In BPP University College of Professional Studies v HMRC the First-tier Tribunal (Tax Chamber) (FTT) found that HMRC had failed to comply with an ‘unless’ order under Rule 8(3) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the Rules).
BPP supplied standard-rated education to students, including (within that single supply) printed matter. A reorganisation of the business took place in 2006 so that a separate company would make a supply of books to the students whilst another continued to supply the education. The intention was to take advantage of the zero-rating for VAT purposes on supplies of books*.
From 19 July 2011, this zero-rating was amended by section 75, Finance Act 2011, to exclude, broadly, a supply of goods where, had the two supplies been made by a single supplier, they would have been treated as a single supply of services, where that supply would have been taxable. From 19 July 2011, BPP accounted for VAT on the supply of the printed materials.
On 29 November 2012, HMRC issued assessments on certain BPP companies of approximately £6m for the period September 2008 to 18 July 2011. The assessments were based on the grounds that VAT should have been charged on the supply of books, either because there was a single composite supply, or on the basis of an abuse of law under the Halifax principle.
On 6 December 2012, HMRC issued a decision to certain BPP companies in relation to the supply of printed materials made after 19 July 2011.
The assessments and decision were appealed in time, and the appeals joined together pursuant to directions issued by the FTT that required HMRC’s statement of case to be served by 2 October 2013. HMRC applied for a short extension of time when their statement of case was filed late on 21 October 2013.
On 11 November 2013, BPP sought further and better particulars from HMRC. BPP applied to the FTT on 22 November 2013 for an order that unless replies were provided within 14 days of the date of the order HMRC would be barred from further participation in the proceedings pursuant to Rule 8(3)(a) of the Rules.
Although the parties agreed the replies would be provided by 31 January 2014, HMRC was unwilling to consent to an order which provided that they would be barred in the event that the direction was not complied with. BPP therefore proceeded with its application.
Directions were issued by the FTT but they did not give full effect to BPP’s application. Instead, the directions provided, in accordance with Rule 8(3)(a), that if HMRC failed to provide replies to each of the questions identified in the request for further and better particulars then HMRC ‘may be barred from taking further part in the proceedings.’
HMRC served a reply on 31 January 2014.
It fell to the FTT to determine whether HMRC complied with the ‘unless’ order and, if not, what sanction should be imposed.
HMRC’s reply stated that they did not accept that at the hearing of the appeals they would be confined to relying only on the facts, matters and submissions set out in the reply. The reply was stated to merely ‘elaborate’ on their statement of case. This was despite a direction requiring HMRC to:
identify, with the same degree of particularity as will be relied upon at the hearing of these appeals, each and every matter on which they rely in support of their argument
The FTT said that it was not open to HMRC to argue that they were not obliged to fully comply with the above direction. That HMRC may have subsequently considered it was unwise to have agreed to a direction requiring pleadings in that level of detail did not mean that they did not have to comply with the direction.
It then fell to the FTT to consider what sanction should be imposed for such failure.
BPP sought to rely on the Mitchell case, and the test laid down in that case for relief from sanctions for failing to comply with the civil procedure rules (CPR)**.
The FTT was of the view that Mitchell was not strictly relevant, particularly as no sanction had yet been applied to HMRC (from which they could seek relief). The FTT did think that Mitchell meant that significant weight should be given to ‘the factors (a) and (b) of CPR 3.9 to ensure fair and just hearings’.
The FTT concluded that there was ‘very clear prejudice’ to BPP in not knowing HMRC’s case, observing that litigation ‘is not to be conducted by ambush’. HMRC’s continued failure to make a proper statement of their case resulted in a delay of some 8 months to the progress of the appeal. The FTT did not have a clear understanding of the reason for HMRC’s default. The FTT was critical of HMRC’s conduct, commenting that they had ‘not shown a great respect for time-limits’, nor had they ‘appreciated the importance of adhering to directions.’
Having identified this prejudice, the FTT considered that costs would not adequately compensate BPP. No alternative was suggested by HMRC other than simply allowing the appeal to proceed. It was argued by HMRC that they should be barred only where the breach was incapable of remedy or had not been remedied. HMRC also argued that they should not be barred from taking further part in the appeal because this was effectively a test case for HMRC. The FTT gave short shrift to this argument, stating that if HMRC are barred ‘they will simply have to find another test case.’
The FTT concluded that HMRC were on notice that they were at risk of a direction barring them from further participation in the appeal from January 2013, but did not remedy the position for a further five months, making barring the appropriate sanction.
The FTT found that Mitchell was not strictly relevant to the exercise of its discretion, but that it provided useful guidance when exercising its powers.
When HMRC fail to comply with any of the Rules, taxpayers should give serious consideration to applying to the FTT for a direction providing that unless HMRC complies with the relevant Rule they will be barred from taking part in the proceedings.
This case is a timely reminder to HMRC that they should not underestimate the importance of complying with directions issued by the FTT and cannot assume that they will be permitted to simply remedy their breach after the event.
* Pursuant to group 3 of schedule 8 to the Value Added Tax Act 1984.
** Although the recent Court of Appeal decision in Denton v TH White Ltd (2014) EWCA Civ 906 (delivered after the hearing of this case) refined the Mitchell test, the new Denton test continues to place significance on the importance of the CPR overriding objective.
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Author: Nigel Brook, Associate RPC
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