The Commissioners for HMRC v Mohammed Zaman

The UT and Court of Appeal judgments in Award Drinks Ltd v HMRC [2020] UKUT 0201 (TCC) and [2021] EWCA Civ 1235 concerned the distinction between a legal and an evidential burden of proof in the context of a disputed VAT assessment.

In so far as is relevant, the UT made the following comments at [30] and [36] (cited with approval by the Court of Appeal), referring to Brady v Group Lotus Car Companies PLC [1987] 3 All ER 1050 and Ingenious Games and others v HMRC [2015] UKUT 0105 (TCC):

“The critical point was that the legal burden of proof and the evidentiary burden of proof were distinct…

Two principles emerge from Ingenious and Brady: (1) The burden of showing an assessment is incorrect remains on the taxpayer throughout the appeal. This is so even if the circumstances of the case are such that there either must, or may, have been some fraudulent conduct on the part of the taxpayer which is relevant to the tax liability…”

In Award Drinks, the Court of Appeal stated at [37]:

“Brady was a case about direct taxation, not VAT, but I can see no reason why the same principles should not apply to a "best of judgment" assessment to VAT made under section 73 of VATA 1994. The guidance given by Carnwath LJ in the Khan case may have been technically obiter on this point, but he regarded the position on an appeal against such an assessment as "well-established" and cited Brady with apparent approval. In my respectful view, he was clearly right to do so.”

It is, therefore, well-established law that on an appeal from an assessment to VAT the assessment stands good unless the appellant is able to produce evidence to show that it is wrong.

HMRC have always maintained that they bore the burden of proof in relation to the validity of issuing the PLN. They also accepted that Mr Zaman could appeal the PLN on the basis that the underlying assessment and penalty were wrongfully issued (see Bell v Revenue and Customs Commissioners [2018] UKFTT 225 (TC)).

However, HMRC submitted that the FTT erred in its failure to apply a shift in the evidential onus of proof in circumstances where Mr Zaman positively asserted before the FTT that there were no “vatable supplies”. At that point, HMRC submitted, Mr Zaman assumed the evidential burden of displacing the assessment, and, if he failed to discharge that evidential burden, the penalty would, accordingly, stand. The challenging of the VAT assessment in the context of an appeal against a PLN did not, and sensibly could not, affect the applicability in the PLN proceedings of the rules governing the way in which assessments to VAT are challenged. Whether an assessment to VAT was challenged directly (which, as we note above, did not happen in this case as Zamco brought no such appeal) or whether it was challenged as a defence to the bringing of penalty proceedings relating to the original assessment could not affect who bears the evidential proof in relation to any challenge brought to the VAT assessment.

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

The arguments advanced in support of the second ground of appeal can be summarised shortly.

Relying on Advocate General for Scotland v Murray Group Holdings Limited 2016 S.C. 201, HMRC submitted that no reasonable tribunal could have failed to conclude, as a matter of inference based on primary findings of fact and evaluating the whole circumstances, that the place of Zamco’s supplies was in the UK: (emphasis added)

“where the First-tier Tribunal has made a fundamental error in its approach to the case: for example, by asking the wrong question, or by taking account of manifestly irrelevant considerations, or by arriving at a decision that no reasonable tax tribunal could properly reach. In such cases we conceive that the Court of Session and the Upper Tribunal have power to interfere with the decision of the First-tier Tribunal as disclosing an error on a point of law (Edwards v Bairstow, per Lord Radcliffe, p 36).”

We were taken to a number of passages within the Decision which, HMRC submitted, support its submission that the FTT erred in its evaluation of the evidence. By way of example, the FTT having found that: (i) Zamco was involved in illicit activity; (ii) the illicit activity involved supply chains which operated (partly) in the UK; and (iii) the Appellant knew about this, the FTT nonetheless went on to infer that Zamco did not make supplies in the UK despite its concerns about the truthfulness of Mr Zaman’s evidence and its finding that there were unusual features present in the business.

HMRC submitted that the FTT erred in failing to give sufficient weight to factual issues and erred by postulating on what did or did not happen to certain goods and Zamco’s role in the supply chain at [95]:

“The facts that (i) payment was made by delivery of cash to the UK, and (ii) a few counterparties had UK connections, are in themselves insufficient to persuade us, on the balance of probabilities, that the goods made their way from French and German warehouses to the UK at, or before, Zamco on-sold them - they are not facts relating to the location of the goods. Similarly, our finding, by inference from the circumstances, that there was illicit activity somewhere in the supply chains, is not specific enough to persuade us of the likelihood that the illicit activity was smuggling into the UK at or before the point of Zamco’s sale. Rather, given the insubstantial role of Zamco in the supply chain, we find it more likely that “nothing at all” happened to the goods during the very short period of Zamco’s ownership: and so, given that Zamco acquired them in French and German warehouses, the likelihood is that they remained there up to and at the point of Zamco’s onward sale. As found at [91] above, we think it likely that Zamco’s role in the supply chain was one of “covering up” or obscuring illicit activity, rather than itself doing something more active such as organising smuggling into the UK.”

