, P, N and D; we also refer to G, which is connected to Client D. We have referred to umbrella employees whose expenses or payslips were before us by their initials and by reference to the client to whom their services were supplied.

EE139 was incorporated on 15 November 2006, with two issued shares, one each held by Ms Suttle and Mr Jaekel. Ms Suttle and Mr Jaekel were appointed as directors on 12 December 2008. They were the directors throughout the Relevant Period. There was an informal understanding that a third person, Mark Hulin, would receive a one-third share of the profits; this was later formalised and from 15 November 2015, Mr Hulin became a shareholder, such that Ms Suttle, Mr Jaekel and Mr Hulin each owned one-third of the shares in EE139.

The background to the establishment of EE139 was:

EE139 was initially intended to operate as a composite payroll company, pursuant to which employees would receive a basic salary and dividend payments. The introduction of the managed service companies legislation meant that this was no longer commercially viable. Instead, they re-structured to provide different payroll services – umbrella, construction industry scheme (“CIS”) arrangements and PAYE (for employees who had no or minimal expenses). EE139 has provided all these services at different times, although from 2012 workers who would not need to claim expenses were generally employed by Earn Extra PAYE Ltd and later CIS workers were generally engaged by EECIS.

There were a relatively small number of employees working for EE139 itself, rather than being provided to clients. We have referred to these employees as office staff, but do not use this term to describe either of the Appellants:

Whilst Ms Suttle’s role changed over the years, she was always based in the office. Initially, Ms Suttle registered employees (and the employees who provided their services to EE139’s clients are generally referred to in the Findings of Fact and Discussion as “workers” or “umbrella employees”) on EE139’s system, received the worksheets from clients, and claims from umbrella employees and was responsible for processing them. As EE139 started to recruit office staff (during the period from 2007-2009), she became less involved in the day-to-day processing tasks, but was responsible for managing the small team of office staff and was present in the office and available if questions arose. Once Ms Suttle had returned from maternity leave, her role continued to have a more supervisory nature – this included looking at recruitment needs, training office staff on how to process expenses (which is considered further below), credit control, processing internal payroll (ie of office staff), and working with Merit on the development of the software which they used for payroll.

Mr Jaekel’s experience was in sales and marketing. He had undertaken this role in various industries, as well as within payroll management prior to joining EE139. As set out at [126(3)] above, he had worked at MaxiPay, which provided payroll and accountancy services across various industries, being employed in business development there – his role had been to approach employment agencies and contractor-type organisations within the construction and telecoms sectors and sell MaxiPay’s services.

At EE139, Mr Jaekel’s role was client-facing – he was canvassing for new business, visiting clients and potential clients at their offices or work sites, and was not based in EE139’s office. Mr Jaekel attracted new business for EE139 from his existing contacts, his own research to identify possible new clients, or if an employee of a contractor who was using EE139 moved to a new company and then recommended EE139’s services. Mr Jaekel sought to understand the nature of a client’s business and developed relationships with individuals at EE139’s top clients. He knew the relevant individuals and had a point of contact with them, and would visit them in person.

We were satisfied that, whilst Mr Jaekel was not based in EE139’s office, and did not verify expense claims, process claims or submit the Returns himself, he understood the way in which the taxable pay of umbrella employees was calculated. This can be illustrated by the fact that he had worked with Ms Suttle on developing the approach which was encapsulated in the Excel spreadsheet referred to at [196] below. When Ms Suttle went on maternity leave, Mr Jaekel also took over responsibility for registering employees onto the payroll system, and he was the contact for Ms Robson on questions on all matters, including expenses.

EE139 was launched with SDH as its first client, and thus inherited the sector-focus of SDH, ie telecoms. As EE139 found new clients, it started to operate in other industries, particularly overhead power lines. The move into power lines was around September 2012, and this resulted in significant growth in a short period of time.

The number of workers, or umbrella employees, fluctuated dramatically. The average numbers were:

EE139’s turnover grew as follows:

EE139’s income was a margin which it deducted from the amounts paid by clients. Whilst Ms Suttle’s evidence was that this was “generally” 5% of amounts paid by clients, we were not taken to any evidence of it being any amount other than 5%, whereas the marketing materials refer to a fee of 5% and this was the amount which we could see had been taken from Company Receipts on the payslips to which we were taken. We find that EE139 received 5% of the gross amount paid by clients as a fee for its services. This amount was not pure profit – overheads were funded from this margin.

EE139 had obtained tax advice from Accountax at a meeting on 30 March 2006. That meeting was attended by Ms Suttle, Mr Jaekel and Ms Crowther from EE139 and David Harmer and Sarah Rogers from Accountax. That meeting addressed:

We conclude from these detailed meeting notes that the focus of the advice from Accountax in that meeting was the composite model (whereby employees would own shares of a particular class and receive some amounts from the company as dividends). This is apparent throughout the notes, including in discussion of the employment contract and payslips (where there is reference to showing the gross dividend only on the dividend voucher). This finding is supported by the follow-up correspondence from Accountax (on 6 April 2006), where the pay calculation is worked through on the composite basis.

There are various aspects of these notes that address transparency:

Whilst the focus of this advice in 2006 was the composite model, the umbrella company model was outlined therein.

HMRC challenged whether EE139 ever obtained updated tax advice. Ms Suttle’s evidence was that EE139 relied heavily on the support of external advisers, and used them for ad hoc questions as well as on the running procedures. Ms Suttle’s evidence was that EE139 used Accountax (primarily David Harmer) until 2012. From 2013 they moved to Acumen Legal (Mark Taylor had moved there from Accountax), and at some point Acumen Legal became Chartergates so they used Chartergates.

It is clear from the documentary evidence (notably the correspondence with HMRC once Officer McConnell started his investigation) that EE139 had instructed Chartergates to advise them on the enquiry in November 2014. This correspondence is described in detail below. However, there was minimal documentary evidence of tax advice being taken by EE139 between March 2006 and this date as to, eg good practice as to the checking and processing of expense claims, conditions for entitlement to AMAPs or record-keeping. The only documentary evidence to which we were taken was:

On 30 May 2014 Officer McConnell notified EE139 that HMRC intended to conduct a check of their VAT and PAYE records. In a phone call to Ms Suttle on 6 June 2014 he informed her they would be concentrating mainly on expenses, looking at employee contracts, payroll, job sheets, and time sheets for what he described to Ms Suttle as a random sample of 12 employees (out of 450) for a 12-month period.

The first visit by HMRC to EE139 took place on 8 July 2014 (the “July 2014 Meeting”). That visit was attended by Officer Bernadette O’Neill and Officer McConnell from HMRC, Ms Suttle and Mr Jaekel. The meeting note prepared by HMRC records:

Giving evidence Ms Suttle and Mr Jaekel both pointed out that these were HMRC’s notes of the meeting and had not been agreed with them at the time. Nevertheless, the explanations recorded as having been given by Ms Suttle and Mr Jaekel in that meeting as to how umbrella companies operated (eg the pay calculation used) are broadly consistent with their evidence in these appeals. There are some areas where explanations provided through Chartergates did later differ (eg as to agency expenses and the reason for six hours per day being used), but giving evidence Ms Suttle did not support the description of the latter as an anomaly – EE139 had set it at six hours. These meeting notes were made contemporaneously, and whilst there was some challenge to accuracy, that was in substance a challenge to the interpretation to be placed on them, eg as to no general meal/lodging allowance being paid. We do find that the meeting notes are a broadly accurate record of what was said at that meeting.

On 22 October 2014 Officer McConnell wrote to Ms Suttle following his review of the records supplied at the July 2014 Meeting. He said the review had raised a number of concerns:

Officer McConnell said that he had decided to extend his review to 20 workers and requested records for a three-month period from 1 April to 30 June 2014. He also expressed doubt as to whether the employment contracts were an overarching contract, questioning whether there was a mutuality of obligation between assignments.

On 3 March 2015 Chartergates (acting for EE139) wrote to HMRC and agreed to provide the records requested and they responded to points made on overarching contracts.

On 23 June 2015 Officer McConnell wrote to Chartergates setting out his position:

Officer McConnell concluded:

“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.”

He requested a face-to-face meeting.

