The Commissioners for HMRC v Sintra Global, Inc & Anor

This is an appeal by the appellants, the Commissioners for His Majesty’s Revenue and Customs (“HMRC”), against a decision of the First-tier Tribunal (the “FTT”) dated 5 October 2022 (the “FTT Decision”) (Footnote: ¹).

In the FTT Decision (Footnote: ²), the FTT allowed the appeals of the respondents, Sintra Global Inc. (“Global”) and Mr Parul Malde, against various decisions and assessments of HMRC relating to the non-payment of VAT and excise duties and related penalties, which HMRC say arose from the fraudulent diversion of alcohol into the UK and its subsequent sale in the UK by Global and Sintra SA (“SA”). Global is a company that is incorporated in Panama. SA is a company incorporated in Belize. It is HMRC’s case that Global and SA were at all material times controlled by Mr Malde.

HMRC appeals against the FTT Decision with the permission of the FTT.

At the hearing, HMRC were represented by Mr Ben Hayhurst and Mr George Penny. Global and Mr Malde were represented by Alistair Webster KC and Mr Simon Gurney. We are grateful to counsel for their helpful submissions both orally and in writing and for their assistance during the hearing. We should express particular thanks to Mr Hayhurst (supported by Mr Penny) who, we understand, took over this case from John McGuinness KC at short notice due to a clash with Mr McGuinness’s other court commitments. We are also grateful to the parties for arranging for a transcript of the hearing, at our request. We have found the transcript to be of great assistance in considering the submissions of counsel made at the hearing.

As we have described above, it is HMRC’s case that SA and Global were involved in the fraudulent diversion of alcohol into the UK from the EU by a process known as “inward diversion fraud” resulting in unpaid VAT and excise duties. There is a description of inward diversion fraud in the Decision at FTT [7]. This description was taken from the decision of Judge Falk, as she then was, in Dale Global Ltd v HMRC [2018] UKFTT 363 (TC) at [50] to [52]. We set out those paragraphs for ease of reference below.

In the FTT Decision, the FTT made extensive findings about the background to these appeals. We will refer to some of the detail of the FTT’s findings later in this decision, but we have set out below a summary of the factual background in order to provide some context for our explanation of the various issues.

SA was incorporated in Belize on 10 June 2004 (FTT [132(3)]). At all material times, SA was controlled by Mr Malde.

SA engaged in trading goods, principally alcohol (wine and beer), between 2004 and 2011 (FTT [266]).

As part of its trade, SA purchased beer and wine in other EU member states from traders and wholesalers and sold those goods to Corkteck Limited (“Corkteck”), a UK registered alcohol trader, which was also controlled by Mr Malde (FTT [132)], [148], [266], [267]). In particular, between 2004 and 2007, SA purchased beer and wine from an unconnected company, York Wines Limited (“York Wines”), and sold those goods to Corkteck (FTT [266, [267]).

It is HMRC’s case that the sales to Corkteck were the “cover loads” as part of an inward diversion fraud, and that SA owned the alcohol that was supplied to Corkteck in the UK. It is also HMRC’s case that SA owned other alcohol which was sold in the UK as the “mirror loads”, as evidenced by sums deposited in SA’s bank accounts. The FTT found that SA made supplies of beer and wine in the UK (FTT [637]).

York Wines was subsequently the subject of a criminal investigation, referred to as “Operation Rust”, which resulted in the conviction, amongst others, of its sole director, Mr Kevin Burrage, for cheating the public revenue as a result of involvement in inward and outward diversion fraud (FTT [132(24)], [132(25)], [299]).

Global was incorporated in Panama on 16 February 2011 (FTT [132(7)]). It is HMRC’s case that Global was, at all material times, controlled by Mr Malde, although for reasons to which we shall return, the FTT made no finding of fact on that question.

At some point in 2011, Global took over the trade of SA and began trading in alcohol and other goods. As part of that trade, Global purchased alcohol from traders based in other EU member states (FTT [266], [300]). It sold alcohol to various purchasers. Some of the sales were made via Adrena sp. z o. o. (“Adrena”), a Polish company, to Corkteck in the UK. It is also HMRC’s case that Adrena was, at all material times, controlled by Mr Malde, although the FTT made no finding of fact on that question.

Once again, it is HMRC’s case that the sales to Corkteck were “cover loads” as part of an inward diversion fraud, and that Global owned other alcohol which was sold in the UK as the relevant “mirror loads”, as evidenced by sums deposited in Global’s bank accounts. For reasons to which we shall return, the FTT found that there was insufficient evidence that Global was the owner of alcohol that was supplied in the UK (FTT [644]).

HMRC launched an investigation into the activities of SA and Global. As a result of that investigation, HMRC concluded that SA and Global were controlled by Mr Malde, and that SA and Global had evaded VAT and excise duties on alcohol supplied in the UK by falsely declaring that the goods were destined for other EU countries or were in duty suspension.

As a result of their enquiries, HMRC issued the following decisions and assessments to SA, Global and Mr Malde.

In relation to SA:

In a letter dated 16 July 2015:

HMRC informed SA that it was liable to be registered for VAT for the period from 1 December 2004 to 26 March 2012 under section 3 of and Schedule 1 to the Value Added Tax Act 1994 (“VATA”);

HMRC assessed the amount of VAT payable by SA in respect of that period in the amount of £11,749,664.22 by a “best judgment” assessment under section 73 VATA.

In a letter dated 20 July 2015, HMRC issued an assessment to SA under section 12(1) Finance Act 1994 (“FA 1994”) in respect of unpaid excise duty for the period from 1 December 2004 to 26 March 2012 in the amount of £19,583,773.

In a letter dated 8 December 2016, HMRC informed SA that they intended to charge a civil evasion penalty under section 60 VATA in the amount of £11,162,180 as a result of SA’s dishonest failure to register for VAT and to submit VAT returns for the period from 1 December 2004 to 26 March 2012 (the “civil evasion penalty”). HMRC informed SA that they intended to recover 100% of the civil evasion penalty from Mr Malde by notice under section 61 VATA. As a result, HMRC would not be seeking to recover any of the civil evasion penalty from SA.

In relation to Global:

In a letter dated 16 July 2015:

HMRC informed Global that it was liable to be registered for VAT between 1 April 2012 and 30 June 2015 under section 3 of and Schedule 1 to VATA;

HMRC assessed the amount of VAT payable by Global in respect of that period in the amount of £8,921,064.64 under section 73 VATA;

Also on 16 July 2015, HMRC issued a penalty assessment to Global under section 123 of and paragraph 1 of Schedule 41 to the Finance Act 2008 (“FA 2008”) in the sum of £8,698,035.42 (the “registration penalty”) in relation to the failure of Global to notify HMRC of its liability to register for VAT for the period from 1 April 2012 to 30 June 2015.

In a letter dated 20 July 2015, HMRC issued an assessment to Global under section 12(1) FA 1994 in respect of unpaid excise duty for the period from 1 April 2012 to 30 June 2015 in the amount of £14,184,948.

On 11 October 2017, HMRC issued a penalty assessment to Global under Schedule 24 to the Finance Act 2007 (“FA 2007”) in the sum of £8,698,035.42 in relation to an inaccurate VAT return submitted on 12 October 2016 (the “inaccuracy penalty”) (in the alternative to the registration penalty).

On 21 December 2017, HMRC issued a penalty assessment to Global in the sum of £13,830,324 pursuant to paragraph 4 Schedule 41 FA 2008 for handling goods subject to unpaid excise duty (the “excise duty penalty”).

In relation to Mr Malde:

HMRC issued a personal liability notice (“PLN”) to Mr Malde on 16 July 2015 pursuant to paragraph 22 Schedule 41 FA 2008, making Mr Malde liable for the registration penalty.

HMRC issued a PLN to Mr Malde on 11 October 2017, pursuant to paragraph 19 of Schedule 24 to the Finance Act 2007 (“FA 2007”), in the alternative to the registration penalty, making Mr Malde liable for the inaccuracy penalty.

HMRC issued a director’s liability notice (“DLN”), dated 8 December 2016, to Mr Malde pursuant to section 61 VATA, making Mr Malde liable for the payment of the civil evasion penalty.

HMRC issued a PLN to Mr Malde on 21 December 2017, pursuant to paragraph 22 Schedule 41 FA 2008, making Mr Malde liable for the excise duty penalty.

SA did not appeal against the decision that it was liable to be registered for VAT and the related VAT assessment (at [17(1)(a)] and [17(1)(b)] above), or the excise duty assessment (at [17(2)] above), or the civil evasion penalty (at [17(3)] above).

Global did not appeal against the inaccuracy penalty (at [18(4)] above) or the excise duty penalty (at [18(5)] above). Global appealed to the FTT against the other decisions and assessments.

Mr Malde appealed to the FTT against each of the PLNs and the DLN that were issued to him.

In its statements of case for each of the relevant appeals, HMRC pleaded that both SA and Global “were involved in alcohol diversion fraud; selling large quantities of beer and wine in the UK without accounting for VAT and excise duty”.

Global’s appeals against the VAT assessment (at [18(1)(b)] above) and the excise duty assessment (at [18(3)] above) could not be entertained by the FTT unless either Global deposited the disputed amount of tax or excise duty with HMRC or HMRC was satisfied or the FTT decided that the requirement to deposit that amount would cause Global to suffer hardship (section 83(3) and (3B) VATA and section 16(3) FA 1994). Global applied to the FTT for a decision that it would suffer hardship if it were required to deposit the tax or the duty. That application was refused by the FTT in a decision dated 26 October 2016 (Footnote: ³).