In those circumstances, HMRC submitted, the FTT erred in reaching its findings based on evidence which it had held to be unreliable.

Mr Zaman maintained that Zamco was trading outwith the scope of UK VAT and no VAT was involved in the company’s transactions. On this basis the assessments were wrong, and the PLN unlawfully issued. The burden of proof was put on HMRC who could not prove their case. There was no evidence of fraudulent or deliberate conduct and the FTT reached the correct decision by a reasonable evaluation of the evidence and taking all facts into consideration.

Mr Zaman distinguished Award Drinks on the basis that there was no allegation of smuggling in the present appeal nor was there any evidence of wrongdoing.

The FTT performed a careful analysis of a number of transactions including the documentation pertaining to those transactions, cash movements, Zamco’s customers and suppliers and warehousing. Neither party made any criticism of this analysis.

At [63], the FTT identified that:

“Prior tribunals have decided that, on an appeal against a PLN, arguments can be brought against the underlying penalty, where that penalty has not been appealed by the company:

(1)

In Bell v HMRC, the Tribunal agreed with Judge Kempster’s analysis in Jason Andrew v HMRC [2016] UKFTT 295 (TC)  “and the conclusion that it cannot have been  the intention behind the legislation to leave an unchallengeable company penalty” (at [160]).

(2)

The Tribunal in Hussain v HMRC also agreed with this approach (at [12]), as did the Tribunal in Jarvis v HMRC [2020] UKFTT 54 (TC) at [24].”

At [75] the FTT directed itself:

“As this is a penalty appeal, HMRC bear the burden of proof to show that the PLN was validly issued.  The standard of proof is the ordinary civil standard, being the balance of probabilities.”

However, in our judgment, HMRC are plainly right that, as per their submissions that we have set out above, if the challenge to the PLN was brought on the basis that the assessment to VAT on Zamco was wrong, the legal rules relating to the way in which the assessment could have been challenged by Zamco if it had appealed the assessment remain in play in any appeal against the PLN. As we set out above, it is well-established law that it is for the taxpayer to prove, by evidence, that an assessment to VAT issued by HMRC is incorrect. HMRC do not have that evidential burden and that cannot sensibly be affected by the fact that the challenge to the assessment occurs in satellite litigation where, as in this case, a penalty charged on Mr Zaman is sought to be defended on the basis that the assessment to VAT on Zamco was wrong. In our judgment, it is clear that the FTT lost sight of the fact that after establishing whether the PLN was validly issued, the evidential burden in relation to the assessment to VAT on Zamco shifted to Mr Zaman when he sought to positively challenge the assessment as the sole basis on which the PLN was invalidly issued: see the FTT’s overall conclusion at [96] as to whether HMRC had discharged the burden of proof: (emphasis added)

“We thus find that it has not been proven, on the balance of probabilities, that the alcoholic goods in question were removed to the UK by Zamco or under its directions; and so, for the same reason, it is not proved that the place of supply of all of Zamco’s supplies in the relevant period was the UK, such that its VAT returns in that period contained inaccuracies. Given the burden of proof on HMRC, this means that we have to allow the appeal…”

Read together with the FTT’s other findings, we consider that [96] discloses an error of law in relation to the burden of proof. We also consider that this affected the way in which the FTT approached the appeal against the PLN in a materially relevant way.

For the reasons that we have given, HMRC’s appeal in relation to the burden of proof issue succeeds. In those circumstances, there is no need for us to address in any detail HMRC’s alternative Edwards v Bairstow challenge to the FTT’s evaluation of its factual conclusions.

We simply note, in considering the evaluation of the facts in the light of the conclusion we have just expressed, the relevant question for the FTT was whether Mr Zaman had discharged the evidential burden of proof in relation to the assessment. The problem with the FTT’s conclusion was not that its factual findings were wrong. Rather, it answered the question by reference to whether HMRC had discharged the burden of proof which, despite the FTT having expressedsignificant reservations about the reliability of Mr Zaman’s evidence, led it to find in his favour.

For the reasons that we have given, the appellants have succeeded on Ground 1. The FTT erred in law by misdirecting itself and failing to recognise that the evidential burden lay with Mr Zaman in relation to his challenge to the assessment on Zamco. We consider that the error was material, and it follows, therefore, that we must set the Decision aside.

HMRC invited us to remake the Decision in such a way that Mr Zaman’s appeal against the PLN is dismissed. The FTT heard substantial evidence over the course of three days. We have not heard, or considered in detail, any of that evidence and in circumstances where the key issue is whether, on the basis of that evidence, Mr Zaman has discharged the evidential burden of challenging the assessment to VAT on Zamco, we consider it would be inappropriate for us to remake the Decision. In our view the proper course is to remit the case back to the same panel of the FTT for reconsideration in light of the conclusion we have reached. As we record above, neither party challenged any of the FTT’s underlying (or primary) factual findings and we should make it clear that the reconsideration of the appeal by the FTT is not an opportunity to ask the FTT to disturb those findings of primary fact or make new findings of primary fact.