On 28 July 2015 Chartergates wrote to Officer McConnell. They attached a spreadsheet in relation to letters of request for information issued to employees, and acknowledged receipt of the letter of 23 June 2015 saying that they would be in touch in respect of the points raised in due course.

There was an exchange of emails in November 2015 with Chartergates explaining that delays in providing a response were due to sickness.

HMRC sent a warning letter to EE139 on 22 January 2016 (copied to Chartergates), which included noting that HMRC had been provided with some but not all records requested on 22 October 2014, setting out the concerns detailed in their letter of 23 June 2015, referring to the lack of response to the letter of 23 June 2015 and stating that they would issue Regulation 80 determinations and Section 8 decisions. They required a response by 22 February 2016.

On 5 February 2016 Chartergates wrote to Officer McConnell. They addressed points made on overarching contracts and then provided responses to points made by Officer McConnell:

On 24 February 2016 Officer McConnell responded as follows:

On 17 March 2016 Chartergates asked that formal proceedings be stayed to allow EE139 to provide the relevant information requested by the 24 February 2016 letter.

On 7 July 2016 Chartergates wrote again:

There was a phone call between Officer McConnell and Chartergates on 11 July 2016. The note of that call (prepared by HMRC) records:

On 28 July 2016 Officer McConnell re-iterated his views, and said he would be prepared to view any additional information supplied by EE139, giving specific examples of any additional mileage records EE139 held for the period 1 April to 30 June 2014 and evidence that claims were rejected, and evidence it was the workers who hired the vans from the fleet hire companies and supplied the fuel for those vehicles.

Chartergates responded on 19 August 2016:

On 30 August 2016 Officer McConnell said that HMRC would be issuing Regulation 80 determinations and Section 8 decisions, calculated on 90% of the expenses paid to EE139 employees, shortly. In that letter he added:

There was further correspondence, and the Assessments were issued on 21 September 2016.

There was a telephone conference between HMRC and Chartergates on 18 October 2016. There was discussion about HMRC’s position and the meeting included:

There were further emails and telephone conferences between Officer McConnell and Chartergates, during the course of which Chartergates provided (in December 2016 or January 2017) a USB stick containing payslips and expenses for all employees for August 2016. That was then reviewed by Officer McConnell, who again found deficiencies (noting absence of completed forms, claims lacking detail) but recorded that no agency expenses were now being claimed and holiday pay was being taxed.

The investigation conducted by Officer McConnell, some of which has already been referred to above, included:

Client S, Client P, Client N and Client D were clients of EE139. The information provided by them is considered, together with other evidence in relation to workers provided to them by EE139, at [210] to [241] below.

Whilst Officer McConnell had told Ms Suttle on 6 June 2014 that he wanted the records of what he described as a random sample of 12 employees for a 12-month period, on the basis of the evidence before us we conclude that:

Similarly, there was no evidence as to how the wider sample of 20 employees was selected, save for the explanation in Officer McConnell’s witness statement that they were from the largest clients and that 318 out of 430 umbrella employees were being supplied to these clients.

We did not have a copy of the Employee Questionnaire which was sent to the 20 employees, or the responses thereto in the form in which they were provided by the employees. Mr Firth was particularly critical of this approach. However, whilst the bundle included a form of a letter (dated 12 May 2015) on HMRC’s letterhead addressed to the employees, overall the documentary evidence suggests that this questionnaire was later sent by EE139 or Chartergates to the 20 employees. We make no finding as to whether this was in addition to or instead of the letter being sent by HMRC. In any event, we find on the facts that responses to the Employee Questionnaire were sent by employees to EE139 or Chartergates, and not to HMRC. Eight out of the 20 in the sample responded to the Employee Questionnaire. A spreadsheet summarising these responses was then sent by Chartergates to HMRC, and it is that summary table that was exhibited in the bundle. This is consistent with a letter from Chartergates to HMRC and also Officer McConnell having referred in his witness statement to the responses being returned in a summarised form via Chartergates. We have taken account of the information provided in this form, but assessed it against all of the evidence available to us when making our findings, and bore in mind throughout that the responses were from just eight employees at a time when EE139 had over 400 umbrella employees.

Officer McConnell’s letter of 21 September 2016 to EE139 which enclosed the Regulation 80 determinations stated that:

Mr Ripley and Mr Firth submitted that the Assessments were thus based on a disallowance of expenses, and that submissions by Ms Goldring as to matters relevant to the hours worked by umbrella employees and the provision of timesheets were simply not relevant. We address those legal submissions in the Discussion.

We make findings of fact here on the range of challenges identified by Officer McConnell. Potentially relevant to whether there was an under-declaration of taxable pay are matters relating to hours worked and timesheets, and relevant to whether expenses were properly reimbursed are facts relating to ownership of vehicles, mileage claimed and payment of agency expenses to employees.

One issue that was identified in Officer McConnell’s witness statement was that there were various examples of the payment to umbrella employees of what was labelled holiday pay or holidays in lieu and these payments were not taxed, eg:

These payments were made in April and May 2014, and are evident throughout the sampling of 20 employees that was conducted during this period of April to June 2014. Officer McConnell recorded in his witness statement that when he reviewed the August 2016 records he identified that holiday pay had started to be taxed.

The Tribunal asked HMRC after the hearing to clarify its position on holiday pay, asking whether it was part of HMRC’s case that these payments being reported as non-taxable in the relevant Returns was a relevant inaccuracy for the purposes of Schedule 24 and, if so, where this was first set out (in HMRC’s pleadings).

HMRC responded as follows:

Whilst we agree with HMRC (as did Ms Suttle) that holiday pay and payments in lieu of holiday should have been taxed, we proceed on the basis of HMRC’s pleaded case, namely that this was not a relevant inaccuracy for the purposes of Schedule 24. We take no further account of this when considering matters relating to inaccuracies and the calculation of the PLR. We do not disregard the evidence relating to the treatment of holiday pay for all purposes, as it was relied upon by Ms Suttle as an example of a mistake (her explanation being that it arose from an error in the software) that was corrected by EE139 when they realised (and this was recognised by Officer McConnell when he reviewed the records).

The RTI returns submitted by EE139 record taxable pay and non-taxable payments (ie expenses reimbursed) for the four RTI Years. From reviewing the RTI returns for the RTI Years, Officer McConnell calculated that of the amounts paid to employees in the tax years 2012-2013, 2013-2014, 2015-2016 and 2016-2017, the non-taxable proportion was 62%, 63%, 59% and 46% respectively (albeit that we recognise that this final year was not within the Relevant Period). There was no corresponding data for 2014-2015 (which was one of the RTI Years).

We find that the expenses reimbursed by EE139 were consistently higher than the taxable pay of umbrella employees. Looking at a week for which EE139 provided data to HMRC (week ending 6 April 2014):

This is a handful of employees over a single week – on any view, this is a very small sample. The evidence before us included a large number of payslips for April to June 2014, as well as various from earlier and later in the Relevant Period as well as some from after the Relevant Period. Whilst the amounts in the above table cannot purport to be an average, we find that these amounts are not atypical – they are a fair illustration.

The decisions taken by Officer McConnell as to how to conduct his investigation have had a significant impact on the range of evidence before us – there is a concentration of documentary evidence relating to Client S, Client P, Client N and Client D, and it is mainly the expense claims and payslips from employees who were within the samples that were exhibited to witness statements. Ms Suttle did exhibit additional specific documentary evidence in relation to employees, both these and others, in the context of rebutting conclusions reached by Officer McConnell. We make the following points in this regard:

We set out here our findings as to how EE139 operated the umbrella model, albeit with occasional examples by reference to specific umbrella employees.

At the first meeting with Officer McConnell, the July 2014 Meeting, Ms Suttle explained that workers were obtained from a number of sources – marketing material which they left at training sites, referrals from fellow workers, some end clients (eg Client S) would obtain the workers and ask EE139 to employ them, and EE139 would approach end clients directly.

Giving evidence at the hearing:

We accept that evidence. This explanation, which has been given consistently by the Appellants, is also reflected in the documentary evidence (eg emails with end clients). Two illustrations are:

The employment relationship was between EE139 and the workers, and EE139 provided their services to its clients. However, the clients would then give instructions directly to the workers – EE139 did not have oversight of their work, and did not know what workers were doing on a day-to-day basis.

