Burden of Proof in VAT Abuse Allegations Following Hilden Park LLP v HMRC

Introduction

The case of Hilden Park LLP v. Revenue and Customs ([2017] UKFTT 217 (TC)) is a significant judicial decision addressing the burden of proof in Value Added Tax (VAT) abuse allegations. This case revolves around allegations by Her Majesty's Revenue and Customs (HMRC) that Hilden Park LLP and its predecessor engaged in arrangements aimed at abusing the VAT sporting exemption to gain tax advantages. The central issue under scrutiny is the allocation of the burden of proof in such tax avoidance allegations, particularly following the principles established in the European Court of Justice (CJEU) decision in Halifax ([2006] EUECJ C-255/02).

Summary of the Judgment

Hilden Park LLP, succeeded by an earlier ordinary partnership, operated a golf course and structured its business through companies that rendered golf club memberships without accounting for VAT, relying on the sporting exemption purportedly available to non-profit entities. HMRC assessed the original partnership and the LLP for VAT liabilities, contending that the arrangements were profit-making and thus ineligible for the exemption. Both entities appealed the assessments, but both the First-tier Tribunal (FTT) and the Upper Tribunal upheld HMRC's decisions.

The current judgment focuses on a subsequent iteration of these arrangements, designated as Hilden Park 2, and primarily examines the appropriate allocation of the burden of proof. The Tribunal considered whether HMRC should bear the burden of proving the abuse of the VAT exemption under Halifax principles or whether this burden should remain with the appellant, as traditionally established in tax law.

Ultimately, the Tribunal concluded that HMRC bears the burden of proof in Hilden Park 2, aligning with the Upper Tribunal's dicta in Hilden Park 1, despite debates over whether these dicta constitute binding precedent. The Tribunal also declined to refer questions to the CJEU, deeming existing national case law sufficient to resolve the issues at hand.

Analysis

Precedents Cited

The judgment extensively references key legal precedents that shape the understanding of burden of proof in tax avoidance cases:

• Halifax ([2006] EUECJ C-255/02): Established that tax authorities could disregard certain business arrangements if they were deemed abusive, shifting the tax liability to the original taxpayer.
• Grunwick Processing Laboratories Ltd ([1987] STC 357): Affirmed that the burden of proof in tax appeals typically lies with the appellant.
• The Lower Mill Estate Ltd ([2010] UKUT 463 (TCC)): Discussed the onus of proof in comparator selection but did not establish a binding decision on the burden of proof.
• Mobilx Ltd and others ([2010] EWCA Civ 517): Reinforced that in cases of fraud or sham, the burden of proof shifts to HMRC.
• Atrium Club Limited ([2010] EWHC 970 (Ch)): Addressed the applicability of the Halifax doctrine even when arrangements do not operate as intended, highlighting the accrual of tax advantage regardless of the intended outcome.

Legal Reasoning

The Tribunal delved into whether the existing legal framework and precedents justify shifting the burden of proof onto HMRC in cases alleging VAT abuse, particularly under the Halifax doctrine. Traditionally, under the common law and as established in cases like Grunwick, the burden lies with the appellant taxpayer to disprove an assessment. However, the Upper Tribunal in Hilden Park 1 suggested, through obiter dicta, that HMRC should bear this burden in Halifax-abuse scenarios.

The Tribunal evaluated whether these dicta should be followed, considering that they were not binding but highly persuasive given their origin in a superior court. Recognizing the complexities and potential implications for both HMRC and taxpayers, the Tribunal emphasized the importance of clarifying who holds the burden of proof before proceeding with evidence exchange or case management.

Weighing the arguments, the Tribunal concluded that HMRC should bear the burden of proof in Hilden Park 2. This decision aligns with the Upper Tribunal's stance in Hilden Park 1 and is justified by the nature of the abuse alleged, where HMRC asserts that arrangements were designed solely for tax advantages contrary to the VAT Directives.

Impact

This judgment has significant implications for future VAT abuse cases:

• Shift in Burden of Proof: Formalizes the practice of placing the burden of proof on HMRC in cases alleging abuse of VAT exemptions, potentially easing the appellant's burden in similar cases.
• Guidance for Taxpayers and HMRC: Clarifies procedural expectations, allowing both parties to prepare more effectively for hearings by understanding their respective obligations.
• Precedential Value: Although the dicta from the Upper Tribunal were not binding, the Tribunal chose to follow them, thereby strengthening their persuasive authority in subsequent cases.
• Potential for Increased Scrutiny: HMRC may need to bolster its evidentiary requirements to meet the burden of proof, possibly leading to more rigorous assessments.

Complex Concepts Simplified

Conclusion

The Hilden Park LLP v. Revenue and Customs judgment underscores a pivotal development in the allocation of the burden of proof in VAT abuse allegations. By aligning with the Upper Tribunal's dicta, the Tribunal affirms the principle that HMRC may bear the burden of proof in specific abuse scenarios, particularly those invoking the Halifax doctrine. This decision not only provides clarity for future cases but also balances the scales between tax authorities and taxpayers, ensuring that allegations of abuse are substantiated with adequate evidence. As tax avoidance schemes become increasingly sophisticated, such judicial clarifications are essential in maintaining the integrity and fairness of the tax system.

Furthermore, the Tribunal's decision to refrain from referring questions to the CJEU indicates confidence in the existing UK jurisprudential framework to address complex VAT abuse issues. However, this stance also leaves room for future legal debates, especially in the context of evolving EU-UK relations post-Brexit.

In essence, this judgment serves as a cornerstone for understanding and navigating the intricacies of VAT abuse allegations, providing a balanced approach that protects both the taxpayer's rights and the tax authority's ability to enforce compliance.