As a result, the matters before the FTT were in summary as follows:

the appeals of Global against:

the decision of HMRC, contained in the letter dated 16 July 2015, that Global was liable to be registered for VAT between 1 April 2012 and 30 June 2015;

the registration penalty issued by HMRC on 16 July 2015;

the appeals of Mr Malde against:

the PLN issued by HMRC on 16 July 2015 in respect of the registration penalty;

the PLN issued by HMRC to Mr Malde on 11 October 2017 in respect of the inaccuracy penalty;

the PLN issued by HMRC to Mr Malde on 21 December 2017 in respect of the excise duty penalty; and

the DLN, dated 8 December 2016, issued by HMRC to Mr Malde pursuant to section 61 VATA in respect of the civil evasion penalty.

Before we turn to the FTT Decision, we will set out some of the legislative background.

As we have mentioned above, HMRC made the VAT assessments against SA and Global under section 73(1) VATA. Section 73 permits HMRC to make an assessment “to the best of their judgment” where, inter alia, a taxpayer has failed to make returns as required by VATA. At all material times, section 73(1) VATA was in the following form:

The civil evasion penalty levied against SA was issued under section 60 VATA. At the relevant time, section 60 VATA was, so far as relevant, in the following form:

HMRC issued a DLN to Mr Malde under section 61 VATA in respect of the civil evasion penalty issued to SA. Under section 61, HMRC was able to issue a DLN to recover the amount of a penalty assessed on a company under section 60 VATA (or a proportion of such a penalty) from a director or managing officer of the company in certain circumstances. At the relevant time, it was in the following form:

Section 60 and section 61 VATA were repealed by FA 2007, subject to certain transitional rules. The former penalty regime was replaced by a new regime found in Schedule 24 FA 2007 and Schedule 41 FA 2008. HMRC issued the registration penalty and the inaccuracy penalty to Global and the relevant PLNs in respect of them to Mr Malde under Schedule 41 FA 2008 and Schedule 24 FA 2007.

Under paragraph 1 Schedule 41 FA 2008, a penalty is payable by a person where that person fails to comply with a “relevant obligation”. A relevant obligation is an obligation listed in the table in paragraph 1. The table includes, in relation to VAT:

“Obligations under paragraphs 5, 6, 7 and 14(2) and (3) of Schedule 1 to VATA 1994 (obligations to notify liability to register and notify material change in nature of supplies made by person exempted from registration).”

Paragraphs 5, 6 and 7 Schedule 1 VATA 1994 are the obligations on persons who make taxable supplies or who expect to make taxable supplies with a value in excess of the relevant threshold to notify HMRC of a liability to register for VAT.

Under paragraph 22 Schedule 41 FA 2008, HMRC may issue a PLN to recover the amount of a penalty (or a proportion of it) payable by a company under paragraph 1 Schedule 41 (and certain other provisions of Schedule 41) from an officer of the company in certain circumstances. At all material times, paragraph 22 was in the following form, so far as relevant:

Under paragraph 1 Schedule 24 FA 2007, a penalty is payable by a person where that person gives HMRC a document of a kind listed in the table in sub-paragraph (4) of paragraph 1, that document contains an inaccuracy, and the inaccuracy was careless or deliberate on that person’s part. The table in sub-paragraph (4) includes in respect of VAT:

Under paragraph 19 Schedule 24 FA 2007, HMRC may issue a PLN to recover the amount of a penalty payable by a company under paragraph 1 Schedule 24 for a deliberate inaccuracy (or a proportion of it) from an officer of the company in certain circumstances. At all material times, paragraph 19 was in the following form, so far as relevant:

HMRC made the excise duty assessments against SA and Global under section 12(1) FA 1994. At all material times, section 12(1) VATA was in the following form:

HMRC issued the excise duty penalty to Global under Schedule 41 FA 2008. Under paragraph 4 Schedule 41 FA 2008, a penalty is payable by a person, who acquires excise goods after the duty point for the goods, where the duty has not been paid. Paragraph 4 was in the following form at all material times:

The relevant PLN was issued to Mr Malde under paragraph 22 Schedule 41 FA 2008, which we have set out at [32] above.

The FTT Decision sets out in considerable detail and at some length a description of the evidence before the FTT, the FTT’s views of that evidence and the witnesses, the FTT’s findings of fact, and details of HMRC’s investigation, before turning to the issues before the FTT and the FTT’s conclusions on them. We will address some aspects of the FTT Decision in more detail when we turn to the various grounds of appeal. However, for present purposes, we will set out a brief summary of the FTT Decision in order to provide some background to our discussion of the issues.

The FTT identified the issues before it as follows (FTT [4]):

The FTT began its decision by setting out an extensive summary of the evidence before it (FTT [8]-[131]). This summary included an outline of the evidence provided by the witnesses who had appeared before the FTT.

There were 24 officers of HMRC who gave witness evidence and who were cross-examined on their statements. In addition, the witness statements of a further 21 HMRC officers were not challenged, and their statements were admitted into evidence (FTT [108]).

The FTT criticised the evidence of some of the witnesses who appeared on behalf of HMRC. For example, the FTT was critical of the evidence of Mr James Dibb, an officer in HMRC’s Fraud Investigation Office – Organised Crime – Civil MTIC/Alcohol Team. Mr Dibb had undertaken much of the underlying analysis of how SA and Global operated. In the FTT’s view his evidence was “inconsistent to the extent of misleading” (FTT [27]).

The FTT reserved particular criticism for the evidence of Mr Dean Foster. Mr Foster was also a member of HMRC’s Fraud Investigation Service, Organised Crime – Civil MTIC/Alcohol Team. The FTT found that Mr Foster was responsible for the decisions which were the subject of most of the appeals, with the exception of the excise duty assessments (FTT [80]). The FTT found that Mr Foster was “unable to answer our questions in relation to many of the topics he had addressed in his first witness statement” (FTT [52]) and that his answers to questions were “frequently evasive, often obstructive, and on occasions inconsistent, contradictory and misleading” (FTT [53]).

The witnesses who appeared before the FTT also included Mr Malde, and two other witnesses, Mr Andrew Quay and Mr Steven Simmonite, Mr Malde’s tax adviser, who gave evidence on behalf of Global and Mr Malde. Another witness, Mr Eric van de Vondel, produced a witness statement, but did not appear in person. The FTT accepted his evidence albeit with reservations as to the weight that could be afforded to it (FTT [107]).

The FTT was also critical of Mr Malde’s evidence. It found much of his evidence was “inconsistent with statements that he had previously made in interviews and/or correspondence and as such casts doubt on its veracity” (FTT [83]).

The FTT set out its findings of fact in a lengthy section, which begins at FTT [132]. This section includes a limited agreed statement of facts followed by a description of the activities of the various companies over the relevant period. This description includes:

details of various seizures of alcohol by the UK Border Force between 1 July 2011 and 5 November 2013 (FTT [159]-[175]), noting, in relation to those seizures, that SA was designated as the owner of the relevant goods up to a date in 2011, and from 20 December 2011, Adrena was identified as the owner of the relevant goods (FTT [170]-[174]);

a description of the police investigation in relation to Operation Rust in relation to which Mr Malde was interviewed by the police (FTT [185]-[210]);

a description of the formation and operations of SA and Global in relevant periods, including Mr Malde’s authority to act on behalf of both companies and the operation of their bank accounts (FTT [212]-[265]);

details of the trading arrangements of both SA and Global in the relevant periods, as derived from HMRC’s enquiries (FTT [266]-[354]);

details of HMRC’s enquiries into commission payments made by SA and Global to Mr Malde between 24 March 2011 and 21 March 2014 in an aggregate sum of £2,991,794.84 (FTT [355]-[360]);

a description of evidence drawn from various criminal investigations including:

evidence from Operation Rust relating to the sale of alcohol by York Wines to SA (FTT [404]-[413]);

evidence from “Operation Banjax” – which resulted in the convictions of ten individuals for money laundering the proceeds of diversion frauds – which, HMRC say, relates to payments made to and by Global and other companies controlled by Mr Malde (FTT [414]-[436]);

evidence from “Operation Epsom”, a fraud “predicated on the sale of illicit alcohol” (FTT [437]-[456]);

details of interviews given by Mr Malde to HMRC on 1 December 2009, 10 December 2013, and 4 December 2015, the latter of which took place under the Practice Note 160 procedure and was also attended, amongst others, by Mr Simmonite and by Mr Malde’s solicitors (FTT [457]-[485]); and

a summary of the evidence given by Mr Simmonite relating to his analysis of the SAGE records of York Wines, on which HMRC rely in relation to the assessments on SA (FTT [486]-[510]).

The FTT then turned to the various assessments made by HMRC on SA, Global and Mr Malde. We will return to the detail of the manner in which HMRC computed the sums in the assessments and the penalty notices later in this decision. For present purposes, the following summary will suffice.

In the absence of information from SA, Mr Foster computed the VAT liability of SA for the period 1 December 2004 to 26 March 2012 for the purposes of the assessment under section 73 VATA in the following manner:

For periods for which this information was available, Mr Foster computed the ratio which the purchases of alcohol made by SA from York Wines (as taken from SA’s bank statements) bore to the total sales made by York Wines to SA as shown in its SAGE records (referred to as the “cash/bank ratio”).