We were taken to what was described as a sample employment contract between EE139 and an umbrella employee and accept that this was the standard form used between EE139 and the umbrella employees. The employment contracts include the following clauses:

Umbrella employees joining EE139 were sent a standard form introductory email. The email contains a reminder that employees should only claim for expenses that were wholly and exclusively incurred whilst working on their job.

The documents attached also included:

Ms Suttle’s evidence was that this Expense Claim Form was an old form, used at the beginning of the Relevant Period, and that EE139 had changed its claim forms at some point during the Relevant Period in the light of the concerns being raised by Officer McConnell. Ms Suttle accepted that employees did still use these old forms (even in September 2016) and that they were accepted by EE139. We find that the version produced before us, as described above, was the Expense Claim Form used by umbrella employees throughout the Relevant Period and any new version was only introduced after April 2016:

We were taken to a number of payslips prepared by EE139 – a sample which was used as an illustration, as well as various actual payslips which had been provided to Officer McConnell at different times during his investigation as well as some disclosed subsequently. The form of these payslips was not in dispute between the parties.

A payslip for a particular week records:

The illustrative payslip showed Company Receipts of £500 from the end client for the week. The fictional employee then receives taxable basic pay of £185.70 and expenses of £261.60. PAYE and NI of £5 are deducted, leading to a “net pay” (ie amount credited to bank account) of £442.30. The payslip shows where the balance of the £500 is allocated (£5.20 for Employer Costs, Margin of £25 and retained holiday pay of £22.50, in addition to the £5 PAYE and NI).

This illustration deals with a situation where the expenses being paid match exactly the amount available to reimburse them (once taxable Basic pay had been calculated on the basis of NMW). In reality, this was not the case:

Payroll software, known as Merit, had been developed for use by umbrella companies. When EE139 launched, they initially decided not to purchase a licence to use the Merit software as it was expensive, and instead used a combination of TASBooks payroll software and Microsoft Excel. Ms Suttle and Mr Jaekel together created an Excel spreadsheet which calculated the taxable element of an umbrella employee’s pay.

Each week:

The office staff at EE139 would then process, using the Excel spreadsheet, a given employee’s gross receipts and the expenses. (The approach to dealing with claims for and payment of expenses throughout is set out at [204] to [207] below.) The outputs would then be entered into TASBooks. EE139 would then need to make further adjustments to this to deal with, eg pension contributions.

As EE139 started to grow, this process of using Excel, TASBooks and manual adjustments became cumbersome, so they purchased a licence to use the Merit software in around 2007. EE139 was therefore using Merit for their payroll throughout the Relevant Period. Ms Suttle referred to this software as being bespoke, as EE139 had worked with Merit to develop it over a period of time.

Initially, Expense Claim Forms were sent by email to EE139, although some employees did make claims without using this form and instead provided amounts and some further information in the body of an email (and such claims were not rejected for this reason alone). For an employee to receive reimbursement, the expenses needed to be entered onto Merit by a member of the office staff. From around May 2013, employees could use an online portal within Merit to submit their expenses, but uptake on the use of this portal was slow, and many employees continued to use the Expense Claim Forms or the body of an email.

The office staff would then set Merit to run payroll for the week. The Merit software would automatically send a text to the employees giving them information about their pay. The member of office staff dealing with payroll would then email or print payslips for employees (again, this was largely automated by Merit). Merit would then generate a BACS file, which would be imported onto EE139’s banking software and an email would be sent asking for the payment to be co-authorised. All office staff could either import this data or co-authorise a payment – initially only the Appellants could both import and co-authorise a particular payment, but Ms Robson was also given equivalent authority from October 2010. The office staff dealing with payroll would then (from April 2012 onwards) generate EE139’s RTI submission to HMRC for the week through Merit, and the system would file the RTI return using the government gateway.

EE139’s record-keeping involved filing Expense Claim Forms together for each employee, and the documents for each client. From around April 2014, they moved to an online “drive filing” system, and stored all of this information on a centralised EE139 server. The exception was for expenses claims submitted via the portal, as they were only accessible on Merit.

The above sets out the overall process which was adopted by EE139. We now deal with the checking of expense claims by EE139, and how this relates to the processing of them.

Ms Suttle’s evidence included that:

We have already found that EE139 did send guidance to umbrella employees with the introductory email. However, we also find that:

We make findings in relation to agency expenses at [262] to [265] below. At this stage, we record our finding that agency expenses were amounts that were paid by EE139 to umbrella employees in certain circumstances (based on payments that were made by clients to EE139) and did not necessitate a claim being made for them. We base this finding on the absence of any documentary evidence of such claims being made or required, explanations provided by Chartergates and the evidence of Ms Suttle.

We make the following findings in relation to EE139’s approach to expenses claims:

The Returns were generated by Merit. The P35s show each employee’s taxable income, PAYE and NICs. When these were produced, Ms Suttle checked that they showed for all employees the NI numbers, addresses, dates of birth, and that the totals matched what had been paid to HMRC. EE139 did not conduct further checks on the amount shown as taxable income at this stage, ie looking back at the split between basic pay and expenses. Merit was then used to generate the P60s and P14s. Merit generated the RTI returns during the RTI Years.

The P11Ds (which HMRC have not pleaded as being inaccurate) were completed manually by EE139, using information from Merit. P11Ds did not include the amounts of AMAPs.

During the Relevant Period, EE139’s clients included businesses in the telecoms and overhead power lines sectors. In some instances, their immediate client was another intermediary, eg Capital Outsourcing, which then supplied the workers to another business (eg Kelly’s, which worked in the telecoms sector).

As part of his investigation, Officer McConnell asked questions of four of EE139’s clients, Client S, Client P, Client N (each of which worked on overhead power lines) and Client D (telecoms), and we had documentary evidence of the responses (whether by way of meeting notes, notes of phone calls (in both cases prepared by Officer McConnell) or email exchanges) – these address the factual questions at issue in these appeals. The evidence as to EE139’s arrangements with these clients and the work performed by the umbrella employees (whether as to hours worked, or ownership of vehicles) was not confined to these responses. We also had evidence from the Appellants in relation to these matters (including evidence and submissions challenging the notes exhibited by Officer McConnell), and various documentary evidence in relation to specific employees working for them. We have taken all evidence into account for each client, but do start by recording for each client the information they provided to Officer McConnell before then making our findings of fact.

Three of the four clients questioned by Officer McConnell were, as stated above, working on overhead power lines, a sector which EE139 moved into from September 2012. We did also have other evidence in relation to umbrella employees in the telecoms sector (not just Client D, but also workers supplied to Capital Outsourcing and SDH).

HMRC had a meeting with Client S on 12 June 2014. That meeting was attended by Officer McConnell and Claire Scullion of HMRC, GH (director) and KMcC (accountant) of Client S.

HMRC’s meeting notes record that:

Client S is a small company, with three direct employees. The meeting was with the director and shareholder – Officer McConnell was undoubtedly meeting with those who could tell him about how they used employees from EE139 and how Client S conducted its business.

In his witness statement Officer McConnell summarised these notes (and exhibited them) stating that Client S had confirmed that the employees worked ten-hour days, they owned two vans which were used to transport the workers to site, and all other vehicles were hired.

Officer McConnell did not mention the explanation he was given about workers being supplied by EE139. Client S told him that EE139 “supplied” their workers, and specifically denied that they (or Morrison’s) found workers and referred them to EE139. At the July 2014 Meeting, Ms Suttle told Officer McConnell, in the context of how EE139 obtained workers, that one way was “as in the case of Client S the end client would obtain the workers and then ask EE to employ them on overarching contracts”. We have found that Ms Suttle’s explanation was correct. There was no evidence before us as to why Officer McConnell did not tell EE139 that he had received contradictory information on this matter (given that he did tell them that clients told him at workers did ten-hour days rather than six-hour days) or if he had identified that Client S was telling him contradictory information.

In addition to various expense claims made by workers supplied by EE139 to Client S and payslips, we also had a copy of a charge sheet prepared by Client S for CS (one of the initial sample of 12) that had been sent to EE139. That charge sheet was prepared on a day rate basis, with no mention of hours worked.

