Ramasamy Danapal v The Commissioners for HMRC

It was common ground that the FTT had a duty to give reasons for its finding that Firm A had acted carelessly in completing the tax return year in question and that a failure to do so would amount to an error of law on the part of the FTT. The well-known Court of Appeal judgment in Flannery v. Halifax Estate Agencies Ltd [2000] 1 WLR 377 sets out the relevant principles at page 381G to page 382 C as follows:

“(1)

The duty is a function of due process, and therefore of justice. Its rationale has two principal aspects. The first is that fairness surely requires that the parties especially the losing party should be left in no doubt why they have won or lost. This is especially so since without reasons the losing party will not know (as was said in Ex parte Dave) whether the court has misdirected itself, and thus whether he may have an available appeal on the substance of the case. The second is that a requirement to give reasons concentrates the mind; if it is fulfilled, the resulting decision is much more likely to be soundly based on the evidence than if it is not.

(2)

The first of these aspects implies that want of reasons may be a good self-standing ground of appeal. Where because no reasons are given it is impossible to tell whether the judge has gone wrong on the law or the facts, the losing party would be altogether deprived of his chance of an appeal unless the court entertains an appeal based on the lack of reasons itself.

(3)

The extent of the duty, or rather the reach of what is required to fulfil it, depends on the subject matter. Where there is a straightforward factual dispute whose resolution depends simply on which witness is telling the truth about events which he claims to recall, it is likely to be enough for the judge (having, no doubt, summarised the evidence) to indicate simply that he believes X rather than Y; indeed there may be nothing else to say. But where the dispute involves something in the nature of an intellectual exchange, with reasons and analysis advanced on either side, " the judge must enter into the issues canvassed before him and explain why he prefers one case over the other. This is likely to apply particularly in litigation where as here there is disputed expert evidence; but it is not necessarily limited to such cases.

(4)

This is not to suggest that there is one rule for cases concerning the witnesses truthfulness or recall of events, and another for cases where the issue depends on reasoning or analysis (with experts or otherwise). The rule is the same: the judge must explain why he has reached his decision. The question is always, what is required of the judge to do so; and that will differ from case to case. Transparency should be the watchword.”

We have no doubt in this case that the FTT failed in its duty to give adequate reasons for its finding that Firm A acted carelessly in completing the return in question. Aside from the point that HMRC’s Statement of Case made no allegation of carelessness on the part of Firm A as opposed to Dr Danapal himself, it was the duty of the FTT to explain what evidence it relied on in making its finding of carelessness and why that evidence demonstrated that Firm A had been careless. In order to do so, the FTT would have had to have considered what material was before Firm A when it completed the return, what it was told by Dr Danapal or his practice manager about that evidence and how it was that Firm A came to complete the return inaccurately. None of those matters are addressed by the FTT in the Decision. That is not surprising, because Firm A gave no evidence itself and was therefore not cross examined as to how it carried out its work in relation to Dr Danapal’s tax returns.

None of the matters relied on by HMRC demonstrate that adequate reasons were given. The only findings made by the FTT at [76] to [79] were that (i) Dr Danapal’s practice manager handled the maintenance of the accounting records (ii) Dr Danapal relied entirely on his accountants to complete the returns correctly (iii) Dr Danapal himself was believed in that regard so the FTT impliedly rejected any allegation of carelessness on his part and (iv) the accountants were qualified and their letters indicated an understanding of the issues. None of those findings explains why Firm A was careless in completing the returns. No explanation is given as to why a failure to complete the returns accurately could be attributed to a lack of care on the part of Firm A. The FTT gave no explanation as to why it had reached the conclusion that it did, in particular, why Firm A had failed to identify what was agreed were errors in the returns.

Nothing in the FTT’s later discussion on the question of carelessness improves the position. Although at [87] the FTT made a finding that the lack of care was in respect of the over claimed expenses for 2009/2010 no further explanation is given for that finding. Whilst at [99] the FTT found that there was a lack of care in relation to the 2010/2011 return, there was no further analysis of carelessness in respect of any the years covered by the Assessments.

We therefore find that Dr Danapal has made out his case on Ground 1 and that the FTT made an error of law in not giving adequate reasons for its decision on the carelessness issue.

We have no doubt that the FTT was not entitled to find that Firm A acted deliberately in completing the relevant return inaccurately in this regard.

Ms Sheldon accepted that the finding in this case that Firm A acted deliberately in causing an inaccurate entry to be made in the 2007/08 tax return could be characterised as a finding of dishonesty. She also accepted that it was not open to the FTT to make a finding of dishonesty where such an allegation had not been pleaded or put to the witness in cross examination.