Mr Foster applied that cash/bank ratio to the purchases of alcohol made by SA (as taken from SA’s bank statements) for other periods for which the SAGE records were not available to produce a figure of total purchases by SA for all periods.

Mr Foster applied a mark-up of 19.61% to that total figure to produce a total value of sales from which to calculate the VAT due. The mark-up was derived from the average gross profit ratio for wholesalers and cash and carry businesses provided by HMRC’s Business Information Unit. No allowance was given for input tax.

In the absence of information from Global, Mr Foster computed the VAT liability of Global for the period 1 May 2012 to 13 May 2014 for the purposes of the assessment under section 73 VATA by:

applying the same cash/bank ratio to the movements on the cash at bank figures derived from Global’s bank statements and, in some cases, allowing a discount of 10% for bank charges and non-trading expenditure, to produce a figure for the purchases of alcohol;

applying the same mark-up of 19.61% to that total figure to produce a total value of sales from which to calculate the VAT due. No allowance was given for input tax.

The civil evasion penalty on SA, the registration penalty on Global and the related DLN and the PLN were all calculated by reference to these figures. Mr Malde was treated by HMRC as a director or officer of SA and Global and the failures to register as being attributable to him (FTT [543]-[548]).

The inaccuracy penalty and the related PLN were issued by HMRC when Mr Malde submitted a “nil” VAT return for Global for the period 1 July 2012 to 30 June 2015 (FTT [549]).

The excise duty assessments were based entirely on the VAT assessments (FTT [554]).

Having set out the procedural issues and summarized the applicable legislation, the FTT addressed two preliminary issues before turning to the issues that it had identified as being before it: the first of these was the burden of proof; the second was the order in which it proposed to address the relevant issues.

As regards the burden of proof, the FTT noted that the “general position” on tax appeals was that it was “for the taxpayer to establish the correct amount of tax due” and that “this burden of proof does not change merely because allegations of fraud may be involved” (FTT [593]). The FTT cited the judgment of Mustill LJ in Brady (Inspector of Taxes) v Group Lotus Car Companies plc [1987] 3 All ER 1050 (“Brady”) in support of this principle.

The FTT noted two exceptions to this general position.

The first was where “fraud was an essential element of the basis of assessment” as in the case of missing trader intra-community (“MTIC”) appeals based on the Kittel principle or “where fraud or dishonesty is pleaded with full particularity”. In such cases, the burden was on HMRC (FTT [593]-[594]).

The second was that HMRC bore the burden of proving that a person is liable to a penalty on the grounds that Article 6 of the European Convention on Human Rights (“ECHR”) was engaged (FTT [595]).

On that basis, the FTT concluded that it was for HMRC “to establish the allegations before the tribunal and the liabilities to penalties” (FTT [596]), with the exception of issues of the quantum of the liability for the purposes of the best judgment assessments, which the FTT proposed to address separately.

The FTT then addressed the order in which it intended to approach the issues that were before it. It concluded – after accepting a submission from Mr Webster KC that to do otherwise would, in effect, reverse the burden of proof – that it was appropriate to determine the questions as to whether SA and Global diverted alcohol to and sold alcohol in the UK (which the FTT referred to as the “place of supply issue”) before turning to the question of whether Mr Malde was the controlling mind behind SA and Global (FTT [598]-[605]).

As regards the main issues before it, the FTT reached the following conclusions.

SA was the owner of alcohol that was smuggled into the UK and sold in the UK between 2004 and 2011 (FTT [637]).

In “the absence of evidence that Global was the owner of goods that were supplied in the UK”, Global was not liable to be registered for VAT in the relevant periods (FTT [644]).

Given its conclusion on the question of place of supply it was not necessary for the FTT to determine whether Mr Malde was the controlling mind behind Global (FTT [645]).

Mr Malde controlled SA in all relevant periods (FTT [649]).

HMRC and, in particular, Mr Foster did not “fairly consider” the evidence before them and accordingly the assessment made against SA was not made to the best of their judgment as required by section 73 VATA. The FTT considered that the failings of HMRC and Mr Foster in this regard were of such a degree that, had the assessment been appealed by SA, it would have been necessary to set it aside in its entirety “in the interests of justice” (FTT [664]).

As a consequence of these findings, the FTT allowed Global and Mr Malde’s appeals against all the decisions and assessments (FTT [666]). The FTT did not need to determine whether the PLN issued to Mr Malde in respect of the excise duty penalty had been issued in time and it did not do so (FTT [665]).

The FTT commented (at FTT [667]):

On 25 November 2022, HMRC made an in-time application for permission to appeal against the FTT Decision on six grounds. The grounds were set out in detail in the application. In summary, they were as follows:

the FTT erred in law when it concluded “in general terms” that the burden of proof fell on HMRC to establish the allegations before the tribunal and the liabilities to penalties (FTT [593]-[596]);

the FTT erred in law in its approach to the issues and evidence by compartmentalizing factors rather than examining the totality of the evidence;

the FTT’s conclusion (at FTT [643]) that Adrena “supplied” the alcohol in the UK (and that Global did not) was demonstrably inconsistent with the underlying evidence;

the FTT erred in law in concluding that there was a breach of the “best of their judgment” requirement in section 73 VATA (in relation to the liability of SA, which underlies the civil evasion penalty);

in the alternative to (4), even if there had been a breach of the “best of their judgment” requirement in relation to some elements of the assessment, it was an error of law to set aside the whole assessment rather than correcting the amount to a fair figure (FTT [662]-[663]); and

the FTT failed to give any or adequate reasons with respect to a number of key matters set out in the application.

The FTT granted permission to appeal on all grounds on 9 December 2022.

Ground 1 is that the FTT erred in law when it concluded that the burden of proof fell on HMRC “to establish the allegations before the tribunal and the liabilities to penalties”.

As we have mentioned above, the question of where the burden of proof lies assumes some significance in this case. This is because of the manner in which the FTT reached its conclusion that Global was not liable to be registered for VAT in the UK.

The relevant passage in the FTT Decision is at FTT [642]-[644] where the FTT says this:

HMRC dispute much of the reasoning in this passage. We will address their other points later in this decision. However, as can be seen from this passage, the FTT relied upon HMRC’s failure to prove that Global owned any of the goods that were sold in the UK in determining that Global had not made taxable supplies in the UK and so was not liable to register for VAT in the UK. That conclusion was sufficient to determine all the appeals in favour of Global and Mr Malde, with the exception of Mr Malde’s appeal against the DLN.

The FTT commenced the relevant section of the FTT Decision by noting that the “general position” on tax appeals was that it was “for the taxpayer to establish the correct amount of tax due” and that “this burden of proof does not change merely because allegations of fraud may be involved”. The FTT said this (at FTT [593]):

The FTT went on to identify two exceptions to this general rule.

The first was where “a connection to fraud is an essential element of the basis of assessment” such as in the case of MTIC appeals based on the Kittel principle (Footnote: ⁴) (FTT [594]).

The second was where fraud or dishonesty is pleaded by HMRC with full particularity (FTT [594]):

“In addition, in any case where fraud or dishonesty is pleaded with full particularity, as in the present case, HMRC adopts the burden of proof in relation to those allegations which should not be made without evidence by which the allegations can apparently be justified.”

The FTT then drew a contrast with cases involving a penalty. In such cases, HMRC bore the burden of proving that a person was liable to a penalty on the grounds that Article 6 of the European Convention on Human Rights (“ECHR”) was engaged. The FTT said this (at FTT [595]):

On that basis, the FTT concluded that it was for HMRC “to establish the allegations before the tribunal and the liabilities to penalties” (FTT [596]), with the exception of issues of the quantum of the liability for the purposes of the best judgment assessments (which would inform the quantum of any penalty), which the FTT proposed to address separately. As we understand it, the FTT reached this conclusion because:

in the present case, HMRC had pleaded a particularized case of fraud against Global and Mr Malde, and so, in relation to Global’s appeal against HMRC’s decision that Global was liable to be registered for VAT, the burden of proof was on HMRC;

all the other appeals were penalty appeals, and so, once again, the burden of proof was on HMRC.

HMRC disputes this reasoning; the respondents support it. In summary, the parties’ submissions are as follows.

For HMRC, Mr Hayhurst submits that there is a strand of authorities which supports the proposition that in all tax cases (including appeals against penalty assessments) the burden is on the taxpayer except where: (i) the statute expressly or impliedly places the burden of proof on HMRC or (ii) where the liability for which HMRC contends requires proof of particular knowledge or state of mind on the part of the taxpayer. The clearest example of the latter exception is the requirement on HMRC to show that the taxpayer knew or should have known of a connection with fraud in relation to cases within the Kittel principle.

Mr Hayhurst says that, in addition to Khan, this strand of authorities includes the cases of Brady, Ingenious Games LLP v HMRC [2015] UKUT 0105 (TCC) (“Ingenious”), and Awards Drinks Limited v HMRC [2021] EWCA Civ 1235 (“Awards”).

For the respondents, Mr Webster KC submits:

In relation to tax assessments, the burden of proof is on the taxpayer to show that the relevant assessment is wrong and to establish the correct amount of tax that is due.