We make the following findings of fact in relation to workers provided by EE139 to Client S:

We had an exchange of emails and a note of a telephone conversation between Officer McConnell and CO’N, the director of Client P. CO’N had sent various documents to HMRC, one of which is a timesheet listing a number of workers for the week ending 11 July 2014. It is labelled as a sample timesheet for EE139. That sheet lists all named workers as working ten-hour days, and specifies various charge rates. These charge rates are all presented as sets of, eg, basic, overtime 1 and overtime 2, and are per hour. The named workers include the three selected by HMRC, KM, CZ and AC.

Officer McConnell spoke to CO’N on 14 August 2014. We had Officer McConnell’s note of that conversation. That note records:

The record of the telephone conversation was sent to CO’N afterwards, and he was asked to read and make any amendments and clarify if the same workers always report to the same depots each morning. CO’N replied on 20 August 2014, saying he wanted to clarify some of the points noted, including:

Officer McConnell emailed asking for clarification, saying “surely in order to maximise your profit you will make sure that the jobs per day will involve a full days work. Why did you put 10 hours and not 8 hours for example. When do the employees normally leave the depots? When do they normally return.” He also asked him to identify the workers that fly in every week.

CO’N’s response was that ten hours is just a measure they use, it could be six hours or ten hours, always a day rate is paid. Client P get paid on a day rate so as long as the required productivities are achieved it doesn’t really impact them. He did not provide any start and finish times, stating that work is started first thing, from various depots and they return when the programmed amount of work is complete. He doesn’t know who flies – from chats with them, most of them are flying but he has no record.

There is then a further email from Officer McConnell on 22 August 2014, referring an earlier discussion (of which there was no other record before us), stating “Can you confirm that the workers start at 7am every day and work through until after 4pm. They would never work less than 8 hours a day and would often work more than the 50 hours recorded on the time sheets.” CO’N sent a short email on 27 August saying “I can confirm you are correct in which you are saying below.”

From this, Officer McConnell set out in his witness statement and correspondence that Client P had confirmed they supplied all vehicles and equipment, workers worked a ten-hour day and a timesheet was provided by the director and emailed to EE139 each week.

The other documentary evidence before us included expense claims made by various workers, payslips and DVLA records.

We make the following findings of fact in relation to workers provided to Client P:

Officer McConnell obtained information about Client N from KM, the company’s accountant. Client N installed and maintained overhead power cables in England.

The email from KM set out that Client N worked for Morrison’s and Leven, on overhead power lines. Client N worked anywhere in the UK, machinery is provided by Client N. Workers are costed at a daily rate, but this is up to EE139 – Client N do not supply timesheets to EE139. On a Monday morning, workers report to site, where that site is varies from job to job. Start and finishing times vary. Workers make their own way to site. Workers use their own vehicle to travel to site, and the amount of site visits per day varies, it could be anything from one to ten sites per day.

On 20 January 2015 KM had said vehicles are kept in a yard on site or secure storage close to site, in the last six months Client N had worked in Yorkshire, Durham and Derbyshire. Client N does not work for customers on an amount per man per day, but for an agreed price per contract. Start and finishing times can vary.

There was a telephone conversation between Officer McConnell and KM on 12 February 2015, after which Officer McConnell sent questions to KM. Officer McConnell asked KM about the vehicles used, and for confirmation that workers worked a minimum of nine hours a day five days a week.

KM responded on 5 May 2015 by email setting out:

Officer McConnell recorded in his witness statement that workers used company vehicles to travel to site, and employees did work full days (nine to ten hours) most days.

We make the following findings of fact in relation to workers provided by EE139 to Client N:

Officer McConnell wrote to Client D on 24 May 2016 explaining he was making contact to obtain information about their use of intermediary businesses and temporary labour. There was a call with SG of Client D on 27 June 2016. Officer McConnell’s note of that call sets out:

There was then some follow-up by email. On 12 September 2016 SG emailed Officer McConnell and provided:

SG responded to follow-up on 14 October:

Officer McConnell concluded from this that Client D provides vans to workers, as well as a fuel card. There is a list of employees paid by EE139 who were also supplied with a company van and fuel card. Yet all Client D workers employed by EE139 identified as having been provided with a van and fuel were receiving mileage allowance.

We had various expense claims and payslips for umbrella employees within the samples, but also had the following:

We make the following findings of fact in relation to workers provided to Client D:

HMRC’s case included that EE139 was understating the hours worked by employees when it paid them basic pay calculated at NMW per hour for six hours per day, and that EE139 knew that this was the case as it had timesheets.

We find that EE139 generally paid employees basic pay (ie the taxable element of the amounts paid to them) calculated at NMW per hour, for six hours per day. This was evident from many of the payslips before us, eg JB at Inspirium, where Inspirium was paying EE139 a daily rate of between £107 and £182 per day, but taxable pay was £189 each week.

Ms Suttle’s evidence was that taxable pay paid to employees would be higher than this in two situations:

We find that both of these scenarios did take place. We have already found that the situation in [244(2)] did occur. We also find that EE139 did pay some employees on the basis of actual hours that differed from six hours per day, eg:

We would add that where EE139 paid employees on the basis of actual hours worked, our own review of all of the payslips in the bundle leads us to conclude that in many of these instances the result was that taxable pay was of a lower amount than would have been the case using the default approach of six hours per day. Furthermore, whilst Mr Ripley submitted that there were numerous examples of EE139 having paid workers on the basis of different hours specified on a timesheet, we would say there were just some examples.

We have found above that EE139 generally paid employees at NMW for six hours per day. We make findings here as to the decision to pay on this basis, and whether EE139 generally received timesheets recording (a higher) number of hours worked by employees.

We accept the Appellants’ evidence that the initial reason for using six hours per day was that which was given to HMRC in the July 2014 Meeting, namely that within the telecoms sector, each fault or referral was assumed to take on average two hours, and workers were expected on average to fix three faults per day. Clients would pay EE139 a day rate, but the Appellants’ understanding of work in this sector was that engineers would attend multiple sites in a day, complete three jobs per day, taking two hours each. This resulted in EE139 deciding to pay employees for six hours per day at the NMW. This number of hours was then set within Merit (in around 2009-2010) as the standard number of hours for workers who were paid on a day rate (and Ms Suttle denied this was an anomaly, as it had been described by Chartergates in their letter of 5 February 2016).

We accept the Appellants’ evidence that at the time this number of hours was set as the standard or default rate within Merit, around 90% of EE139’s business was with telecoms clients. They started to provide workers to clients in the overhead power lines sector in September 2012.

We have made findings as to the hours worked by employees for four of EE139’s clients:

We had some additional, somewhat isolated, evidence for other workers:

On the basis of the evidence before us, we are satisfied that HMRC have established that generally umbrella employees were working more than six hours per day. This finding applies to all umbrella employees, and is not confined to those in the overhead power lines sector.

Addressing additional evidence as to how this divergence between the default rate of six hours and the actual hours worked occurred:

Ms Suttle’s explanation for any understatement of hours (which was not admitted for the purposes of this appeal) was essentially that EE139 did not have more accurate information for specific employees (saying that the employees’ admin was poor) and that clients did not generally provide them with details of hours worked on timesheets (but they did use this information where they had it).

Ms Goldring submitted that there must have been timesheets, and referred to a button on Merit for timesheets; and that we should be cautious of Ms Suttle’s evidence to the contrary because of the advice EE139 had been given by Accountax in 2006 (in particular around disclosure of information). Mr Firth’s submissions included that the evidence as to the four clients did not support the conclusions reached by Officer McConnell and that HMRC had not produced the required evidence as to actual hours worked by specific employees.

We have considered all of the evidence relating to whether EE139 received timesheets recording the number of hours actually worked by employees. In this regard:

Taking account of all of the evidence before us, we are not satisfied that EE139 was routinely provided with timesheets (from clients or employees) which informed them of the number of hours worked by specified employees. Sometimes documents labelled or referred to as timesheets existed and were sent to EE139, but did not record this level of information; they could equally have been described as a pay schedule.

We have concluded that where EE139 was provided with a timesheet which recorded actual hours worked by a specified employee in a particular week, the basic taxable pay of that employee was calculated using these actual hours.