As Henderson J said in Ingenious Games LLP v HMRC [2015] UKUT 1659 at [62] to [63]:

“[62] ….it is not open to HMRC to put allegations of dishonesty (or other serious forms of misconduct) to their witnesses, or to invite the FTT to make adverse findings of fact on such a basis, unless the relevant allegations have been pleaded with full particularity and the Appellants have been given a proper opportunity to respond to them.

[63] In cases where the burden of proof lies on HMRC to establish fraud or dishonesty, these principles undoubtedly apply in the same way as they would in ordinary civil litigation. Examples include cases where HMRC wished to make assessments to income tax outside normal time limits on the ground (before 1989) of fraud or wilful default under s 36 of the Taxes Management

Act 1970…”

The requirement under s 36 TMA to demonstrate fraud or wilful default has now been replaced with the concept of deliberate behaviour, but as was said in Tooth, deliberate behaviour in this context is conduct that amounts to fraud or is akin to fraud and HMRC have accepted that the behaviour alleged in this case can be characterised as dishonest. HMRC also accepted that the burden of proof is on them to prove the deliberate behaviour in question.

It is also clear in this case that HMRC, in its Statement of Case, made no allegation of deliberate behaviour against Firm A. That document pleaded that a loss of tax had arisen because Dr Danapal himself had acted deliberately or carelessly in completing the returns. Likewise, in its skeleton argument before the FTT, HMRC’s submissions on deliberate behaviour were confined to making submissions of deliberate behaviour on the part of Dr Danapal, making reference to his defence that he acted on the advice of Firm A. However, no direct allegations were made against Firm A and it is therefore to be assumed that HMRC rejected Dr Danapal’s contentions that he acted in accordance with advice given to him by Firm A.

In those circumstances, it was clearly wrong for the FTT to have made the findings they did of dishonesty on the part of Firm A. Such a finding could have had serious implications for Firm A as a professional firm of chartered accountants and it was given no opportunity to refute them.

In MRH Solicitors v Apex Hire Ltdand others [2015] EWHC 1795 a court found that in a claim for personal injury the underlying motor accident was staged and the claim was fraudulent. The Judge found the solicitors for the claimant were a party to the fraud. The solicitors had not been given any warning that the findings might be made. The solicitors took the matter to the Administrative Court which observed at [34] and [35]:

“34.

We well understand how the Recorder’s suspicions were aroused. However, in the absence of good reason a Judge ought to be extremely cautious before making conclusive findings of fraud unless the person concerned has at least had the opportunity to give evidence to rebut the allegations. This is a matter of elementary fairness. In Vogon International Ltd v the Serious Fraud Office [2004] EWCA Civ 104 at [29] May LJ (with whom Lord Phillips MR and Jonathan Parker LJ agreed) said,

“It is, I regret to say, elementary common fairness that neither parties to the litigation, their counsel nor judges should make serious imputations or findings in any litigation when the person concerned against whom such imputations or findings are made have not been given a proper opportunity of dealing with the imputations and defending themselves.”

35.

This is not only required because of fairness to the party affected but also to avoid the Court falling into error – see for instance Co-operative Group (CWS) Ltd v International Computers [2003] EWCA Civ 1955 at [ 38]. As Megarry J memorably said in John v Rees [1970] CH 345, 402,

“As everybody who has anything to do with the law well knows, the path of the law is strewn with examples of open and shut cases which, somehow, were not; of unanswerable charges which, in the event, were answered; of inexplicable conduct , which was fully explained…Nor are those with any knowledge of human nature who pause to think for a moment likely to underestimate the feelings of resentment of those who find that a decision against them has been made without their being afforded any opportunity to influence the course of events”

Accordingly, we reject Ms Sheldon’s submissions that the fact that an allegation of dishonesty in relation to the capital allowances and underdeclared turnover as made in HMRC’s skeleton argument and in the Statement of Case was sufficient. As we have observed, those allegations were made only against Dr Danapal and not against Firm A. Neither does the fact that questions were put to Dr Danapal regarding the behaviour of Firm A by a member of the FTT’s panel make any difference to the position. Questions from the Tribunal did not amount to a cross examination and in any event the questions were only put to Dr Danapal, not to Firm A.

We therefore find that Dr Danapal has made out his case on Ground 2 and the FTT made an error of law in concluding that Firm A had acted deliberately in relation to the inaccuracy contained in Dr Danapal’s tax return for 2007/2008 regarding the capital allowance claim for that year.

