Judgment summary
This is an appeal against the decision of the First-tier Tribunal (Judge Chapman KC and Ms Stott) handed down on 6 June 2024 (the '2024 Decision') (1). The 2024 Decision concerned a director's liability notice (DLN) issued to Mr Trees on 7 July 2021 under section 61(1) VATA 1994, in the sum of £1,974,850 (1).
The FTT had refused Mr Trees' application for a stay and/or a direction barring HMRC from taking further part in proceedings on the ground that issuing the DLN was an abuse of process, and had dismissed Mr Trees' appeal against the DLN (1).
Permission to appeal to the Upper Tribunal was granted on all grounds by Judge Raghavan on 25 April 2025 (3). The Upper Tribunal (Rajah J and Judge Guy Brannan) allowed the appeal (4, 71, 77).
Background
CCA Distribution Ltd ('CCA') was incorporated in November 2001, went into administration on 21 August 2009, and was dissolved on 16 November 2022. Mr Trees was CCA's sole director and shareholder throughout its trading activities (6).
CCA traded in the grey market for mobile phones from 2003, with Mr Trees undertaking all of CCA's transactions in the relevant VAT periods of April, May and June 2006 (7). In July and August 2007, HMRC issued decisions denying CCA the right to deduct input tax of £9,874,254.54, on the basis that CCA's transactions were connected to an MTIC fraud and that CCA knew or ought to have known this (8).
CCA's appeal against these decisions went through several stages, including a Court of Appeal judgment dated 23 November 2017 dismissing CCA's appeal ([2017] EWCA Civ 1899), before being reheard by the FTT (Judge Mosedale and Mrs Hunter, the '2020 Tribunal') following a twelve-day hearing (9, 10). In a decision released on 14 May 2020 ([2020] UKFTT 222 (TC)), the 2020 Tribunal dismissed CCA's appeal, finding that CCA's transactions were connected with fraudulent evasion of VAT and that Mr Trees (acting on behalf of CCA) knew this (the '2020 Decision') (10). CCA did not appeal the 2020 Decision (10).
HMRC had expressly confirmed to Mr Trees by correspondence dated 11 January 2019 that it did not allege dishonesty or fraud against CCA or Mr Trees, and that its case was based on the Kittel test of 'knew or should have known' (11).
On 7 July 2021, HMRC issued CCA with a civil evasion penalty of £1,974,850 under section 60(1) VATA 1994 on the basis that CCA's conduct involved dishonesty, and issued the DLN to Mr Trees on the same day under section 61(1) VATA 1994 on the basis that CCA's dishonesty was wholly attributable to him (12). Mr Trees requested a review, which HMRC upheld on 17 November 2021, and he appealed on 13 December 2021 (12).
On 20 February 2023, Judge Redston granted HMRC's applications to strike out parts of Mr Trees' grounds of appeal that sought to relitigate the 2020 Decision's findings on knowledge, for the 2020 Decision to stand as evidence, and for case management directions (the '2023 Decision') (13). Mr Trees did not appeal the 2023 Decision and was unrepresented at that hearing (14). As a result, Mr Trees' grounds of appeal against the DLN were restricted to a plea that he was not dishonest (15). A further application for specific disclosure was refused by Judge Redston on 25 August 2023 (the '2023 Disclosure Decision') (16).
The appeal was heard before Judge Chapman KC and Ms Stott between 8 and 14 March 2024, alongside Mr Trees' application to strike out/debar HMRC on grounds of abuse of process (17). The FTT dismissed the application, finding that although dishonesty 'could' have been raised in the 2020 Appeal, it could not be said that it 'should' have been raised, and went on to find, based on the 2020 Decision's findings, that Mr Trees' conduct was dishonest, dismissing the appeal and upholding the DLN (17). No further evidence beyond the 2020 Decision was placed before the 2024 Hearing to prove Mr Trees' alleged dishonesty (17).
Core dispute
The central issue was whether it was an abuse of process for HMRC to rely, in the 2024 penalty proceedings alleging dishonesty against Mr Trees under section 61 VATA 1994, on findings of fact made in the 2020 Decision in the Kittel appeal, where HMRC had expressly disavowed any allegation of dishonesty and Mr Trees had given evidence, including under cross-examination, on that basis (51, 52, 57-58).
Mr Trees argued, under the rule in Henderson v Henderson, that HMRC 'could and should' have raised dishonesty during the 2020 Hearing, and that using the 2020 findings against him in later dishonesty proceedings was fundamentally unfair (49(1), 57).
