Introduction

The case of Karoulla (trading as Brockley's Rock) v. Revenue and Customs (Tax) ([2018] UKUT 255 (TCC)) presents a pivotal moment in tax law, particularly concerning the admission of new evidence in Value Added Tax (VAT) assessments conducted under the "best judgment" provision. The appellant, Kyriakos Karoulla, operated a fish and chip shop registered for VAT from December 2011 to October 2014. HM Revenue & Customs (HMRC) conducted VAT inspections, ultimately leading to an assessment and substantial penalties for under-declared VAT. Karoulla challenged the assessment, primarily disputing the factual findings related to credit card transactions and the consequent VAT quantum.

Summary of the Judgment

The First-tier Tribunal (FTT) upheld HMRC's "best judgment" assessment against Karoulla, affirming the VAT under-declaration and imposing corresponding penalties. Karoulla sought to appeal this decision but faced initial refusals. Persisting, Karoulla appealed to the Upper Tribunal under Rule 22(4) and (5) of the Tribunal Procedure (Upper Tribunal) Rules 2008, seeking reconsideration to admit new evidence—specifically till rolls and records related to credit card transactions that were not previously disclosed by HMRC.

The Upper Tribunal granted permission to appeal solely on the grounds concerning the admission of this new evidence and its potential impact on the VAT quantum assessment. The Tribunal scrutinized HMRC's handling of the evidence, particularly HMRC's failure to disclose critical documents despite repeated requests from Karoulla. Emphasizing the principles from Ladd v Marshall [1954] 1 WLR 1489, the Tribunal determined that the new evidence was both credible and likely influential, warranting a fresh hearing before a new FTT panel.

Analysis

Precedents Cited

The judgment extensively references landmark cases that shape the framework for "best judgment" assessments and the admission of new evidence. Notably:

• Van Boeckl v CEC [1981] - Established foundational principles for best judgment assessments.
• WH Smith Limited v CEE - Further refined the criteria for assessing VAT under-declarations.
• Rahman v CEC (No.2) [2003] - Clarified the tribunal's supervisory role in validating HMRC's assessments.
• Ladd v Marshall [1954] 1 WLR 1489 - Provided the criteria for admitting new evidence, focusing on its availability, potential influence, and credibility.
• Bramley Ferry Supplies Ltd v HMRC [2017] UKUT 0214 (TCC) - Applied the Ladd v Marshall criteria within the Upper Tribunal context.

Legal Reasoning

The Upper Tribunal's legal reasoning hinged on the proper admission of new evidence that was previously withheld by HMRC. Applying the Ladd v Marshall criteria, the Tribunal assessed whether the evidence could not have been obtained earlier with due diligence, whether it would likely influence the case's outcome, and whether it was credible. The Tribunal found:

• HMRC failed to disclose the original till rolls despite repeated requests, satisfying the first criterion.
• The newly presented evidence demonstrated inconsistencies in HMRC's earlier findings regarding credit card transaction recordings, potentially impacting the assessment's quantum, thus meeting the second criterion.
• The evidence was deemed credible, fulfilling the third criterion.

Furthermore, the Tribunal criticized HMRC's lack of candor and failure to assist the tribunal in achieving a fair and just resolution, aligning with the overriding objectives of the Upper Tribunal Rules.

Impact

This judgment underscores the importance of transparency and due diligence in tax assessments. By permitting the admission of previously undisclosed evidence, the Tribunal reinforces taxpayers' rights to a fair hearing and ensures that HMRC's assessments stand up to rigorous scrutiny. Future cases will likely see heightened expectations for HMRC to disclose all relevant evidence promptly, and tribunals may be more inclined to permit new evidence that significantly influences case outcomes.

Complex Concepts Simplified

Best Judgment Assessment

A "best judgment" assessment is a tax authority's estimation of the amount of tax due when a taxpayer's return is incomplete or incorrect, and the correct amount is not ascertainable from the provided information. It involves the authority making an informed estimate based on available data and reasonable assumptions.

Ladd v Marshall Criteria

Originating from a 1954 case, these criteria determine whether new evidence should be admitted in legal proceedings. The evidence must:

1. Not have been obtainable with reasonable diligence for earlier use.
2. Have the potential to significantly influence the case's outcome.
3. Be credible and reliable.

Duty of Candour

This refers to the obligation of HMRC to act honestly and transparently, particularly in disclosing relevant information and evidence during tax proceedings. It ensures that HMRC does not withhold evidence that could materially affect the tribunal's decision.

Conclusion

The Upper Tribunal's decision in Karoulla v. HMRC marks a significant reaffirmation of taxpayers' rights to access and challenge all relevant evidence in VAT assessments. By applying and adapting the Ladd v Marshall criteria within the tribunal context, the judgment emphasizes fairness, transparency, and due process in tax disputes. This case sets a precedent for more stringent scrutiny of HMRC's evidence handling practices and ensures that taxpayers are not disadvantaged by undisclosed or selectively presented information. As a result, HMRC may need to reassess its evidence disclosure protocols to align with the Tribunal's expectations for fairness and justice in tax assessments.