There is an exception to that general principle where dishonesty or fraud is expressly alleged by HMRC against a taxpayer. In such cases, HMRC must plead, particularize and prove dishonesty or fraud in the same way that it would have to do so in civil proceedings (E Buyer UK Ltd v HMRC [2017] EWCA Civ 1416 (“E Buyer”) per Sir Geoffrey Vos C, as he then was, at [98]).

Where a penalty is imposed upon a taxpayer, HMRC bears the burden of proving liability to that penalty, unless an exception to Article 6 ECHR can be justified (Euro Wines v HMRC [2018] EWCA Civ 46 (“Euro Wines”)).

Although it is possible to justify an exception to the application of Article 6 ECHR in some cases, given the nature of the appeals in this case, it would not be appropriate to make an exception. The FTT was correct to impose the burden of proof on HMRC.

We have been referred by the parties to a significant body of case law in relation to this ground of appeal. We have taken the parties’ submissions on those authorities into account, but do not intend to comment on all of them in this decision. It will be sufficient for us to focus on the leading authorities.

In addition, notwithstanding Mr Hayhurst’s submissions that there is a general principle applicable to both proceedings in appeals against tax assessments as well as penalty assessments, we find it more straightforward to approach this ground of appeal by reviewing separately the principles that can be derived from the case law authorities in relation to appeals against tax assessments themselves before turning to those which can be derived from the case law authorities in relation to appeals against penalty assessments.

We will begin with the position in relation to appeals against tax assessments (not including penalties).

Subject to certain exceptions, to which we will return below, on an appeal against an assessment to tax, the general rule is that, unless the statute expressly or impliedly provides otherwise, the burden is on the taxpayer to show that the assessment is wrong and to establish the correct amount of tax that is due (see, for example, T Haythornthwaite & Sons Limited v Kelly (Inspector of Taxes) [1927] 11 TC 657, Tynewydd Labour Working Men’s Club and Institute Limited v Customs & Excise Commissioners [1979] STC 570 (“Tynewydd”), Grunwick Processing Laboratories Ltd v Customs & Excise Commissioners [1987] STC 357).

The rationale for this rule is variously expressed in the cases. In some cases, it is referred to as a product of the statutory rules that an assessment will stand good unless it is successfully appealed (such as in section 50(6) Taxes Management Act 1970). In others, it is expressed as an exception to the general principle that the person who asserts must prove on the grounds that the taxpayer is usually in a position to produce the evidence that he or she needs to prove his or her case (see, for example, Tynewydd at page 580). In Khan, Carnwath LJ suggested that the rule may be a product of a broader principle that, subject to certain exceptions, the burden is on an appellant in the case of an appeal against an enforcement action taken by public authority (Khan [70]).

There are some well-established exceptions to this general rule. These are typically cases where a particular state of mind or particular conduct on the part of the taxpayer is an essential element of the liability for which HMRC contends. So, for example, in MTIC cases, which rely on the Kittel principle, it is for HMRC to show that the taxpayer knew or should have known that the transactions in which he or she was involved were connected to fraud (Mobilx Ltd and others v HMRC [2010] EWCA Civ 517 (“Mobilx”) per Moses LJ at [81]). HMRC also have the burden of proving an allegation that a transaction is a sham (Hitch and others v Stone (Inspector of Taxes) [2001] EWCA Civ 63 per Arden LJ at [32]) or that transactions involve an abuse of law in order to invoke the principles in Halifax plc and others v Commissioners of Customs & Excise (C-255-02) (“Halifax”) in VAT cases (Massey (t/a Hilden Park Partnership) v HMRC [2015] UKUT 405 (TCC) (“Massey”) at [60]).

Mr Webster KC, for the respondents, sought to persuade us of a more general principle consistent with the FTT’s conclusion that HMRC adopts the burden of proof in any case where “fraud or dishonesty is pleaded with full particularity” (FTT [594]). Mr Webster submitted that in this case, HMRC had pleaded fraud and so HMRC assumed the burden of proof. This was the case even if the relevant liability to tax did not require proof of fraud or dishonesty.

In support of his submission, Mr Webster KC referred us to the decision of the Court of Appeal in E Buyer. In E Buyer, HMRC appealed against two decisions of the Upper Tribunal to the effect that HMRC was required to plead dishonesty against the respondents in MTIC fraud cases. The Court of Appeal allowed HMRC’s appeals. Sir Geoffrey Vos C summarized his conclusions in the following way (at E Buyer [90]):

He continued (at E Buyer [98]):

Hallett LJ makes a similar point in her judgment (at E Buyer [103]).

Mr Webster also relied on the decision of the Upper Tribunal in Massey. Massey concerned arrangements for the running of a golf course, which HMRC asserted constituted an abuse of law under the principles in Halifax. On the question of the burden of proof, the Upper Tribunal said this (at Massey [58] – [59]):

The Upper Tribunal concluded (at Massey [60])

In our view, these cases fall short of establishing the principle for which Mr Webster contends. In E Buyer, Sir Geoffrey Vos C and Hallett LJ are simply making the point that, if HMRC are asking the court or tribunal to make a finding of fraud or dishonesty against the taxpayer, HMRC must properly plead, particularize and prove their case. We note that E Buyer is an MTIC case and Massey an abuse of law case, so the burden was on HMRC in any event – in E Buyer, to show the relevant connection to fraud and, in Massey, to prove an abuse of law. They are not cases in which HMRC would not otherwise have the burden of proof in relation to the essential elements of the tax liability, but are treated as adopting the burden of proof simply because they assert in their pleadings that the taxpayer’s conduct amounts to fraud or dishonesty.

If we turn to the case of Khan, on which the FTT relies as authority, we equally cannot read the passage to which the FTT refers (Khan [73] – [74]) as supporting its conclusion or for that matter Mr Webster KC’s principle. We will address that passage in more detail below, but, in our view, the judgment of Carnwath LJ is consistent with our view that, unless one of the well-established exceptions applies, the burden remains on the taxpayer in tax appeals and is not reversed merely because allegations of fraud or dishonesty are involved (whether as a result of HMRC pleading fraud or dishonesty as part of its case or by suggesting that a taxpayer or a witness is guilty of fraud or dishonesty in meeting the taxpayer’s case). Indeed, Carnwath LJ expresses that principle in almost precisely those terms earlier in his judgment (at Khan [69]) where he says:

We are confirmed in our view by the judgments in the other cases in the line of authorities to which Mr Hayhurst refers. These cases clearly establish that the burden of proof is on the taxpayer to demonstrate that the assessment is wrong and to establish the correct amount of tax and is not reversed simply because HMRC assert fraud or dishonesty in traversing the taxpayer’s case.

The first in this line of authorities is Brady. In that case, the General Commissioners discharged two assessments to corporation tax on the grounds that the Inland Revenue had failed to show that certain payments had been made to the taxpayer company. This was on the basis that, in the absence of evidence that the payments had been made to the company, the Inland Revenue were in effect alleging that there had been fraud, and that, in those circumstances, it was incumbent on them to prove fraud. The High Court (Sir Nicholas Browne-Wilkinson VC) allowed the Inland Revenue’s appeal and remitted the case to the Commissioners on the grounds that the Commissioners had misdirected themselves in law as to the onus of proof.

The Court of Appeal dismissed the taxpayer’s appeal. As Mustill LJ explained in his judgment, although, in correspondence with the taxpayer, the Inland Revenue had originally put their case on a basis that might have required HMRC to prove fraud, wilful default, or neglect, their case before the Commissioners related simply to the underlying liability and did not require them to plead fraud. Mustill LJ said this (at page 1058c-1058d):

For this purpose, it was not relevant to the burden of proof that, in traversing the taxpayer’s case, HMRC raised issues from which it might be inferred that the taxpayer was guilty of fraud. In that context, Mustill LJ said this (at page 1059e-f):

On this issue, Mustill LJ concluded (at page 1060):

The next case to which Mr Hayhurst referred was Ingenious. This is a decision of Henderson J, as he then was, sitting as a judge of the Upper Tribunal, in which he allowed, in part, an appeal against a decision of the FTT dismissing an application for an adjournment. As part of his decision, Henderson J addressed the question as to how the case should be managed where HMRC’s case was not pleaded as a case involving fraud, but allegations of dishonesty were to be put to the taxpayer’s witnesses. He said this (at Ingenious [62] – [65]):

In this passage, Henderson J is dealing primarily with a case management issue. However, the passage highlights the key distinctions as we see them. In a case where fraud, dishonesty or some other serious conduct is an essential element of the tax liability in question, HMRC will have the burden of proof in respect of that issue. HMRC must plead that conduct with appropriate particularity (Ingenious [63]). In other cases, the burden remains on the taxpayer to displace the closure notice (Ingenious [64]), although as a matter of procedural fairness, if HMRC wish to put questions to a witness suggesting fraud or dishonesty on the part of that witness, they are required to ensure that the allegation has been put to the witness fairly and squarely in cross-examination, together with the evidence supporting the allegation, and the witness has been given a fair opportunity to respond to it (Ingenious [65]).

The final case in this line of authorities to which we were referred by Mr Hayhurst was Awards. This case involved an appeal against two best judgment assessments made under section 73 VATA.

Henderson LJ then quoted the passage from his judgment in Ingenious (at Ingenious [62] – [65] to which we have just referred and continued (at Awards [40]) by referring with approval to the conclusions of the Upper Tribunal in Awards:

In his judgment in Awards, Henderson LJ therefore essentially reiterates some of the key principles from his judgment in Ingenious that we have summarized above.

