Burden of Proof in VAT Best Judgment Assessments Confirmed: Awards Drinks Ltd v. HMRC

Introduction

Awards Drinks Ltd v. HM Revenue and Customs ([2021] EWCA Civ 1235) is a significant appellate decision delivered by the England and Wales Court of Appeal (Civil Division) on August 6, 2021. The case centers around Awards Drinks Ltd ("Awards"), a UK-based wholesaler of beers, wines, and spirits, which faced substantial Value Added Tax (VAT) assessments from HM Revenue and Customs (HMRC) after ceasing operations and entering liquidation in June 2013. The core issue revolves around whether Awards failed to declare the correct amount of VAT due, with HMRC employing "best of judgment" assessments under Section 73 of the VAT Act 1994 and alleging possible inward diversion fraud.

Summary of the Judgment

The Court of Appeal upheld the First-tier Tribunal (FTT) and Upper Tribunal (UT) decisions, which dismissed Awards' appeals against HMRC's VAT assessments. The courts reinforced the principle that the burden of proof rests on the taxpayer to displace HMRC’s "best of judgment" assessments. Awards failed to provide credible evidence to support its claims that the cash deposits in its UK accounts were proceeds from sales made in France rather than the UK, leading to the confirmation of the VAT assessments. The appellate courts emphasized that even when allegations of fraud are implicit, the burden of proof remains with the taxpayer, and HMRC is not required to explicitly plead fraud unless it intends to do so.

Analysis

Precedents Cited

The judgment references several key cases that shape the understanding of VAT assessments and the burden of proof:

• Khan v Customs and Excise Commissioners [2006]: Established that the burden of proving the correctness of a "best of judgment" assessment lies with the taxpayer.
• Brady v Group Lotus Car Companies PLC [1987]: Affirmed that the burden of proof does not shift to HMRC even when fraud is alleged.
• Dale Global Ltd v HMRC [2018]: Provided a description of inward diversion fraud, which was pivotal in understanding HMRC's position.
• Meek v Fleming [1961]: Influenced the approach to burden of proof in cases involving potential deception.
• Lorraine, Hudson v Humbles (1966) and Haythornthwaite & Sons Ltd v Kelly (1927): Reinforced the continued burden on the taxpayer to displace assessments.

These precedents collectively establish that taxpayers must provide substantial evidence to counter HMRC's assessments, particularly in complex cases involving potential fraud.

Legal Reasoning

The court's reasoning centered on the affirmation of established legal principles regarding the burden of proof in VAT assessments:

• Burden of Proof: Consistently, the burden remains on the taxpayer (Awards) to disprove HMRC's "best of judgment" assessments. The court emphasized that this burden persists irrespective of any implications or suspicions of fraud.
• No Obligation to Plead Fraud: HMRC is not required to specifically plead fraud unless it intends to establish it. In Awards' case, HMRC focused on demonstrating that the cash deposits were proceeds of taxable supplies in the UK without alleging fraud directly.
• Credibility of Evidence: Awards' failure to provide credible and consistent evidence weakened its position. The inconsistent testimonies of Awards' director, Mr. Paul Judd, undermined the company's credibility.
• Inward Diversion Fraud: While HMRC discussed patterns indicative of inward diversion fraud, it did not conclusively link Awards to fraudulent activities but relied on the lack of evidence provided by Awards to uphold the assessments.

The appellate courts meticulously applied these principles, rejecting Awards' arguments about procedural unfairness and reaffirming the need for robust evidence from the taxpayer.

Impact

This judgment has several implications for tax law and future VAT assessments:

• Reaffirmation of Burden: Strengthens the position that taxpayers must substantiate their claims against HMRC's assessments, emphasizing the need for thorough and credible evidence.
• Clarification on Fraud Allegations: Clarifies that HMRC is not obligated to allege fraud unless it actively pursues it, thereby preventing undue shifts in the burden of proof.
• Guidance on Best of Judgment Assessments: Provides a clear framework for how "best of judgment" assessments are to be challenged, highlighting the criteria for disputing such assessments.
• Impact on Inward Diversion Cases: Offers detailed insights into how cases involving possible inward diversion fraud will be handled, especially concerning evidence requirements and procedural fairness.

Practitioners can rely on this ruling to better understand the exigencies involved in contesting HMRC's assessments, especially regarding the presentation and credibility of evidence.

Complex Concepts Simplified

Conclusion

The Awards Drinks Ltd v. HMRC case solidifies the ongoing legal standards governing VAT assessments and the burden of proof in the United Kingdom. By affirming that the taxpayer bears the responsibility to disprove HMRC's estimates, the courts have reinforced the necessity for taxpayers to maintain transparent and well-documented financial records. Moreover, the decision underscores that HMRC's ability to uphold assessments does not inherently require explicit allegations of fraud unless pursued explicitly. This judgment serves as a crucial reference point for future tax disputes, ensuring that the burden remains appropriately placed and that procedural fairness is maintained.