As set out at [32] above, the FTT found at [104] there was a deliberate omission of fee income which was the result of the action of either Dr Danapal or Firm A or both. No allegation of deliberate behaviour against Firm A was pleaded by HMRC and accordingly, for the reasons set out above, this finding cannot stand.

Ms Sheldon submitted that, as found by the FTT, Dr Danapal disputed the legality of the Assessments, but save in relation to an argument that some or all of them could only be for nil amounts, made no argument as to their amounts. In the absence of evidence from Dr Danapal, who had the burden of proof regarding whether turnover had been understated, it was open to the FTT to accept the amount of £24,755 as understated turnover.

Furthermore, Ms Sheldon submitted, it was open to the FTT, as it did at [102] to [104], to conclude that such a substantial amount could not have been omitted through carelessness and that a deliberate underreporting indicates a pattern of behaviour that was likely in the Assessment Years. This follows from the presumption of continuity: see Jonas v Bamford [1973] STC 519 at [540].

In circumstances where the FTT had found that the underreporting of income was deliberate, Ms Sheldon submitted that it was open to it to determine, in the absence of contrary evidence from Dr Danapal, that there had been a similar pattern of underreporting in previous years. Additionally, questions surrounding the understated turnover and associated deliberate behaviour were put to Dr Danapal in cross-examination.

We reject those submissions. In our view it was not open to the FTT on the basis of the evidence before it to make a finding that Dr Danapal had deliberately omitted fee income from his tax returns for the following reasons.

First, as recorded at [101] the FTT found that the figure included in the 2010/11 tax return was reduced following discussions between Mr Robinson and Firm A. That in itself casts doubt on whether the figures on which HMRC relied, namely review of the deposits into Dr Danapal’s personal and business bank accounts represented turnover. The FTT undertook no analysis as to why HMRC had agreed that the figure could be reduced.

As Mr Windle submitted, the evidence before the FTT showed that Firm A wrote to HMRC explaining that Dr Danapal took loans from family and friends while always inserting fee income into the fee book maintained by his staff. At a meeting with HMRC, Firm A repeated the contention that some of the deposits were transfers from family. It was conceded, however, that without documentary evidence of this, the deposits should be treated as sales.

As Mr Windle submitted, HMRC’s inability to identify the correct understatement of turnover at the first attempt demonstrates that calculating the turnover was not simply a matter of adding up the deposits into the bank accounts: further analysis of the source of the payments was required. The documents before the FTT show that identifying the source of the payments was non-trivial and that this work had not been undertaken by HMRC. Bank statements for the previous years were not adduced by HMRC to prove that the underreporting of turnover occurred in those years.

Secondly, as Mr Windle submitted, the FTT’s conclusion that it was for Dr Danapal to rebut the FTT’s inference of a pattern of behaviour (based on one year of limited evidence) was an improper approach to the burden of proof. The FTT was wrong to say that it was for Dr Danapal to adduce evidence to rebut the allegation that he had acted deliberately. As Mr Windle submitted, the FTT made a double inference (that there was an underreporting of turnover and that this inferred underreporting was deliberate) thereby effectively removing the requirement that HMRC prove the serious allegation of deliberate behaviour made against Dr Danapal.

Finally, the FTT does not record that any of its inferences of deliberate behaviour were put to Dr Danapal in cross examination and we can therefore infer that they were not. It was therefore clearly inappropriate for the FTT to have made that finding without the issue having been put squarely to Dr Danapal in cross-examination.

We therefore find that Dr Danapal has made out his case on Ground 3.

This ground is only relevant if any of the allegations of deliberate behaviour on the part of Dr Danapal are ultimately found to be made out. For the reasons set out at [65] to [78] below we have remade the Decision as a result of the errors of law made by the FTT regarding its conclusions on deliberate behaviour and have found that none of the allegations have been made out. In those circumstances, there is no need to address Ground 4 and in our view consideration of the point should be left to a case where it is relevant.

We have found that the Decision discloses a number of errors of law. That fact does not necessarily mean that we should allow the appeal and set aside the Decision. Section 12 TCEA provides that if the Upper Tribunal finds that the making of the relevant decision involved the making of an error on a point of law it “may (but need not) set aside” the decision, and that if it does it must either remit the case to the FTT with directions for reconsideration, or remake the decision. That language clearly indicates that we have a discretion in that respect. It is well established that we should not exercise our discretion to set aside the Decision if we are satisfied, notwithstanding errors of law in the Decision, that there was a sufficient basis in the findings of the FTT which were fully reasoned and not subject to challenge to justify its conclusions on the relevant issue.

We cannot be so satisfied in this case. In our view, the errors of law made by the FTT are material and we should set aside those parts of the Decision that relate to the Assessments in their entirety.