We regard all these cases (Brady, Ingenious, Awards together with Khan) as supportive of our view. We accept that none of them directly addresses the question of whether HMRC assumes the burden of proof in relation to the essential elements of the tax liability in a case where fraud or dishonesty is not an essential element, but HMRC pleads fraud or dishonesty. However, in our view, the burden does not change in such cases; the burden remains on the taxpayer to show that the closure notice is wrong and to establish the correct amount of tax. If for any reason, HMRC plead fraud or dishonesty in such cases – for example, because HMRC are seeking such a finding from the court or tribunal because of the part that it might play in future penalty proceedings – HMRC should plead their case with appropriate particularity, and prove it. However, that does not reverse the burden of proof in relation to the essential elements of the underlying assessment.

For these reasons, we do not agree with the FTT’s broad conclusion or with Mr Webster KC’s general principle.

On an appeal against a penalty assessment, it is well-established that the general rule is that the burden is on HMRC to prove all aspects giving rise to the penalty (see, for example, R (PML Accounting Ltd) v HMRC [2018] EWCA Civ 2231 (“PML”) [101]).

The underlying rationale for this presumption is commonly stated to be that appeals against penalty assessments are “criminal” proceedings for the purposes of Article 6 ECHR (King v Walden [2001] STC 822 at [71], Customs & Excise Commissioners v Han [2001] EWCA Civ 1040). If so, Article 6(2) ECHR requires that a defendant be presumed innocent until proven guilty. It follows that the burden falls on HMRC to prove that the conditions for a penalty to be issued are met.

In his submissions to this tribunal, Mr Webster KC acknowledged that the right of a defendant under Article 6(2) ECHR is a “qualified right”. Article 6(2) does not prohibit the creation of presumptions of fact or law (Salabiaku v France (1988) 13 EHRR 379, Sheldrake v DPP [2004] UKHL 43 (“Sheldrake”)). However, exceptions to the presumption of innocence have to be confined within reasonable limits and should not be arbitrary. In appropriate cases, therefore, it may be possible to justify an exception to the general principle to the extent that it is a justifiable and proportionate response to a legitimate issue. The justifiability of any exception requires “an examination of all the facts and circumstances of the particular provision and the particular case” (Sheldrake [21] per Lord Bingham).

In this respect, Mr Webster KC referred to the decision of the Court of Appeal in Euro Wines. That case concerned the imposition of a penalty on a person holding excise goods under paragraph 4 Schedule 41 FA 2008. The taxpayer appealed against the decision of the Upper Tribunal that the provisions of section 154 CEMA 1979 – which imposed the burden of proof on the taxpayer to show that duty had been paid on excise goods – was incompatible with Article 6(2) ECHR. The Court of Appeal dismissed the appeal finding that, in the circumstances, it was reasonable and proportionate to impose the reverse burden of proof on traders in excise goods. In reaching this conclusion, David Richards LJ, giving the judgment of the court, took into account the following factors (i) that the penalty was of a regulatory nature and its imposition was not dependent on the proof of fault on the part of the trader (Euro Wines [34]); (ii) that the penalty was being imposed on a trader in excise goods, who would be aware of the risks of holding goods in respect of which duty had not been paid (Euro Wines [35]); and (iii) that it remained open to the trader to disprove the presumption or to show that the trader had a reasonable excuse for the default (Euro Wines [38]). In those circumstances, David Richards LJ considered that the reverse burden of proof was justified “in circumstances where the evasion of duty was a longstanding problem with serious consequences for the public finances” (Euro Wines [42]). Mr Webster KC says that there is no such justification in the present case for a departure from the general rule.

As we have mentioned, Mr Hayhurst, for HMRC, argued before the Tribunal that even on an appeal against the penalty assessment, the general rule was that the burden of proof fell on the taxpayer except where statute expressly or impliedly provided otherwise or one of the well-established exceptions (such as in cases involving the application of the Kittel principle) applied. He made this argument by reference to the series of cases to which we have just referred (namely Brady, Khan, Ingenious, and Awards).

We do not accept this submission. As an initial point, we do not accept that this line of cases is authority for the position that Mr Hayhurst advances. This is particularly the case in relation to the decisions in Brady, Ingenious and Awards. These cases are not penalty cases. As we have discussed, they establish that, in a tax appeal the burden is on the taxpayer even in cases which involve allegations of fraud or dishonesty subject to the well-established exceptions to which we have referred. They do not justify a departure from the general rule – based on Article 6(2) ECHR – that, in penalty proceedings, the onus is on HMRC to prove all aspects of the case required to impose the penalty subject to any exceptions expressly or impliedly required by that statute.

The only penalty case in the line of cases to which Mr Hayhurst refers is Khan. That case involved appeals by the taxpayer, Mr Khan, against a decision of the Commissioners for HM Customs & Excise that his taxable supplies had been above the VAT threshold, with the consequence that he should have been registered for VAT, against a “best judgment” assessment to VAT under section 73 VATA, and against a civil penalty under section 60 VATA.

The appeals raised various issues: unfairness at interview; breach of Article 6 ECHR at the hearing of the appeals before the tribunal; the burden and standard of proof; and irrationality. So far as the burden of proof was concerned, the Commissioners had not disputed that the burden was on them to prove that Mr Khan had acted or omitted to act for the purposes of evading VAT, and that his conduct involved dishonesty. Mr Khan’s argument was that the burden was also on the Commissioners to show that the VAT threshold had been exceeded and, for the purposes of the penalty calculation, that the “best judgment” assessment (by reference to which the penalty was calculated) was correct. The Commissioners conceded that the burden of proof lay on them not only to show that Mr Khan’s supplies had exceeded the VAT registration threshold, but also to establish the quantum of tax evaded. Their contention was that they had discharged these burdens.

In the Court of Appeal, Carnwath LJ was not content with the analysis of the parties in relation to the burden of proof. As he explained, at Khan [68]:

Carnwath LJ then supplied his own analysis, beginning with the appeal against the underlying assessment to VAT (at Khan [69] to which we refer at [78] above). He then went on to consider the question of burden of proof more generally, at Khan [70]:

After citing two planning cases in support of this proposition, Carnwath LJ set out his analysis of where the burden of proof lay in relation Mr Khan’s appeals, including the appeal against the civil evasion penalty. The relevant part of the judgment is found at Khan [73]-[74]:

There is an argument that this guidance from Carnwath LJ in Khan is strictly obiter given that the Court of Appeal was able to reach its decision on the basis of the agreed position of the parties (to which Carnwath LJ refers at Khan [69]). However, the judgment is referred to with approval by Henderson LJ in Awards (Awards [37]). Although it is not strictly binding upon us, we take due regard of the analysis set out in this judgment as being at least helpful guidance and guidance which we should follow (particularly in relation to the burden of proof in the context of civil evasion penalties under section 60 VATA).

We note, in particular, the following points from Carnwath LJ’s judgment.

As a general point, Carnwath LJ’s analysis suggests that the burden is on the taxpayer in both tax appeals and penalty appeals except where the statute expressly or impliedly dictates otherwise (Khan [73]). In this respect, the comments of Carnwath LJ lend some support to the principle for which Mr Hayhurst, on behalf of HMRC, argued before this tribunal.

These comments have to be read in their context, namely that of an appeal against a civil evasion penalty under section 60 VATA. In such a case, the statute is clear that the burden falls on HMRC in relation to the intention to evade VAT and dishonesty (see section 60(7) VATA). The clear implication was that the burden of proof on other matters fell on the taxpayer. This point is acknowledged by Carnwath LJ in his judgment (Khan [73], [74(ii)]). Those other matters included the quantum of the underlying liability where the burden of proof fell on the taxpayer “for all purposes” i.e. including for the purposes of the civil evasion penalty (Khan [73]);

Even so, as Carnwath LJ acknowledges (Khan [73]), in proving an intention to evade VAT for the purposes of section 60 VATA, HMRC must necessarily also prove “the fact of evasion”. For that reason, the burden was on HMRC to establish that the VAT threshold had been exceeded and, by implication, also that the taxpayer had made sufficient taxable supplies in order to exceed the relevant threshold.

In relation to the question of the burden of proof in relation to the amount of the underlying tax liability on which the penalty was based, the burden remained on the taxpayer. In this context:

Carnwath LJ considered that any concerns about the application of Article 6 ECHR in this context were adequately addressed by the fact that section 60(7) VATA placed the burden on HMRC in relation to the issues of dishonesty and evasion (Khan [74(iii)]);

Carnwath LJ directly addressed the question of the burden of proof in penalty cases where there had been no appeal against the underlying assessment – which was not the case in Khan itself (see Khan [74(v)]). In his view the amount of the liability assessment in such cases became an amount of VAT due (by virtue of section 73(9) VATA) and in the separate penalty proceedings there was no scope to reopen the underlying assessment;

finally, Carnwath LJ notes that there are policy reasons for the burden of proof being imposed on the taxpayer in relation to questions of the underlying liability. The alternative – that the burden was on HMRC – would favour non-compliant and uncooperative taxpayers (Khan [74(vi)]).

As we have mentioned above, this passage provides some support for the proposition that Mr Hayhurst advances. However, the judgment has to be set in its context. Furthermore, as the Carnwath LJ’s analysis acknowledges, any decision on where the burden of proof lies has to pay due regard to and be compatible with the presumption of innocence in Article 6(2) ECHR. The reason that Carnwath LJ was able to come to the view that the onus was on the taxpayer in relation to the quantum of the tax liability was that the statute provided clear guidance as to where the burden should fall, and he was satisfied that the requirements of Article 6(2) were met at least in part by the allocation of the burden in relation to issues of evasion and dishonesty to HMRC.