The correspondence from Officer McConnell identified concerns or questions in relation to the agency expenses paid by EE139, AMAPs (as to distances travelled and ownership of vehicles) and other expenses reimbursed to employees. All of these amounts were paid to employees as non-taxable payments. Whilst AMAPs are not reimbursement for expenses incurred, neither HMRC, EE139 nor the Appellants have generally drawn a distinction in terminology (save where the Appellants rebut Officer McConnell’s statements as to employees effectively working at a loss on the basis of mileage claimed) and where we refer to HMRC’s challenges as to expenses claimed, we are also referring to claims for AMAPs.

We have already described, in the context of setting out the correspondence with Chartergates, the concerns raised by Officer McConnell. Those concerns (or challenges) were maintained by HMRC in this appeal. We do not lose sight of the submissions made by Mr Ripley and Mr Firth as to the basis on which HMRC subsequently issued the Assessments to EE139, or that the expense claims made by employees are not themselves PAYE documents for the purposes of Schedule 24. We do make findings in relation to the claims and entitlements to expenses.

We first refer to three payslips simply to illustrate some of the challenges which were being put by HMRC:

EE139 made non-taxable payments of what were identified on payslips as “agency expenses” to some employees. The amounts varied (and were not made to all employees).

The explanations relevant to these amounts has differed:

There were various examples of agency expenses being paid from the sampling of employees. These were always treated as non-taxable and in the vast majority of instances were paid in addition to a separate line item of Expenses on the payslips:

We find as facts:

In February 2016 Chartergates told Officer McConnell that EE139 was now applying PAYE to all payments unless the employee submitted a receipt; and, following a review of all claims and payslips for August 2016 (ie after the Relevant Period), Officer McConnell recorded that no agency expenses were now being claimed. We accept that EE139 stopped paying these round-sum allowances as tax-free amounts during the Relevant Period; and having regard to the timing of the confirmation from Chartergates, the progress of the investigation, the slow pace of making changes which was explained by Ms Suttle and the evidence of agency expenses being paid during 2015, we find that EE139 continued making these payments until the end of December 2015.

EE139 paid AMAPs to employees for the mileage which they claimed. Officer McConnell identified various concerns in relation to the AMAPs that were claimed and reimbursed – he considered that the large claims being made meant that some employees were effectively operating at a loss; he challenged the distances for which claims were being submitted (including the lack of details) and (in June 2015) the ownership of vehicles (which affected eligibility for AMAPs, irrespective of distances travelled).

We have addressed the submission of claims, the declarations by employees on the Expense Claim Forms, the processing and spot-checking of claims above.

The additional evidence as to ownership of vehicles comes from the notes of the communications between Officer McConnell and four of EE139’s clients, the information from the NMW enquiry (which related to an employee working for a fifth client), DVLA records, the eight responses to the Employee Questionnaire and information provided by clients to EE139 (or EECIS).

The DVLA records provide details of the registered keeper of a vehicle. Where such registered keeper is a fleet hire company, the Appellants did not accept that this meant that it had been hired by the client and provided by them to the relevant employee, submitting that it was entirely possible that the employee had hired the vehicle themselves from the fleet hire company. Whilst we accept that it is possible for an employee to hire a vehicle from a fleet hire company, on the basis of all of the evidence before us we have inferred that vehicles which were registered to a fleet hire company had been hired by EE139’s client (whether directly, or, in the case of intermediaries, that client’s client). We reach this conclusion on the basis of evidence as to how some clients sourced vehicles which were provided to employees, and inferences as to the type of vehicles and equipment which may be required for the relevant jobs. This is relevant to the application of the requirement (in s229(4) ITEPA 2003) that the vehicle is not a “company vehicle”.

We have made findings of fact in relation to four of EE139’s clients:

We make the following findings in relation to other clients of EE139:

The following claims were made by umbrella employees of EE139 (and, for the avoidance of doubt, we also find that such claims were processed and paid):

On mileage, to illustrate what HMRC submitted were false or excessive claims (that were paid), we were taken to:

Mr Firth emphasised that HMRC had not asked any umbrella employees if they had submitted false claims for AMAPs, or introduced evidence from the clients to show that these distances were overstatements of the journeys that were in fact undertaken. We recognise that. Nevertheless, whilst evidence from employees (or clients) would have been of direct relevance, the panel is permitted, when making findings of fact based on evidence before it and drawing inferences therefrom, to use its own experience and knowledge, and reach conclusions, bearing in mind that the standard of proof is the balance of probabilities.

Considering both the evidence before us and being mindful of evidence that we do not have, we agree with HMRC that some of the claims for AMAPs by employees were for distances in excess of those that were actually travelled; CZ at Client P is one such illustration. This can only affect entitlement to AMAPs for employees who were using a vehicle which was not a “company vehicle” (ie where they are otherwise eligible to claim AMAPs and the only question is whether the mileage claimed is accurate).

As we seek to assess whether claims made (and paid) were valid, we find as follows:

There were claims for passenger miles at 5p per mile (eg by MMcE); none of these claims complied with HMRC guidance that the names of passengers be provided, nor was there any way for EE139 to check that the passenger was working for the same client as the relevant employee; it had to rely on the employees only making eligible claims. Of itself, this does not mean that the claims were not allowable. Whilst HMRC drew our attention to these claims, noting the lack of detail, there was no submission by HMRC that there were in fact no passenger(s). We do have a concern that (with the exception of one employee in the sample of 12, who did not claim any expenses) as all employees were claiming AMAPs, and passenger miles are only able to be claimed where the passenger is another employee of EE139, this presupposes that those within the sample claiming passenger miles were always travelling with fellow employees who were outside the sample. This is factually possible on the numbers, and in any event it was for HMRC to put the challenge that there was no passenger and they did not do that. (HMRC’s challenge (for the purposes of these appeals) to the payment of passenger miles was that the relevant employee was not entitled to AMAPs in the first place, and in that situation the claim for passenger miles must also fail.)

The expenses claimed and reimbursed by umbrella employees included claims for amounts other than mileage, eg accommodation costs.

Officer McConnell concluded that some of these expenses should not have been reimbursed, on the basis either that receipts were not provided, or that they were not allowable expenses in any event (eg restaurant meals for groups, not just the employee).

We have made findings in relation to the checking of such claims, and found that some claims were rejected by EE139. Examples of claims being rejected are:

However, we do accept that EE139 was processing claims which were not allowable expenses:

HMRC have issued the PLNs on the basis that inaccuracies in the Returns were deliberate and attributable to both of the Appellants. We address the relevant requirements in the Discussion; here we make findings as to knowledge, actions taken (or not taken) and other matters potentially relevant.

Both Appellants denied that they had actual knowledge of any inaccuracies. The evidence from the Appellants included:

We make the following findings:

Paragraph 1 of Schedule 24 provides that a penalty is payable where a person gives HMRC a document of a kind listed in the table and conditions 1 and 2 are satisfied. The kind of document listed in the Table for income tax purposes, and on which HMRC relies here, is a “return for the purposes of PAYE regulations” – in this case the P14s and P35s for the first two years and the RTI returns for the remaining four years. Condition 1 is that the document contains an inaccuracy which amounts to or leads to an understatement of tax. Condition 2 is that the inaccuracy was careless or deliberate on EE139’s part.

The Assessments issued by HMRC to EE139, which set out the amount of the inaccuracy on which HMRC relies, are:

The Section 8 decision is a single decision. The Regulation 80 determinations were issued for each tax year, but we only had four of them, as specified above.

In HMRC’s Skeleton they state that their case is that EE139 deliberately understated the earnings of its employees and overstated their expenses in order to reduce the PAYE income tax and the NICs that it had to pay:

The Appellants’ submissions included:

We turn to the basis of the decisions taken by HMRC as to the issue of the Assessments, with a view to deciding the relevance of the matters relied upon by HMRC and addressing submissions as to evidence of the 90% disallowance:

Additional evidence potentially relevant to consideration of how the amount of the total expenses claimed (and decided by HMRC to be disallowed) is the letter from Armstrong Watson – when describing how they selected the sample for their review, they referred to what they described as total expense claims of £27,665,330 reimbursed in the Relevant Period. There is no further information to which we were taken, or which we could find in the Armstrong Watson letter, which explains the source of this number. We consider the most likely explanation is that it was simply based on the amounts of the Assessments, albeit that on our estimation they are referring to the total expenses disallowed rather than those reimbursed. (The total PAYE assessed was £5,533,065, which is 20% of £27,665,325, which is itself 90% of £30,739,250.)