Ms Sheldon submitted that if we were to set aside the Decision, we should remit it to the FTT for a fresh hearing. However, we are satisfied that we can remake the decision on the basis of the evidence that was before the FTT for the reasons set out below. We do so by reference to each of the Assessments in turn.

The amount of the Assessment for this year was comprised of items representing (i) overclaimed expenses, which the FTT found to have occurred as a result of the carelessness of Firm A and (ii) understated turnover which the FTT found to have occurred as a result of deliberate behaviour on the part of either Firm A or Dr Danapal.

As regards the overclaimed expenses, in our view the Assessment in relation to those sums cannot stand. The only finding of carelessness was in relation to Firm A and, as we have found, inadequate reasons were provided for that finding. Having considered the evidence before the FTT, we can find nothing that will support a finding of carelessness against Firm A, particularly as there was no evidence from the Firm itself. There can be no finding of carelessness against Dr Danapal. The FTT found that he had not been careless in relation to the claims in question and HMRC have not challenged that finding.

As regards the understated turnover, for the reasons set out above there is no proper basis on which a finding of deliberate behaviour on the part of Firm A can stand. The question therefore is whether there is sufficient evidence to support a finding of deliberate behaviour against Dr Danapal.

We have considered whether it would be appropriate to remit the matter to the FTT for that to be determined, bearing in mind the credibility of Dr Danapal as a witness is relevant in that regard and the opportunity would arise for the allegations of deliberate behaviour to be put to him fairly and squarely. However, in the circumstances we are satisfied that we can remake this part of the Decision on the basis of the evidence put to the FTT and its own findings on Dr Danapal’s credibility.

In his witness statement filed with the FTT Dr Danapal said that his accountants dealt with HMRC and provided all the replies on whatever evidence was required by HMRC on his behalf. He said that his accountants only know the answers to the questions raised by them and the evidence required by them. He said it was his practice to provide all the information and evidence to his accountants of all his financial transactions and they selected the relevant information to file tax returns. He said that he was fully dependent on his accountants for their services.

It is clear that the FTT accepted that evidence. As we have previously mentioned, at [78] the FTT said that it believed Dr Danapal when he said he left everything to his accountants and followed their advice and that his private practice manager handled the maintenance of the accounting records. The FTT also found that it was unlikely that Dr Danapal knew how the figures in his returns were calculated.

On the basis of those findings, in our view there was no basis on which it could be found that Dr Danapal knowingly provided inaccurate information to Firm A. All that was relied on by HMRC was the bank statements provided in relation to the enquiry for the year 2010/2011 and in relation to that year Dr Danapal’s accountants accepted that that a number of the items represented fee income in the absence of a detailed analysis of what the relevant entries represented. No analysis of relevant items was undertaken in relation to the previous years and, as we have said the burden is on HMRC to show that items had been omitted deliberately by Dr Danapal rather than for Dr Danapal to have refuted the allegation by producing the bank statements in question. That evidence could clearly have been requested by HMRC and they never did so. On that basis, in our view there was no evidence before the FTT that could found a finding of deliberate behaviour on Dr Danapal’s part, having taken into account the FTT’s own assessment of his credibility as a witness.

Consequently, the allegation of deliberate behaviour on the part of Dr Danapal in relation to understated turnover in respect of this year of assessment cannot stand and the Assessment in relation to the amounts in question was therefore out of time.

For the reasons given in relation to 2006/07, the Assessment in relation to both the overclaimed expenses and understated turnover cannot stand.

In relation to the claim for capital allowances, for the reasons that we have given, the finding that there was deliberate behaviour on the part of a person acting on behalf of Dr Danapal, namely Firm A, cannot stand. There was no finding of deliberate behaviour on the part of Dr Danapal himself and HMRC have not challenged that conclusion. In any event, the Decision does not record any questions having been put to Dr Danapal about his knowledge or understanding of the capital allowance claims and therefore whether he was responsible for any deliberate inaccuracy in his tax return in that regard. Accordingly, there is no basis on which we should seek to alter that finding on appeal and the assessment in relation to the capital allowance claim was therefore out of time.

For the reasons given in relation to 2006/07 the Assessment in relation to both the over claimed expenses and the understated turnover cannot stand.

It follows from our conclusions in remaking the Decision in relation to each of the Assessed Years that all of the Assessments were made out of time. That follows from the fact that we have decided that HMRC have not satisfied the burden which rests with them to prove that either Dr Danapal or Firm A acted carelessly or deliberately in relation to the insufficiency of tax which was discovered by HMRC. Accordingly, the Assessments must be discharged.

The appeal is allowed.