In the usual case, an appeal against the imposition of the penalty will take place against the background of an appeal against the tax liability to which it relates. The assessment of that liability will either have been finalised or will be determined as part of the same proceedings. The statements made regarding the burden of proof in many cases concerning penalty assessments will therefore often assume that questions relating to the substantive liability have been settled. Such statements can properly be regarded as limited to the conditions that have to be fulfilled for the imposition of the penalty (for example, the conduct of the taxpayer and whether that conduct has brought about a loss of tax).

That having been said, the case law is clear that it is open to a taxpayer when disputing a penalty assessment to challenge the underlying tax liability itself (see, for example, Bell v HMRC [2018] UKFTT 0225 (TC) [159]-[160]). If a taxpayer seeks to do so, issues of issue estoppel (rare in tax cases) and/or abuse of law may arise (see HMRC v Kishore [2021] EWCA Civ 1565)). However, HMRC have not sought to argue that estoppel or abuse of law issues arise in these appeals.

In a case where a taxpayer does challenge a penalty assessment on the grounds that the underlying tax assessment is wrong and an estoppel or abuse of law issue does not arise, there is a potential conflict between the two general rules to which we have referred governing the burden of proof in tax appeals and the burden of proof in penalty appeals. This is particularly acute where the underlying assessment has not been the subject of litigation.

Of the cases to which we have been referred, there is only one case outside the First-tier Tribunal that directly addresses this issue. That is the Upper Tribunal decision in Zaman v HMRC [2022] UKUT 252 (TCC) (“Zaman”). In that case, the taxpayer, Mr Zaman, appealed against a PLN which had been issued to him following a VAT assessment on a company, Zamco Limited, of which he was the sole director. Zamco did not appeal the assessment.

The FTT allowed Mr Zaman’s appeal on the grounds that HMRC had not shown, on the balance of probabilities, that the relevant goods (alcoholic drinks) had been supplied in the UK. On appeal to the Upper Tribunal, HMRC argued that the FTT erred by failing to apply a shift in the “evidential onus of proof” in circumstances where Mr Zaman asserted before the FTT that there were no “vatable supplies”. At that point, HMRC argued, Mr Zaman assumed the evidential burden of displacing the assessment, and, if he failed to discharge that burden, the penalty should stand (Zaman [22]). The Upper Tribunal allowed HMRC’s appeal. The Upper Tribunal said this at Zaman [34]:

The Upper Tribunal’s decision in Zaman therefore suggests that if a challenge to a penalty assessment is made solely on the basis that the underlying assessment to tax is wrong, the burden remains on the taxpayer to show that the assessment was wrong. The burden does not fall on HMRC simply because the matter is being determined as part of an appeal against the penalty. The burden only falls on HMRC in respect of the additional requirements that are required to be fulfilled in order to impose a penalty.

The Upper Tribunal is very clear in its decision in Zaman. However, we do have some reservations about it. In particular, there is no reference in the decision to the potential application of Article 6(2) ECHR. Nor is there reference to the leading cases on the burden of proof in the case of penalty assessments (such as King v Walden, Khan and Euro Wines). This is so notwithstanding that the practical effect of the decision of the Upper Tribunal in Zaman appears inconsistent with the guidance of Carnwath LJ in Khan (albeit in a different statutory context) in that Carnwath LJ accepted that some essential elements of the underlying tax liability (i.e. whether the threshold was exceeded) were part of the issue of evasion and for HMRC to prove.

Having reviewed the authorities, in our view, the key cases (principally King v Walden and Euro Wines) are clear that the question of the scope of the burden of proof in penalty appeals must be determined by reference to the application of the presumption of innocence in Article 6(2) ECHR. On that basis, the burden must fall on HMRC in penalty appeals unless an exception to the presumption can be justified. Whether or not an exception can be justified will depend upon all the facts and circumstances of the case. A penalty appeal in which a penalty is challenged on the basis that the underlying assessment is wrong – once questions of estoppel or abuse of process have been addressed – remains a penalty appeal. As such, and as a general rule, the principle that the burden is upon HMRC in penalty appeals includes a penalty appeal of this kind; that is to say a penalty appeal where the challenge is made on the basis that the underlying assessment is wrong.

As we have mentioned above, it is arguable that Carnwath LJ’s comments regarding the burden of proof in his judgment in Khan are strictly obiter. However, they are approved by Henderson LJ in Awards (Awards [37]). In any event, we do not regard our conclusion as inconsistent with Carnwath LJ’s judgment in Khan. In our view, his judgment falls within the exception. The relevant statute in Khan – section 60(7) VATA – defined the matters that were for HMRC to prove on any appeal. The clear implication was that the burden fell upon the taxpayer in relation to other matters. Carnwath LJ considered the implications of Article 6(2) ECHR and decided that they were adequately addressed.

As regards the decision of the Upper Tribunal in Zaman, which falls within the same statutory context as the appeals against the PLNs in this case, for the reasons that we have given, in our view the decision may be regarded as per incuriam given that there is no reference in the decision to the leading cases on penalty appeals or to Article 6(2) ECHR. In any event, we respectfully disagree with the conclusion in that case. We acknowledge that, although a decision of the Upper Tribunal is not binding on a later Upper Tribunal, as a tribunal of coordinate jurisdiction we should normally follow the decision of the earlier tribunal unless we are satisfied that the earlier decision is wrong (see Gilchrist v HMRC [2014] UKUT 169 (TCC) at [94]). However, on this issue, we are satisfied that the decision in Zaman is wrong, and so we will not follow it.

We turn now to the application of those principles to the facts of this case.

We will deal first with the DLN issued to Mr Malde.

The DLN was issued by HMRC under section 61 VATA in relation to the civil evasion penalty imposed on SA as a result of SA’s dishonest failure to register for VAT. Under the DLN, HMRC seek to recover the whole of the penalty from Mr Malde “as if he were personally liable under section 60 VATA to a penalty” of that amount (section 61(3) VATA).

It is therefore Mr Malde who appeals against the imposition of the civil evasion penalty itself (the “basic penalty” as referred to in section 61(2) VATA). In relation to Mr Malde’s appeal against the basic penalty, the same rules apply to Mr Malde’s appeal as would have applied to an appeal by SA. Accordingly, as in Khan, section 60(7) VATA applies to impose the burden of proof on HMRC in relation to the questions of whether SA has for the purposes of evading VAT taken any action or omitted to take any action and whether that conduct involves dishonesty. In proving the intention to evade, HMRC must also prove the fact of evasion (Khan [73]). In Khan, Carnwath LJ took the view that “in most cases, proof of intention to evade is likely to depend partly on proof of the fact of evasion” (Khan [73]). The effect was that, in a case involving a penalty for failure to register for VAT, the burden was on HMRC to show that the VAT threshold had been exceeded. We take a similar approach in this case.

In the present case, the issue of whether the threshold has been exceeded necessarily involves not only the question of whether the level of supplies that were made by SA exceeded the threshold, but also the question of whether those supplies were made in the UK. Following the guidance set out by Carnwath LJ in Khan, both of these issues fall to HMRC to prove in order to establish liability to the basic penalty. That conclusion is also consistent with the authorities suggesting that the general rule in penalty appeals is that the burden is on HMRC to prove all aspects relating to the imposition of the penalty (King v Walden, PML).

The exception, to which Carnwath LJ referred in Khan, relates to the burden of proof in relation to the quantum of the underlying tax liability by reference to which the penalty is calculated. In Khan, Carnwath LJ expressed the view that the burden remains on the taxpayer in relation to the quantum of the underlying tax liability. This was on the basis that the implication of the drafting of section 60(7) VATA was that issues other than those identified in the section as falling to HMRC to prove must fall to the taxpayer (Khan [74(ii)]). Any concerns about the implications of Article 6(2) ECHR were, in Carnwath LJ’s view, adequately addressed by the imposition of the burden on HMRC in relation to the issues identified in section 60(7) (Khan [74(iii)]). In accordance with that guidance, Mr Webster KC conceded in his submissions to this tribunal that the burden fell on the taxpayer in relation to issues as to the quantum of the underlying liability. That view was also consistent with the FTT’s treatment of the issues in this case. We would follow the same approach.

In addition, to the appeal against “the basic penalty”, although Mr Malde is not entitled to appeal against the issue of the DLN itself, he is, in accordance with section 61(5)(b) VATA entitled to appeal against both HMRC’s decision that the conduct of SA giving rise to the penalty (i.e. the failure to register) was attributable to his dishonesty, and against HMRC’s decision to recover 100% of the civil evasion penalty from him rather than the company. In relation to the burden of proof on these issues, we can derive no guidance from Khan as it did not involve a DLN. However, in our view, the burden must fall on HMRC. This is a penalty appeal and so Article 6(2) ECHR would ordinarily dictate that the burden of proof should fall on HMRC (as outlined in King v Walden and PML) in the absence of factors which justify a departure from the presumption of innocence in Article 6(2) ECHR. There are no such factors in this case. Furthermore, the former issue involves an assertion by HMRC of dishonesty on the part of Mr Malde, which in accordance with general principle, HMRC must plead and prove.

