Judgment summary
This is an appeal against a decision of the First-tier Tribunal (Tax Chamber) released on 4 January 2024, which dismissed New Claire Wine Limited's appeals against corporation tax and VAT assessments and against a penalty for deliberate inaccuracies in its VAT returns (1).
The FTT found that the appellant had understated its sales in its corporation tax and VAT returns, a finding not challenged on appeal (5). The FTT further found that this understatement was deliberate, meaning the assessments were within the extended 20 year time limit and a higher penalty applied, and found in the alternative that the conduct was careless (5, 6).
The appellant argued that a finding of deliberate conduct necessarily constitutes a finding of dishonesty, and that HMRC had not pleaded, particularised, or put dishonesty to the appellant's witness, rendering the FTT's finding of deliberate conduct procedurally unfair (7). HMRC contended that it had properly pleaded and put a case of deliberate understatement, which was sufficient (8).
The Upper Tribunal reviewed the statutory provisions on discovery assessments (paragraph 41 Schedule 18 FA 1998), VAT assessments (section 73 VATA 1994), extended time limits (paragraph 46 Schedule 18 FA 1998, section 77 VATA 1994) and penalties (Schedule 24 FA 2007), and considered case law including HMRC v Tooth [2021] UKSC 17, CF Booth Limited v HMRC [2022] UKUT 217 (TCC), Citibank NA and E Buyer UK Ltd v HMRC [2017] EWCA Civ 1416, Danapal v HMRC [2023] UKUT 86 (TCC), Delphi Derivatives Limited v HMRC [2026] UKUT 21 (TCC), and Brett v The Solicitors Regulation Authority [2014] EWHC 2974 (39-110).
The Upper Tribunal held that deliberate conduct in this statutory context requires an intention to mislead HMRC, following Tooth, but does not necessarily involve dishonesty as defined in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 (57, 68, 73, 81). It held that HMRC had sufficiently pleaded and put its case of deliberate inaccuracy to the appellant's witness, and was not required additionally to plead or put dishonesty (95, 96). It further held that the FTT was not required to explain how the appellant's conduct might not involve dishonesty, distinguishing Brett (109, 110).
The appeal was dismissed (111).
Background
The FTT had dismissed New Claire Wine Limited's appeals against discovery assessments to corporation tax issued on 22 October 2019 for the accounting period ending 31 March 2013 and subsequent periods, VAT assessments issued on 20 November 2018 for VAT accounting period 06/12 and subsequent periods, and a penalty notice issued on 6 November 2019 for deliberate but not concealed inaccuracies in the appellant's VAT returns (22).
The FTT found that the appellant had failed to comply with statutory record-keeping obligations, and a 'stock flow exercise' established major omissions in records and returns (24). Mr Bhattachan, one of the appellant's two shareholders and directors, did not give evidence (25). Mr Paudel, the other shareholder and director, was the sole witness for the appellant and was found by the FTT not to be a credible witness (26).
The appellant had purchased wine for resale from a business involved in an excise duty diversion fraud, The Italian Wine Company (TIWC), and TIWC's records showed sales to the appellant that were not in the appellant's own records (27). The stock flow exercise identified significant volumes of off-record sales and purchases (28). The appellant diverted proceeds of off-record sales to the two directors, amounting to advances for the purposes of section 455 Corporation Tax Act 2010 (29).
The FTT held that the inaccuracies in the appellant's returns were deliberate, citing Tooth and finding that at every stage there was an intention to mislead the Revenue (30). It found HMRC in time to issue corporation tax discovery assessments back to the accounting period ending 31 March 2013, and in the alternative found the conduct careless (31). It rejected a challenge to the VAT assessments, finding them made to best judgment and in time (32, 33). The penalties for deliberate but not concealed behaviour in the VAT returns were confirmed, subject to quantum (33).
Core dispute
The single ground of appeal permitted was that the FTT erred in finding that the appellant had deliberately understated its tax liabilities in circumstances where, as the FTT acknowledged at paragraphs 238 and 241 of the Decision, HMRC had not alleged and it was not open to the FTT to find that the appellant had behaved dishonestly (34).