HMRC’s Skeleton sets out an explanation of HMRC’s case, a very high-level summary of which is referred to at [289] above, and it does (very briefly) refer to overarching contracts at [101(viii)], where HMRC summarise their conclusions on deliberate and concealed inaccuracy:

“(viii)

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.”

Having considered the basis on which the decisions are expressed, in the context of all of the correspondence between HMRC and EE139, and in light of the way in which HMRC have put their case and having regard to the overriding objective in rule 2 of the Tribunal Rules, we reach the following conclusions as to the range of matters that are in issue before us:

With this in mind, we thus revert to the issue as to whether HMRC have established that there were inaccuracies in the Returns submitted by EE139, in order that we can then consider whether such inaccuracies were deliberate (or deliberate and concealed). We have made extensive findings of fact on which we base our conclusions below, and reiterate (for the avoidance of doubt) that the question is not whether expense claims submitted by umbrella employees were correct, whether appropriate receipts were provided, or whether EE139 checked those claims, but whether the Returns submitted by EE139 to HMRC, which declared the taxable pay and, for the RTI Years, the non-taxable payments, contain inaccuracies which amount to or lead to an understatement of tax.

We reach the following conclusions in relation to the non-mileage related matters:

Dealing with claims for AMAPs, for cars from 2011-2012, the claimable rates of AMAPs were 45p per mile for the first 10,000 miles and 25p per mile thereafter. Officer McConnell expressed the opinion that the levels of AMAPs being claimed by employees in some weeks meant that those employees were (when looking at the amounts of net pay received) operating at a loss. HMRC did not adduce evidence as to costs incurred by these employees to enable us to find that employees claiming any particular level of AMAPs were working at a loss. We agree with Ms Suttle that a claim for AMAPs of, eg, £450 does not necessarily mean that the employee has incurred expenses (whether fuel or repairs or otherwise) of that amount.

When considering whether there were inaccuracies resulting from payment of AMAPs by EE139 (and the consequent treatment of such payments as non-taxable in the Returns) we focus on our findings as to the ownership of vehicles used and (to a lesser extent, for reasons explained below) the distances claimed to have been travelled.

Section 229(1) ITEPA 2003 provides that there is no liability to income tax on AMAPs for a vehicle to which that chapter applies. These are defined by s235, and cars and vans are such vehicles. The legislation then provides:

There was no dispute over the rate at which EE139 was making payments. The issue was as to the entitlement to AMAPs. On the basis of our findings of fact, we have concluded that EE139 paid some AMAPs and passenger payments to employees which did not meet the conditions for eligibility thereto. In reaching our conclusions, we have recognised that we may make findings and reach conclusions based on extrapolating from samples of data, but also taken account of the relative amount of that data compared to the number of employees and the length of the Relevant Period. Taking this and all of the evidence before us into account:

The way in which expenses were carried forward by EE139 means that in a particular week, inaccuracies which arose from the payment of AMAPs or non-allowable expenses could arise from claims which had been made by the relevant employee in that week, or claims which had been made previously but not paid and thus formed part of the carried forward balance which was recorded on payslips.

HMRC have treated 90% of the non-taxable payments made to employees as additional earnings (and issued the Assessments to EE139 accordingly). Our conclusions above as to inaccuracies are expressed in general terms. On an appeal against a penalty (including a PLN), the Tribunal has power to determine the amount of a penalty; as the amount is calculated as a percentage of the PLR, we would need first to determine the amount which we find to be the PLR for this purpose. In present case, we are satisfied that:

We have already set out in the Introduction that we have concluded that the inaccuracies were not deliberate, and for this reason the appeal is allowed. That means that the calculation of the penalty (and thus, logically, the prior step of determination of the amount of the PLR) cannot affect the outcome of our decision. We have made detailed findings of fact above which would need to be applied to determine the amount of the PLR if this was to become relevant in the event of a successful appeal.

Paragraph 19(1) of Schedule 24 provides that 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. Paragraph 19 therefore cannot apply where a penalty is imposed on a company for a careless inaccuracy.

HMRC issued a penalty to EE139 on the basis that the inaccuracy was deliberate and concealed. They have issued the PLNs to the Appellants on the basis that 50% of this inaccuracy was attributable to each of them.

We have summarised the parties’ submissions in relation to the PLNs below. However, we record at the outset that the approach of paragraph 19 is to attribute liability for payment of a portion of a penalty which is payable by a company to the officer(s). This means that it is necessary first to address the penalty payable by EE139, which includes not only the basis of imposition (ie whether deliberate), but also the amount. Paragraph 19(5) provides that where HMRC have issued a PLN under paragraph 19(1), paragraph 11 applies to the specified portion as to the penalty (ie whether there are special circumstances) and the provisions relating to appeals and the powers of this Tribunal (to affirm, cancel, or substitute a different amount) apply as if HMRC had decided that a penalty of the amount of the specified portion is payable by the officer.

HMRC’s position can be summarised as follows:

For the Appellants, Mr Ripley and Mr Firth denied that the conduct was deliberate, or deliberate and concealed. There was, understandably, considerable overlap in their submissions, and we have outlined their approach below.

For Ms Suttle, Mr Ripley submitted as follows:

For Mr Jaekel, Mr Firth submitted as follows:

The Upper Tribunal’s decision in CPR Commercials Ltd v HMRC [2023] UKUT 61 (TCC) was released after the hearing of these appeals. We requested and received written submissions from all parties on this decision. Those submissions addressed the boundaries to blind-eye knowledge, the application of them to the facts in that case and the pleadings (or lack thereof) in these appeals; we found these written submissions to be very helpful and have taken them into account when reaching our decision.

We address below certain matters arising in relation to HMRC’s pleadings, whether the conduct was deliberate and concealed (including submissions made as to scope of deliberate behaviour, blind-eye knowledge and recklessness), the calculation of the penalty (including the reduction given for disclosure), special circumstances and whether any inaccuracy (if deliberate) was attributable to either or both of the Appellants.

We first address three matters which arise out of HMRC’s pleadings (or what is said to be the lack thereof). These relate to dishonesty, blind-eye knowledge and recklessness:

We do not lose sight of the different submissions of Mr Firth as to the adequacy of HMRC’s pleaded case in relation to deliberate behaviour (in particular the lack of particularisation of the evidence on which HMRC relied, and what he submitted was the failure to identify specific inaccuracies in particular Returns) but take those submissions into account when assessing whether HMRC have established that the inaccuracies in EE139’s Returns were deliberate for the purposes of Schedule 24.

The Tribunal in Auxilium explained a deliberate inaccuracy in the following terms:

“63.

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.

64.

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]).”

This explanation has been approved by the Upper Tribunal in CF Booth at [36]-[37].

The meaning of “deliberate inaccuracy” was considered by the Supreme Court in Tooth (after the decision in Auxilium, but before the decision of the Upper Tribunal in CF Booth). The decision in Tooth related to the approach to deliberate and careless conduct in the context of the discovery assessment provisions in s29 Taxes Management Act 1970 (“TMA 1970”), as interpreted by s118(7) TMA 1970, rather than the penalty provisions in Schedule 24. However, the language of “deliberate inaccuracy” is used in both Acts, and at [27] in Tooth the Supreme Court referred to the “broadly similar differential treatment of careless and deliberate conduct by the taxpayer” being reflected in the different levels of penalty which may be imposed under Schedule 24. Further, this decision of the Supreme Court was considered by the Upper Tribunal in relation to Schedule 24 in CF Booth.

In Tooth, Lord Briggs and Lord Sales in their judgment (with which Lord Reed, Lord Leggatt and Lord Burrows agreed) addressed the meaning of “deliberate inaccuracy” as follows:

“42.

[…] 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.

43.

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.

44.

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.

45.

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.

46.

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.

47.

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.”

There was no disagreement between the parties as to these principles, which we apply in these appeals.

The parties did then diverge, not only as to the application of these principles to the facts, but whether blind-eye knowledge may form the basis of the necessary knowledge and intention for deliberate conduct.