It follows that we find no error in the FTT’s approach in relation to the DLN. All the issues before the FTT were for HMRC to prove apart from the quantum of the underlying liability on which the penalty was based.

We turn now to the penalties that were issued under the regime in FA 2007 and FA 2008.

Apart from the quantum of the underlying liability on which the penalty was based, the key issues involved in relation to each of the penalties were as follows.

In relation to the registration penalty charged on Global under paragraph 1 Schedule 41 FA 2008, the key matters to be proved are that:

Global was required to register for VAT (i.e. its taxable supplies exceeded the VAT threshold) but failed to register; and

the failure was due to relevant conduct on the part of Global.

In relation to the PLN issued to Mr Malde in respect of the registration penalty under paragraph 22 Schedule 41 FA 2008, the key matters to be proved are that:

a penalty is payable by Global under paragraph 1 for the failure to register;

the failure was deliberate; and

the failure was attributable to Mr Malde.

In relation to the PLN issued to Mr Malde in respect of the inaccuracy penalty under paragraph 19 Schedule 24 FA 2007, the key matters to be proved are that:

a penalty is payable by Global under paragraph 1 Schedule 24 FA 2007, which requires it to be shown that Global submitted a return containing an inaccuracy, the inaccuracy led to a loss of tax, and that the inaccuracy was careless or deliberate on the part of Global;

the failure was deliberate, and

the failure was attributable to Mr Malde.

In relation to the PLN issued to Mr Malde in respect of the excise duty penalty under paragraph 22 Schedule 41 FA 2008, the key matters to be proved are:

that a penalty is payable by Global under paragraph 4 Schedule 41 FA 2008 which requires it to be shown that Global was holding excise goods for which payment of duty was outstanding;

that the failure was deliberate; and

that the failure was attributable to Mr Malde.

At this point, we should note that we have treated Global’s appeal against the decision of HMRC that it was required to register for VAT as subsumed within the appeal against the registration penalty. Although at first sight, it would appear that this is a separate appeal (and not a penalty appeal), in this case, the only practical manifestation of the decision that Global was required to be registered for VAT purposes is the registration penalty. The issues that are relevant – in particular, whether Global made taxable supplies in the UK in excess of the VAT threshold – are the same as those which form the basis of the registration penalty. In our view, any decision on the imposition of the burden of proof in relation to the decision that Global was required to be registered must therefore follow the decision on the burden of proof in relation to the registration penalty.

Leaving aside the issue of the quantum of the penalty, Mr Webster KC says that there was no intention on the part of Parliament to change the burden of proof at the time of the introduction of the revised penalty regime FA 2007 and FA 2008. The position was intended to be the same as that under the civil evasion penalty regime. Mr Webster KC referred us to various extra-statutory materials including Explanatory Notes for the legislation introducing the revised penalty regime and various extracts from HMRC’s manuals.

We prefer not to base our decision on the extra-statutory materials. In our view, we can determine this issue by reference to the principles drawn from the case law to which we have previously referred. These are penalty appeals. On all of the issues relating to the penalty, the burden should fall on HMRC as they are all issues to which Article 6(2) ECHR potentially applies unless there is some good reason to justify a departure from that principle. We have considered whether the presumption of innocence in Article 6(2) ECHR should apply in these cases. This is not a case (such as Euro Wines) of a statutory exception to the general rule which can be tested by reference to whether the exception is a justifiable and proportionate response to a legitimate legislative aim. In the absence of an express statutory provision to the contrary, in our view, the general rule – that on penalty appeals the burden falls on HMRC – should apply. We can see no good reason to depart from the general principle in this case. These are significant penalties. They are dependent on proof of “deliberate” conduct on the part of Global and/or Mr Malde, which even if it does not equate directly to the concept of dishonesty carries similar connotations of moral turpitude.

The question for us is whether that general rule should also apply to those aspects of the appeals where the appellants’ case challenges the penalties on the grounds that call into question essential elements of the relevant tax assessment – principally, in relation to the VAT penalties, whether or not Global made taxable supplies in excess of the threshold, and, in relation to the excise duty penalties, whether Global held excise goods in the UK on which excise duty had not been paid.

As we have described, those points were decided by the FTT’s conclusion that there was an “absence of evidence” that Global was the owner of the goods that were supplied in the UK. That conclusion which was clearly based on its decision on the burden of proof, in effect, decided all the penalty appeals in the appellants’ favour with the exception of the appeal against the DLN.

This is therefore a similar question to that which arose in Zaman, where the Upper Tribunal decided that, in circumstances where no appeal against the underlying liability had been contested, the burden in relation to those elements should remain on the taxpayer.

We will not follow that approach in this case. These are penalty appeals. The general rule is that the burden is on HMRC to prove all aspects of these appeals that relate to the imposition of the penalties consistent with the presumption of innocence in Article 6(2) ECHR. We should only depart from that rule where a justifiable and proportionate exception to the presumption can be justified on the facts and circumstances of the case. We cannot justify an exception on the facts and circumstances of this case for the following reasons:

The penalties in this case are not of a regulatory nature. They are substantial penalties that are only payable if it is shown that there has been “deliberate” conduct on the part of Global and/or Mr Malde that has caused a loss of tax.

The relevant issue in each case is whether Global was the owner of the goods in the UK. That issue is integral to the “failure” on which each of the penalties is based – the failure to register, the failure to provide an accurate return, and the failure to ensure that duty was paid on excise goods that are held in the UK.

That issue has not been the basis of a prior decision of a court or tribunal (as Global was unable to appeal following the failure of its hardship appeal) nor is it the subject of an agreed settlement.

HMRC has not raised any question of issue estoppel or abuse of law.

For the sake of completeness, we note that the FTT decided each of the appeals in relation to the PLNs that were issued under the regime in FA 2007 and FA 2008 by reference to the place of supply issue. As a result, the question of the burden of proof in relation to the quantum of a penalty assessment under each of these provisions does not arise in relation to the appeals before us. We do not need to determine that question to decide these appeals and we do not do so.

For all of these reasons, in our view, the FTT was right to conclude that the burden of proof fell on HMRC in relation to all relevant aspects of the penalty appeals with the possible exception of the quantum of the penalty assessment. Although it is not directly relevant, we take comfort that our view is in line with the guidance of Carnwath LJ in Khan in relation to the previous penalty regime.

We dismiss this first ground of appeal.

Ground 2 is that the FTT erred in law in its approach to the issues and the evidence by compartmentalizing factors rather than examining the totality of the evidence.

The focus of this ground is again on the manner in which the FTT determined the place of supply issue. In summary, Mr Hayhurst says that the FTT took a wrong step at FTT [605] when it decided to determine the place of supply issue before deciding whether Mr Malde was the controlling mind behind both SA and Global. The effect was that the FTT decided the place of supply issue without taking into account the evidence as to whether Mr Malde controlled Global. In doing so, the FTT failed to consider the evidence as a whole before reaching its conclusion, contrary to the guidance of the Court of Appeal in CCA Distribution Limited v HMRC [2017] EWCA Civ 1899 (“CCA”) at [31] and Davis & Dan Ltd v HMRC [2016] EWCA Civ 142 (“Davis & Dan”) at [57]-[60].

The point was squarely before the FTT when it came to consider the order in which it should determine issues, at FTT [598]-[605].

The arguments of the parties, which were repeated before us, are set out in the FTT Decision. At FTT [600]-[602], the FTT recorded the argument of Mr McGuiness KC, who appeared for HMRC before the FTT, in the following terms:

The argument in favour of considering the place of supply issue before the control issue, as advanced by Mr Webster KC, was recorded by the FTT in the following terms, at FTT [603]-[604]:

The conclusion of the FTT on the order of issues, at FTT [605], was in the following terms:

From a case management point there was, in theory, merit in deciding the place of supply issue before the control issue for the reason identified by the FTT. If the place of supply issue was decided in favour of Global, it was, in theory, not necessary to decide the control issue.

The problem with that approach was that it ran the risk of compartmentalizing the evidence, and thereby placing the FTT in breach of their duty to consider the totality of the evidence relevant to the place of supply issue, contrary to the Court of Appeal’s guidance in CCA and Davis & Dan.

Whatever the merits of the argument put by Mr McGuiness KC (FTT [600]-[602]) before the FTT and repeated by Mr Hayhurst before us, it is difficult to see how a finding that Mr Malde was in control of Global was not, at the very least, potentially relevant to the place of supply issue. If the FTT had considered this question, and concluded that Mr Malde was in control of Global, and so ought to have been able to produce trading records for Global, this had, at the least, the potential to damage the respondents’ case on the place of supply issue.

The FTT found, and we agree, that the burden of proof on the place of supply issue was on HMRC. But, it does not follow that a finding that Mr Malde was in control of Global was irrelevant to the place of supply issue. Such a finding would have involved rejection of Mr Malde’s assertion that he did not have control of Global. On any view of the matter, the rejection of Mr Malde’s assertion that he did not have control of Global would have been damaging to the credibility of Mr Malde, which itself was capable of having an effect on the place of supply issue.

We cannot accept the arguments of Mr Webster KC (recorded at FTT [603] – [604].

Consideration of the issue of control before the place of supply issue would not have had the effect of reversing the burden of proof. It was for HMRC to prove that Global was the supplier in the UK of the alcohol smuggled into the UK. The weight to be given to a finding that Mr Malde had control of Global, but had failed to produce any trading records, was a matter for the FTT. In order to decide what weight to give such a finding, the FTT had first to consider the evidence before it in relation to the issue of control.