The appellant's case was that deliberate conduct in each of the relevant statutory contexts (discovery assessments, extended time limits, and Schedule 24 FA 2007 penalties) equates to dishonest conduct, so that the procedural safeguards associated with an allegation of dishonesty applied. It contended HMRC was required to plead a case of dishonesty, particularise all facts relied upon to establish dishonesty, and put to Mr Paudel that he had dishonestly understated the appellant's tax liability, which HMRC had failed to do (36).
Alternatively, the appellant argued that if dishonesty was not a necessary element of deliberate behaviour, the FTT erred in failing to explain how the appellant's conduct on the facts found might not have been dishonest (38).
HMRC's position was that it had pleaded and particularised allegations of deliberate understatement of sales, and that this allegation was put to the appellant's witness, so the FTT was entitled to find the conduct deliberate without any procedural unfairness (8).
Court findings
The Upper Tribunal held that it was necessary for HMRC to clearly plead and prove an allegation of deliberate behaviour, given the serious consequences of such a finding, including discovery assessments, extended time limits, increased penalties, potential publication under section 94 Finance Act 2009, and personal liability notices (43).
However, the Tribunal held that deliberate conduct in this statutory context does not necessarily involve dishonesty. Following HMRC v Tooth [2021] UKSC 17, a deliberate inaccuracy requires an intention to mislead HMRC as to the truth of the relevant statement, or perhaps recklessness as to whether it would do so, but does not require the second limb of the dishonesty test in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67, namely that the conduct be objectively dishonest by the standards of ordinary decent people (57, 62).
The Tribunal agreed with the Upper Tribunal's conclusion in CF Booth Limited v HMRC [2022] UKUT 217 (TCC) that dishonesty is not an essential element of a deliberate inaccuracy, finding this supported by the Court of Appeal's decision in Citibank NA and E Buyer UK Ltd v HMRC [2017] EWCA Civ 1416 (68, 73). It also agreed with the observations of the Upper Tribunal in Delphi Derivatives Limited v HMRC [2026] UKUT 21 (TCC) that a deliberate inaccuracy may, but will not necessarily, involve dishonesty, save that it declined to endorse any suggestion that Tooth at [32] and [35] itself indicated otherwise (81).
The Tribunal distinguished Danapal v HMRC [2023] UKUT 86 (TCC), noting that in that case HMRC had accepted that the FTT's finding of deliberate behaviour could be characterised as a finding of dishonesty, whereas there was no such acceptance in this appeal (76).
On the question of pleading, the Tribunal found that HMRC had pleaded that the appellant's directors knew that the returns were inaccurate, and this was sufficient without using the word 'dishonest', citing Mullarkey v Broad [2007] EWHC 3400 (Ch) for the proposition that facts alleged may sufficiently demonstrate an allegation without the specific word being used (84, 95). The Tribunal found no procedural unfairness in HMRC putting its case on the basis of knowledge and intention to mislead without additionally putting to Mr Paudel that his conduct was objectively dishonest (91, 96).
The Tribunal distinguished Brett v The Solicitors Regulation Authority [2014] EWHC 2974, noting that unlike the Solicitors' Disciplinary Tribunal in that case, the FTT here did not disavow any finding that the appellant had made a deliberately inaccurate return, and it specifically recognised at [241] of the Decision that deliberate inaccuracy does not necessarily involve dishonesty, consistent with Tooth, CF Booth and Delphi Derivatives (107, 109). The Tribunal therefore held there was no requirement for the FTT to explain how the appellant's conduct might not involve dishonesty (110).
Outcome
The Upper Tribunal held that the FTT did not err in finding that the appellant had deliberately understated its tax liabilities where HMRC had not pleaded or put that it had acted dishonestly. The appeal was dismissed (111).
Major issues / areas of contention
- Whether a finding of deliberate inaccuracy in a tax return necessarily involves a finding of dishonesty.
- Whether HMRC was required to specifically plead and particularise an allegation of dishonesty, and put such an allegation to the appellant's witness, before the FTT could find deliberate conduct.
- Whether the FTT erred in failing to explain how the appellant's conduct, as found on the facts, might not have been dishonest.
- Whether the FTT's findings of deliberate conduct rendered the corporation tax discovery assessments and VAT assessments in time under the extended 20 year time limits.
- Whether the level of penalty under Schedule 24 Finance Act 2007 should be calculated on the basis of deliberate but not concealed inaccuracy rather than careless inaccuracy.