In CPR Commercials, the Upper Tribunal concluded at [23] that “where a taxpayer suspects that a document contained an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC then the inaccuracy is deliberate on the part of the taxpayer. If it were otherwise then a person who believed there was a high probability that their return contained errors but chose not to investigate would never be subject to a deliberate penalty. However, the suspicion must be more than merely fanciful.”

We follow this decision, and accept that in principle blind-eye knowledge may be sufficient to constitute deliberate behaviour. However, the earlier authorities on the meaning of blind-eye knowledge remain significant, and we refer to two in particular:

In CPR Commercials the Upper Tribunal had cited [116] of Lord Scott’s judgment in Manifest Shipping and continued:

“24.

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.”

The facts in CPR Commercials concerned whether the taxpayer had submitted VAT returns with deliberate inaccuracies and whether the taxpayer knew it had insufficient evidence to zero-rate exports of goods. The Upper Tribunal did not accept that there had been blind-eye knowledge of an inaccuracy despite the Tribunal having found that the taxpayer’s director was aware of VAT Notice 725 and the requirement to obtain evidence of export within three months of removal and the taxpayer had previously received assessments on the basis of the lack of export evidence.

We have made detailed findings as to the hours worked by umbrella employees, payment of agency expenses, claims made by umbrella employees, the way in which EE139 processed expenses claims, the spot-checking, and the Appellants’ awareness of inaccuracies or potential inaccuracies.

We have found that there were inaccuracies in the Returns arising from various situations – taxable pay being calculated at six hours per day when workers were generally working more than six hours, payment of tax-free round sum agency expenses, reimbursement of non-allowable expenses and invalid claims for AMAPs.

Mr Firth submitted that HMRC could only prove its case in relation to deliberate inaccuracies by taking us to each Return which was said to be inaccurate, showing us the inaccuracy and then evidencing the allegation that this was deliberate. We do not accept that that is the only way HMRC can prove its case to the required standard of proof. We can make findings of fact, draw inferences and reach conclusions based on all of the evidence before us and extrapolate therefrom. We take account of the full, detailed picture which is drawn by all of the evidence, and in the light of the overall context as set out in this decision notice.

We remain mindful throughout that the inaccuracies which we have found are of various different types, and that it is open to us to reach differing conclusions as to EE139’s conduct in relation to these various inaccuracies.

We have set out above the authorities on the meaning of deliberate. Without prejudice to the detailed guidance therein, which we follow and apply in these appeals, we would summarise the position by stating that an inaccuracy will be deliberate both:

There was no dispute that EE139 had, when submitting the Returns, intended that HMRC rely upon them as accurate. The evidence and submissions instead focused on the knowledge (or otherwise) of EE139 in relation to the inaccuracies.

We refer to the findings we made at [285] in relation to the awareness or means of knowledge of EE139 of the inaccuracies. Our assessment of all of the facts (including these) when viewed together is as follows:

Taking account of all of the evidence before us, we have concluded that HMRC have not established that EE139 had actual knowledge of inaccuracies in the Returns. We make the following points in this regard (which should be considered alongside our detailed findings of fact and the preceding discussion):

Having reached this conclusion about the absence of actual knowledge on the part of EE139, we have considered whether this is a situation where EE139 suspected that the Returns contained an inaccuracy but deliberately and without good reason chose not to confirm the true position before submitting the Returns to HMRC, ie whether there was blind-eye knowledge of the inaccuracies such that the inaccuracies were deliberate.

We have summarised at [307] to [310] above the parties’ submissions on whether the conduct was deliberate, and this summary referred to their positions on blind-eye knowledge. However, we consider it is helpful to refer here to the additional written submissions which we received after the hearing, in light of the decision in CPR Commercials.

Mr Ripley submitted that:

Mr Firth submitted that:

HMRC submitted:

At the outset we record that we agree with Mr Ripley’s summary referred to above of the approach laid down by the Court of Appeal in Manifest Shipping. We consider HMRC’s pleadings and then address the position in the light of the facts as found to assess whether EE139 had blind-eye knowledge of inaccuracies such that they were deliberate.

The SoCs include the following in relation to HMRC’s pleading that the behaviour was deliberate:

“[] 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.”

HMRC’s pleadings do thus refer to the allegation that EE139 should have known or must have known of inaccuracies. The SoCs do go on to set out further explanations of these paragraphs, including some specific examples of information provided by clients, or claims made by umbrella employees, but do not use the terminology of blind-eye knowledge. However, we consider that the SoCs are sufficiently clear as to HMRC’s position being that EE139 should have known that of the facts which gave rise to what HMRC submits were the inaccuracies and that this resulted in the inaccuracies being deliberate.

We proceed on the basis that the question of whether EE139 had blind-eye knowledge of any inaccuracies is before us, but continue to have regard to the submissions from both Mr Ripley and Mr Firth as to the need to identify whether any suspicions are firmly grounded and targeted on specific facts.

Viewing all of the circumstances as a whole, we consider that EE139 had various grounds for suspicion at different times during the Relevant Period:

Our view of the actions taken and not taken by EE139 in response was that there was a high level of inertia, and a failure to grapple with the substance of both the points being made by Officer McConnell and also the patterns evident before them. EE139 had two groups of potential sources of information available to them – the umbrella employees and its clients. There may well have been concerns about whether employees would respond to requests for information (but at times there were more than 400 employees, so there should have been a prospect of some responses); and both Appellants had contact with individuals at clients, who could have provided additional information (and did indeed do so later when specifically asked, eg PQMS replied to the questionnaire). Yet EE139 did not send a questionnaire to clients until after the Relevant Period and there was no documentary evidence of a concerted attempt to obtain information from employees (eg as to hours worked), rather than random requests for additional information about particular expense claims.

The overall picture is one where EE139 should not have had confidence that it was calculating taxable pay and reimbursing expenses (or paying AMAPs) correctly. Their processes were inadequate, and EE139 persisted with this approach when being confronted with information from Officer McConnell that, whilst they were not obliged to accept it at face value, at least merited full and prompt investigation.

However, when we consider the facts and circumstances in the light of the authorities, in particular Manifest Shipping, and the focus (at [116] thereof) on what is required of both the suspicion and the decision not to enquire, namely that the suspicion must be firmly grounded and targeted on specific facts, and the deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe, we have concluded that HMRC have not established that EE139 had blind-eye knowledge of the facts:

We have therefore concluded that any inaccuracies in the Returns were not deliberate on EE139’s part. The appeals by the Appellants are therefore allowed. However, we have addressed the remaining issues briefly as they were argued before us.

Paragraph 3 of Schedule 24 distinguishes between inaccuracies that are deliberate but not concealed and those that are deliberate and concealed in the following terms:

“3 Degrees of culpability

(1)

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

…

(b)

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

(c)

“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).”

In submitting that the conduct was concealed, HMRC’s submissions were that:

Mr Ripley and Mr Firth submitted that HMRC’s approach to the question of concealment was misconceived. The statement that some of the expenses represented taxable pay and should have been declared as such was no more than a statement that there is an inaccuracy. In order for a penalty to be deliberate a taxpayer must have intended HMRC to rely on a document knowing it was inaccurate. That necessarily entails misleading HMRC and if that were all that is required to constitute concealment, all deliberate inaccuracies would be concealed. That would leave no room for inaccuracies which are deliberate but not concealed. The concealment has to be something separate from the submission of a return containing an inaccuracy itself.

As a matter of principle, in the context of inaccuracies in documents, we agree with these submissions for the Appellants.

Schedule 24 itself does not include a definition of what is meant by “concealed” for this purpose. Paragraph 3 does, however, include two indicators which are of assistance:

We remind ourselves of the information contained in the Returns themselves:

On the facts, we consider that the submission of the Returns themselves did not involve any arrangements by EE139 to conceal the inaccuracy. The P35s and P14s included less information than the RTI returns, and notably did not include details of non-taxable payments made; but that was a consequence of the information required by such forms, and did not reflect any decision by EE139 not to provide this information.

HMRC’s pleadings largely seek to rely on the facts which they submit support a conclusion that the behaviour was deliberate. They do reference a scheme of systematic concealment; if that is merely a reference to the fact that there was a large number of Returns being submitted, that does not add anything to the pleadings in relation to deliberate behaviour. HMRC have not pleaded that any specific statement made, or document provided by EE139, or inaction of EE139 (separate from submission of the Returns) constituted concealment of the inaccuracies for this purpose.