It is unclear to us why it was either unfair or inappropriate for the FTT to consider the issue of control on the basis that a finding adverse to Mr Malde may allow an inference to be drawn that his failure to produce records showed that the companies did make supplies in the United Kingdom. We also cannot accept the argument that it was necessary for the FTT to avoid the issue of control because the drawing of this inference “undermines Mr Malde’s primary defence – that he did not control the companies and cannot produce any trading records”. This was the very point of considering the issue of control. It was for the FTT to decide whether to draw that inference and, if that inference was drawn, to decide what, if any weight should be attached to that inference in relation to the place of supply issue, taking into account where the burden of proof lay.

What the FTT was not entitled to do, given its duty to consider the totality of the evidence relevant to the place of supply, was to place the issue of control into a separate compartment, which was left unconsidered when the FTT came to consider the place of supply issue. The place of supply issue was not suitable to be treated as, in effect, a preliminary issue. There was no clear separation between the evidence relevant to place of supply issue and the evidence relevant to the issue of control. The evidence in relation to each issue, at the least, was capable of overlap.

In these circumstances, in our view, the FTT did make an error on a point of law, within the meaning of Section 12(1) of the Tribunals, Courts and Enforcement Act 2007 (“TCEA 2007”), in deciding that the issue of place of supply should be determined before the issue of control. The FTT could only make this decision if it was satisfied that there was no possibility of overlap in the evidence relevant to the two issues. Mr Webster KC (at FTT [604]) made the argument that the place of supply issue and the issue of control were separate issues, with no logical connection. The FTT did not however address this question. Its conclusions on the order in which to address the issues was based in its acceptance of the arguments of Mr Webster KC recorded at FTT [603]. The FTT left open the question which it needed to decide, if it was to take the place of supply issue before the issue of control; namely whether it was satisfied that there was no possibility of overlap in the evidence relevant to the two issues.

Although we have found an error of law in the FTT Decision, we will not set aside the FTT Decision on this ground. There are two reasons for this.

First, the FTT decided the place of supply issue, in relation to both Global and SA, on a basis which had little connection with the issue of control. In relation to Global, the FTT decided the place of supply issue on the basis that HMRC had failed to prove that Global was the owner of the goods supplied in the UK (FTT [644]). The main reasons for this failure were (i) the evidence of payments to Global by various companies for the alcohol supplied by Global (FTT [638]) and (ii) the evidence that other entities were involved in the supply chains that HMRC’s analysis ignored (FTT [643]-[644]). The FTT were not prepared to disregard that evidence, which in turn called into question the place of supply by Global. HMRC had failed to prove that these sales involved the supply of alcohol by Global in the UK, as opposed to on the continent. It is difficult to see how this result would have been any different if the FTT had decided that Mr Malde did or did not have control of Global before addressing the place of supply issue.

Second, it is clear that the FTT did not regard Mr Malde as a reliable witness (FTT [83]-[97]). The FTT regarded much of his evidence, including in relation to Global, as unreliable (FTT [83]). There is no reason to believe that the FTT’s failure to consider the control issue in advance of the supply issue had a material effect on the FTT’s view of the credibility of Mr Malde’s evidence in relation to the place of supply issue.

For these reasons, while we agree with HMRC that the FTT’s decision on the order of issues did involve an error of law, in our view, it was not material to its decision on the place of supply issue, which is the focus of Ground 2.

We will not therefore set aside the FTT Decision on the basis of Ground 2.

Ground 3 is that the FTT’s conclusion (at FTT [643]) that Adrena “supplied” the alcohol in the UK (and that Global did not) is demonstrably inconsistent with the underlying evidence.

Once again, the focus of this ground is on the FTT’s conclusions on the place of supply issue. HMRC acknowledge that this ground is a challenge to the FTT’s findings of fact. In essence, HMRC say that the evidence clearly demonstrates that Global supplied alcohol in the UK and that the FTT’s findings to the contrary were inconsistent with the evidence to such an extent that it was not open to the FTT to make such findings.

The key section of the FTT Decision to which HMRC refer is at FTT [638]-[644]. These paragraphs contain the FTT’s reasoning that leads to its conclusion on the place of supply issue in relation to Global – namely that, in the absence of evidence that Global was the owner of goods supplied in the UK, the FTT was unable to find that Global was liable to be registered for VAT. The relevant paragraphs are set out below.

Mr Hayhurst for HMRC acknowledges that this ground of appeal is an Edwards v Bairstow (Footnote: ⁵) challenge. It is HMRC’s case that no tribunal properly instructed as to the relevant law could have come to the determination under appeal on the basis of the evidence before it.

As a starting point, Mr Hayhurst says that there is no evidence that Adrena (and not Global) supplied the alcohol that was the subject of the mirror loads in the UK as suggested by the FTT (at FTT [643]). The FTT failed properly to distinguish between the cover loads (imported by Adrena) and the mirror loads. Before the FTT, neither party was advancing a positive case that Adrena imported the alcohol that formed the mirror loads. It was HMRC’s case that the mirror loads were smuggled into the UK by Global. It was the respondents’ case that the alcohol may have been smuggled into the UK by the participants in Operation Banjax or that it may have been owned by Corkteck when it was imported into the UK.

Mr Hayhurst says that the overwhelming evidence points to the mirror loads being smuggled into the UK by Global. He took us to large parts of the evidence that was before the FTT relating to the supply chains for the transactions in which Global was involved in support of this submission. In summary, he made the following points.

The FTT found that SA smuggled alcohol into the UK by means of inward diversion fraud over a period of up to eight years (FTT [626]-[637]). Global was the undisputed “successor” to SA’s trade (FTT [300], [600]).

The FTT found, and the respondents conceded, that Global owned significant amounts of alcohol that it had purchased from various companies in continental Europe, (FTT [303], [304], [308]). These purchases included purchases of alcohol from Adrena to the value of £8.1 million. There was no evidence that Global sold alcohol to Adrena, with the exception of £970,000 of alcohol, which Mr Hayhurst asserted, related to the cover loads.

The evidence did not support Global’s claims that it sold alcohol to a variety of EU-based wholesalers and traders (FTT [310]-[318]). Whilst the transportation documentation suggested that such sales may have taken place, there was no evidence of Global having received payments from such wholesalers and traders.

The FTT was aware of evidence of the movement of lorries transporting alcohol which, in accordance with the relevant documentation, should have been delivered by Global to wholesalers and traders in the EU, but, in fact, showed that those lorries were in the UK at relevant times (FTT [312]-[317]).

Global received substantial payments from persons associated with the organized crime group responsible for Operation Banjax, an organized crime group involved in the laundering of money derived from alcohol diversion fraud (FTT [421]). The paperwork suggested that Global sold non-alcoholic goods for payment to traders controlled by participants in Operation Banjax. The likelihood was that these payments represented the laundered proceeds of inward diversion fraud in which Global was involved.

The evidence showed that Adrena played a limited role in the inward diversion fraud. Adrena’s only roles were (i) to sell alcohol to Global in the EU (see above) and (ii) to act as a “buffer” company in relation to the cover loads, the mirror loads for which were sold by Global in the UK. There was no evidence that Global sold the alcohol for the mirror loads to Adrena in the EU and that Adrena smuggled those goods into the UK (as the FTT’s reasoning suggested).

Mr Webster KC for the respondents says that this ground of appeal represents a challenge to the FTT’s findings of fact. He referred to the guidance of Lewison LJ in Volpi v Volpi [2022] EWCA CIV 464 (“Volpi”) at [2], which highlighted the difficulties for an appellate court or tribunal in reassessing the findings of fact made by the fact-finding tribunal, and the dangers for an appellate court of interfering with a decision of the fact-finding tribunal on these grounds.

Mr Webster KC said that, in any event, HMRC’s argument was misplaced. The FTT did not make a definitive finding that Adrena (and not Global) had sold alcohol in the UK. The FTT’s only conclusion was that there was insufficient evidence before it that Global owned goods in the UK (FTT [644]). The reference to Adrena owning goods in the UK (FTT [643]) was merely a reference to the possibility that Adrena might have held the goods. It was not a finding of fact.

Mr Webster KC also pointed to various deficiencies in HMRC’s case before the FTT including the following.

HMRC’s case was plagued with difficulties derived from an inadequate investigation and the case officers’ failure to appreciate the implications of the separate legal personality of the companies that were involved. HMRC had failed properly to identify the basis on which it was said that Global made supplies in the UK.

The argument that Adrena was a buffer company only in relation to the cover loads on the basis that it appeared as the consignor on the paperwork for the loads that were intercepted by the Border Force was flawed. The ownership of the goods at the UK border could not be determined by what happened at the border. The argument failed to address the fact that Adrena would have had to appear on the paperwork for all the loads (including the mirror loads) if the fraud was to be effective.

It did not follow from the fact that Global owned alcohol in the EU that it must be the supplier of the alcohol in the UK. The evidence presented by Mr Hayhurst – in relation to the transportation of alcohol owned by Global, the extent of Operation Banjax and the sources of funds of Global – was not conclusive of Global having made supplies of alcohol in the UK.

Mr Webster KC submitted that the FTT’s conclusion on the facts was one that was well within the bounds of reasonable decisions open to the FTT and one that it was entitled to reach on the evidence before it.