A further issue was whether the FTT had erred in its application of the two-stage dishonesty test in Ivey v Genting Casinos (UK) Ltd, in particular whether the 'fact-finding tribunal' for Ivey purposes had to be the same tribunal throughout, and whether the FTT could rely on the 2020 Tribunal's findings for the first, subjective limb of that test (49(2)-(3), 73).
HMRC contended that the Kittel test did not require an allegation of dishonesty, that there was a clear distinction between Kittel knowledge and dishonesty per Citibank/E Buyer, that section 77(2) VATA 1994 gave HMRC a two-year window after determination of the underlying tax liability to issue a penalty, and that Mr Trees could have adduced further evidence at the 2024 Hearing to rebut dishonesty (52, 56, 61, 64-65).
Court findings
The Upper Tribunal accepted Mr Pickup's submission that it was inherently unjust for Mr Trees to have been assured, by HMRC's letter of 11 January 2019, that dishonesty would not be pleaded before the 2020 Tribunal, only for the evidence and findings from that hearing to be used against him in penalty proceedings before the 2024 Tribunal where dishonesty was the primary issue (58).
The Tribunal held that HMRC not only could but should have raised the allegation of dishonesty in the Kittel appeal, and that the failure to do so resulted in findings of fact being used as prima facie evidence of dishonesty in the DLN proceedings, circumventing the principle that a defendant should only face dishonesty allegations that are clearly pleaded and particularised with an opportunity to respond (60).
While accepting that HMRC did not need to plead dishonesty to establish Kittel knowledge, and that HMRC had a two-year window under section 77(2) VATA 1994 to issue a penalty and DLN, the Tribunal found this did not permit HMRC to use the Kittel appeal to establish findings of knowledge while disavowing dishonesty, and then rely on those same findings to allege dishonesty in later proceedings (61, 65-66).
The Tribunal distinguished HMRC v Kishore, noting that the penalty in Kishore did not involve an allegation of dishonesty and the complaint there concerned timing rather than fairness of pleading dishonesty (67-68).
The Tribunal found that at the 2024 Hearing, an evidential burden was effectively placed on Mr Trees to rebut dishonesty where HMRC's legal burden was said to be discharged by evidence obtained in circumstances where dishonesty was not alleged and without compliance with the ordinary procedural safeguards for dishonesty allegations, which was unfair (64). The Tribunal considered that the safeguards under Article 6 ECHR would lead to the same result (69).
On Grounds 4 to 7, the Tribunal rejected the submission that Ivey required the same tribunal to determine both stages of the dishonesty test as a matter of law, holding that Ivey was focused on the substantive test for dishonesty rather than the composition of the tribunal, though it considered that, except in exceptional cases, it would be desirable for the same tribunal to determine both stages (74-75).
Outcome
The Upper Tribunal allowed the appeal on Grounds 1, 2 and 3, finding that the 2024 Decision was based on a material procedural unfairness. It set aside the 2024 Decision and re-made it by setting aside the DLN (71, 77).
The Tribunal dismissed the appeal on Grounds 4, 5, 6 and 7, rejecting the argument that Ivey required the same fact-finding tribunal to determine both stages of the dishonesty test as a matter of law (76-77).
Any application for costs was required to be made in writing within one month of release of the decision, under rule 10(5)(a) and (6) of the Tribunal Procedure (Upper Tribunal) Rules 2008 (78).
Major issues / areas of contention
- Whether it was an abuse of process, under the Henderson v Henderson principle, for HMRC to rely on dishonesty in DLN penalty proceedings when it had expressly disavowed alleging dishonesty in the earlier Kittel appeal.
- Whether HMRC 'could and should' have pleaded dishonesty during the 2020 Kittel appeal hearing rather than waiting to raise it in subsequent section 61 VATA 1994 penalty proceedings.
- Whether the FTT erred in applying the two-stage Ivey dishonesty test by relying on findings of fact made by a differently constituted tribunal (the 2020 Tribunal) rather than acting itself as the sole fact-finder.
- Whether the FTT's decision to dismiss Mr Trees' application to stay or debar HMRC was one which no reasonable tribunal could have reached.
- Whether HMRC's two-year statutory window under section 77(2) VATA 1994 to issue a penalty justified its approach of relying on Kittel findings, obtained without alleging dishonesty, to later establish dishonesty.
- Whether Mr Trees suffered unfairness in being required to rebut an evidential case of dishonesty derived from evidence and findings procured when dishonesty was not in issue.
- Whether HMRC v Kishore applied to excuse HMRC's failure to plead dishonesty earlier, given the distinction between mis-declaration penalties and dishonesty-based penalties.