Taking account of all of the evidence, we have considered whether subsequent actions (or omissions) provide evidence that EE139 attempted to conceal or cover-up the inaccuracy, having regard to the example given in the legislation (which we remind ourselves is simply an example, not an exhaustive definition) of submitting false evidence in support of an inaccurate figure.

In concluding that no statements made by EE139 in the July 2014 Meeting (or in subsequent correspondence) constituted concealment we have taken into account:

We reject HMRC’s submission that the inaccuracies were concealed.

Paragraph 4 of Schedule 24 sets out the amount of the penalty payable as a percentage of the PLR (30% for careless action, 70% for deliberate but not concealed and 100% for deliberate and concealed). The PLR is defined by paragraph 5(1) in respect of an inaccuracy in a document as the additional amount due or payable in respect of tax as a result of correcting the inaccuracy.

The Assessments issued to EE139 were based on 90% of the expenses payments made to umbrella employees being disallowed and treated as “additional” pay, taxed at 20%. This led to a calculation of £5,533,065 in unpaid PAYE tax and £6,991,449 in unpaid Class 1 NICs, a total of £12,524,514, and these were the amounts treated by HMRC as the PLR for the purpose of calculating the penalty.

The Appellants submitted that HMRC’s approach to the calculation of the PLR was wholly unreliable (with detailed submissions addressing the lack of evidence as to the use of 90% and the need to identify each inaccuracy which was then relied upon as a component of the PLR).

The discussion at [286] to [303] above sets out our consideration and conclusions on whether there were relevant inaccuracies in the Returns. We took account of the submissions of all parties, irrespective of whether they were made in the context of identifying inaccuracies or the calculation of the PLN.

Paragraph 10(1) provides that if a person who would otherwise be liable to a penalty has made a disclosure, HMRC must reduce the standard percentage to one that reflects the quality of the disclosure. Paragraph 9(1) provides that a person discloses an inaccuracy by:

“(a)

telling HMRC about it,

(b)

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

(c)

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.”

Paragraph 9(3) then provides that the quality of the disclosure includes its timing, nature and extent.

HMRC calculated the penalty on the basis that the disclosure was prompted and a reduction of 30% was made to reflect HMRC’s view of the quality of the disclosure (5% for telling, 10% for helping and 15% for giving access to records). For a deliberate and concealed inaccuracy, with a prompted disclosure, the penalty range is 50% to 100% of the PLR. The penalty percentage was then calculated as 85% of the PLR, which brought the amount of the penalty issued to EE139 to £10,645,836.90.

Both Appellants challenged HMRC’s refusal to allow a full deduction for cooperation (ie reducing the penalty to 50% of the PLR in the context of a deliberate and concealed inaccuracy), as well as the reasons given by HMRC for its position.

Paragraph 10 provides that HMRC “must” reduce the standard percentage to one that reflects the quality of the disclosure, and paragraph 17(2) provides that, on an appeal against the amount of a penalty, the Tribunal may affirm HMRC’s decision or substitute for HMRC’s decision another decision that HMRC had power to make. We thus have appellate jurisdiction in relation to the amount of the penalty (save in respect of reduction under paragraph 11, considered separately below). As was accepted by the Appellants, the burden is on EE139 to satisfy us that a greater reduction should have been given for the quality of disclosure.

We agree with HMRC that the disclosure was prompted, because EE139 did not inform HMRC about the inaccuracies before it had reason to believe that HMRC had or was about to discover it. Following submission of the Returns, EE139 had not sought to engage with HMRC until Officer McConnell commenced his investigation.

The penalty explanation schedule explains the reduction given by HMRC of 30%:

We consider that the reasons given by HMRC are unsatisfactory to the extent that they expressly rely (in the context of telling and helping) on EE139 not admitting that it knew the expenses were wrong, and not accepting there was a liability. A taxpayer is entitled to maintain its position that there is no inaccuracy in relevant documents, or that it did not have relevant knowledge, whilst nevertheless providing full co-operation and disclosure to HMRC. EE139’s refusal to admit knowledge or liability should not be relevant to the assessment of the quality of the disclosure.

On the basis of the facts:

We are not satisfied that the maximum reduction should have been given for the quality of disclosure – there were delays, and EE139 did not take the opportunity to provide a clear narrative in relation to the expenses claims and acceptance/rejection of claims within the samples. However, we would have considered that a higher reduction than the 30% allowed should have been granted, to reflect the volume of material which EE139 provided, and would allow a reduction of 50% for cooperation.

Paragraph 11 of Schedule 24 provides that if they think it right because of special circumstances, HMRC may reduce a penalty under paragraph 1. Paragraph 11(2) provides that “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.

HMRC had concluded that there were no special circumstances and did not reduce the penalty under this provision. Paragraph 17(3) provides that if the Tribunal substitutes its decision as to the amount of the penalty for HMRC’s, the Tribunal may rely on paragraph 11 to a different extent only if the Tribunal thinks that HMRC’s decision was flawed.

This discretion has been considered by the Upper Tribunal in Harrison v HMRC [2022] UKUT 216 (TCC) by reference to its previous decision in Edwards v HMRC [2019] UKUT 131 (TCC). At [54] in Harrison the Upper Tribunal stated:

“54.

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”.”

…

57.

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.”

Neither Mr Ripley nor Mr Firth put forward any detailed submissions as to evidence of special circumstances on the facts in these appeals. They did both refer, in the context of whether the penalty was attributable to the Appellants, to the fact that the expense claims (including for AMAPs) which HMRC submitted to be invalid had been submitted by the umbrella employees, that any inaccuracies resulted in the employees receiving higher net pay, and that EE139 (and thus the Appellants) had not benefitted from any understatement of tax.

We have considered all of the facts and circumstances in these appeals. We recognise that:

We are not persuaded that there was anything special about EE139’s circumstances. We are not satisfied that HMRC’s decision to this effect was flawed.

Paragraph 19(1) of Schedule 24 provides that 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.

The PLNs were issued by HMRC on the basis that each Appellant is liable for 50% of the penalty. HMRC’s position was that the Appellants were the joint directors of EE139 at all material times and there was no-one else to whom the inaccuracies are attributable. HMRC submitted that the Appellants were both responsible for the submission of inaccurate Returns, in particular:

HMRC submitted that the scale of unsubstantiated and false expense claims must have been accepted with the agreement of both Appellants, who must have turned a blind-eye to the obvious inaccuracies that were evident in both the overstated expense claims and understated hours.

Mr Ripley submitted that the benefit of any understatement of tax has been enjoyed by the employees, not by EE139 or the Appellants, and that HMRC’s approach fails to allocate any of the culpability to the workers. Paragraph 19 does not require that a total of 100% of the penalty is attributed to officers of the company, and any attribution must reflect culpability.

Mr Firth submitted that the deliberate conduct, not just the inaccuracy, must be attributable to the officer for paragraph 19 to apply. “Attributable to” means brought about by. HMRC appear to be relying on a submission that the scale of the false expense claims was such that Mr Jaekel must have known of them. Mr Firth rejected this – even if there were false expenses, there is no basis for concluding that Mr Jaekel was aware of them. Mr Jaekel was not office-based, was not involved in processing expenses or filing the Returns. Even if he did have some involvement in processing expenses, it would not follow that he would realise if a false expenses claim was sent in. There is no basis for attributing any part of deliberate conduct, in particular an intention to mislead HMRC, to Mr Jaekel. Furthermore, HMRC’s own case includes reliance on inaccuracies which are directly and immediately attributable to the employees who made false expenses claims, who sought to profit from such claims. It is thus wrong to assert that there is no one else to whom the inaccuracies are attributable.

Having concluded that the inaccuracies were not deliberate, the question of attribution cannot arise. We have found that EE139 did not have the necessary knowledge (either actual knowledge or blind-eye knowledge) and intention to mislead HMRC. Our view is that the basis for reaching the conclusion that behaviour was deliberate (eg whose knowledge and intention) should inform the question of attribution. In the present appeals, given that we have concluded the inaccuracies were not deliberate, it is difficult to reach a final conclusion as to attribution.

We therefore confine ourselves to the following:

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