Determining the Burden of Proof in Tax Appeals: An Analysis of Hull City AFC (Tigers) Ltd v. Revenue and Customs ([2017] UKFTT 629 (TC))

Introduction

This commentary delves into the landmark decision of Hull City AFC (Tigers) Ltd v. Revenue and Customs delivered by the First-tier Tribunal (Tax Chamber) on August 14, 2017. The case revolves around the taxation implications of payments made by Hull City AFC to a third-party service company, Joniere Limited, concerning the image rights of their footballer, Geovanni Deiberson Mauricio G mez (referred to as Mr. G mez).

The crux of the dispute lies in whether these image rights payments were genuine commercial transactions or disguised employment income, thereby subjecting them to Pay As You Earn (PAYE) and National Insurance Contributions (NIC).

Summary of the Judgment

The Tribunal upheld the Appellant's challenge against the Directions and Decisions made by HM Revenue and Customs (HMRC) for the tax years 2008/2009, 2009/2010, and 2010/2011. HMRC had contended that the payments made to Joniere Limited were excessive and uncommercial, effectively representing disguised earnings of Mr. G mez.

Key findings include:

• The burden of proof remains with the Appellant to demonstrate that HMRC's assessments were erroneous.
• HMRC did not sufficiently allege that the agreements were a 'Snook sham,' which requires elements of dishonesty or deceit.
• The Tribunal directed HMRC to serve their witness evidence first, but maintained the standard order for skeleton arguments.

Analysis

Precedents Cited

The judgment extensively references pivotal cases that shaped the Tribunal's approach:

• Snook v London and West Riding Investment Ltd [1967] 2 QB 786: Established the definition of a 'Snook sham,' involving an intention to deceive.
• Hitch v Stone [2001] STC 214: Expanded on the 'Snook sham' concept to incorporate 'partial sham.'
• Acornwood LLP and Others v HMRC [2016] UKUT 361 (TCC): Clarified that HMRC cannot allege sham without explicitly stating it in their pleadings.
• Lords McNicol and Rogers in HMRC v Rogers [2010] STC 236: Discussed the initial burden on HMRC to validate assessments.
• National Westminster Bank plc v Jones [2000] BPIR 1092: Reinforced the presumption against treating documents as sham.

Legal Reasoning

The Tribunal's legal reasoning hinged on the nature of the burden of proof in tax appeals:

• Standard Burden: Typically, the taxpayer bears the burden to disprove HMRC's assessments.
• Exception for Sham Allegations: If HMRC explicitly alleges a sham (in the Snook sense), the burden may shift to them to prove it.
• Extent of HMRC's Allegations: The Tribunal examined whether HMRC's case went beyond merely questioning the commerciality of agreements to alleging deceit or fraud.

In this case, the Tribunal found that HMRC did not explicitly allege a 'Snook sham' but rather questioned the commercial nature of the image rights agreements. This did not suffice to shift the burden of proof to HMRC.

Impact

This judgment reinforces the principle that HMRC cannot implicitly assert allegations of sham without clear, articulated claims in their pleadings. It underscores the importance of precise legal language in tax disputes and clarifies the circumstances under which the burden of proof may shift from the taxpayer to HMRC.

Future cases involving third-party payments for contracts related to employment (e.g., image rights) will reference this decision to determine burden allocation and the necessity of explicit sham allegations.

Complex Concepts Simplified

The Concept of 'Sham' in Tax Law

A 'sham' occurs when parties enter into a contract that appears different from the underlying reality they intend. To qualify as a 'Snook sham,' the following elements must be present:

1. **Appearance vs. Reality:** The contract creates an outward appearance different from the true agreement.
2. **Common Intention:** Both parties intend to present this false appearance.
3. **Deceptive Purpose:** The intention behind the sham is to deceive third parties or legal institutions.

In the absence of these elements, contracts may still be scrutinized for 'mislabelling' or 'pretence,' which lacks the deceitful intent inherent in a 'Snook sham.'

Burden of Proof in Tax Appeals

The "burden of proof" determines which party must provide evidence to support their claims:

• Taxpayer's Burden: Generally, the taxpayer must demonstrate that HMRC's assessment is incorrect.
• HMRC's Burden: If HMRC alleges a sham or fraud, they must provide evidence to support such serious claims.

The burden does not shift merely because HMRC questions the commercial validity of a contract; explicit allegations of deceit or fraud are necessary for such a shift.

Conclusion

The Hull City AFC (Tigers) Ltd v. Revenue and Customs decision serves as a pivotal reference in tax law, specifically addressing the allocation of the burden of proof in scenarios where HMRC questions the nature of contractual payments. The Tribunal reaffirmed that, absent explicit allegations of sham or deceit by HMRC, the burden remains with the taxpayer to disprove the assessment.

This judgment emphasizes the necessity for HMRC to clearly articulate any allegations of sham in their formal pleadings to warrant a shift in the burden of proof. It also highlights the Tribunal's role in ensuring that procedural fairness is maintained, thereby safeguarding taxpayers from unwarranted or implicit inferences of dishonesty.

Overall, the decision aids in maintaining a balanced protocol in tax disputes, ensuring that both parties are held to clearly defined evidentiary standards.