Factual and Procedural Background
The Appellant, trading as Company A, appealed against a decision of the First-tier Tribunal ("FTT") dated 17 August 2016, which upheld a "best judgment" VAT assessment by HM Revenue & Customs ("HMRC") concerning under-declared VAT and penalties related to takings from a fish and chip shop business operated by the Appellant. The Appellant's initial applications for permission to appeal to the Upper Tribunal were refused by both the FTT and the Upper Tribunal. Subsequently, the Appellant applied for reconsideration, and permission to appeal was granted by the Upper Tribunal Judge in respect of the findings related to the extent to which credit card transaction takings were reflected in the till's "Z readings" (end-of-day shift readings).
The FTT had found that the Appellant operated the business between 1 December 2011 and 31 October 2014, was registered for VAT throughout, and that HMRC officers conducted inspections in September and October 2013, collecting till records and adjusting till settings. HMRC concluded that some sales, particularly credit card sales after 8pm, were not recorded in the till's Z readings, indicating takings suppression. HMRC issued a VAT assessment and penalty in 2015, which were upheld on review and by the FTT.
Legal Issues Presented
- Whether HMRC exercised their "best judgment" in making the VAT assessment under section 73 of the Value Added Tax Act 1994.
- Whether the quantum (amount) of the VAT assessment was correct and should be upheld by the tribunal.
- Whether new evidence relating to till rolls and credit card transactions should be admitted in the appeal.
Arguments of the Parties
Appellant's Arguments
- The Appellant sought admission of new evidence consisting of original till rolls and records relating to credit card transactions, which were only recently provided by HMRC shortly before the hearing.
- The Appellant argued that HMRC had failed to disclose these documents despite repeated requests, impeding the ability to challenge the VAT assessment properly.
- The Appellant contended that the new evidence showed inconsistency in the suppression of credit card transactions, which could materially affect the quantum of the assessment.
- The Appellant challenged the FTT’s findings on the quantum of the assessment, particularly regarding credit card sales not reflected in the till's Z readings.
Respondents' Arguments
- HMRC argued that the Appellant should have applied for an order for disclosure before the FTT and that the new evidence could have been obtained with reasonable diligence.
- HMRC contended that the duty of candour did not apply to them in this context as it is limited to judicial review cases.
- HMRC submitted that the percentage of credit card sales not reflected in the Z readings was irrelevant to the best judgment assessment and the subject of the appeal.
- HMRC maintained that the FTT did not make any finding on the suppression percentage for credit card sales, rendering the new evidence immaterial under the relevant criteria for admission.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Ladd v Marshall [1954] 1 WLR 1489 |
Criteria for admitting new evidence on appeal: (1) could not have been obtained with reasonable diligence, (2) probably would have important influence on result, (3) must be credible. |
The court applied these criteria flexibly under Rule 15(2) of the Upper Tribunal Rules, endorsing their persuasive authority in exercising discretion to admit new evidence. |
| Van Boeckl v CEC [1981] STC 290 |
Principles governing "best judgment" VAT assessments. |
Used to frame the two-stage approach: whether HMRC exercised best judgment and whether the quantum of assessment is correct. |
| WH Smith Limited v CEE (Decision No. 16505/1999) |
Principles on "best judgment" assessments. |
Reinforced the framework for reviewing best judgment assessments at appeal. |
| Rahman v CEC (No.2) [2003] STC 150 |
Clarifies tribunal's supervisory jurisdiction on best judgment and full appellate jurisdiction on quantum. |
Guided the tribunal’s approach to distinguishing between best judgment validity and quantum correctness. |
| Edwards v Bairstow [1956] AC 14 |
Standard for appellate review of findings of fact as being perverse or erroneous. |
Applied to determine the scope of appeal on factual findings by the FTT. |
| Bramley Ferry Supplies Ltd v HMRC [2017] UKUT 0214 (TCC) |
Interpretation and application of Rule 15 of the Upper Tribunal Rules regarding admission of fresh evidence. |
Endorsed and applied in considering the discretion to admit new evidence in this case. |
| Gardner-Shaw UK Ltd & others v HMRC [2018] UKFTT 313 (TC) |
HMRC's duty of candour in tribunal proceedings. |
Referenced to highlight HMRC’s usual acceptance of a duty of candour, relevant to disclosure obligations. |
| Fio's Cash and Carry Ltd v HMRC [2017] UKFTT 346 (TC) |
Approach to appeals against best judgment VAT assessments focusing on quantum. |
Used to summarize the tribunal's dual-stage jurisdiction and the focus on determining the correct amount of VAT. |
| Pegasus Birds Ltd v Customs and Excise Commissioners [2004] EWCA Civ 1015 |
Emphasizes tribunal’s focus on finding correct tax amount rather than attacking HMRC’s judgment. |
Supported the principle that appeals should primarily address the correct quantum of tax. |
Court's Reasoning and Analysis
The Upper Tribunal considered the Appellant's application to admit new evidence under Rule 15(2) of the Upper Tribunal Rules, guided by the overriding objective to deal with cases fairly and justly, and the criteria from Ladd v Marshall. The court found that the new evidence was apparently credible and that the Appellant had exercised reasonable diligence in attempting to obtain the documents prior to the FTT hearing, with HMRC unreasonably withholding them despite repeated requests. The court rejected HMRC's argument that the Appellant should have sought a disclosure order, noting that the duty of candour, while traditionally a judicial review concept, is generally accepted by HMRC in tax appeals to require disclosure of relevant material.
On the second Ladd v Marshall criterion, the court analysed whether the new evidence would probably have an important influence on the outcome. The evidence showed that suppression of credit card payments was inconsistent, contradicting the FTT's assumption that such suppression was uniform. The FTT's decision focused heavily on whether HMRC exercised best judgment and devoted limited analysis to the quantum issue, relying in part on the evidence regarding credit card sales exclusion from Z readings.
The court found that the FTT implicitly relied on some suppression of credit card payments to uphold the quantum of the assessment, but did not make explicit findings on the extent of such suppression. Given this, the court could not confidently predict that the FTT’s decision on quantum would have been the same had the new evidence been available. Accordingly, the new evidence was likely to have an important influence on the appeal's outcome.
The court thus admitted the new evidence and decided to set aside the FTT decision in its entirety due to the interdependence of issues, including penalties, and remitted the case for rehearing before a differently constituted panel. The court also encouraged the parties to consider settlement to avoid further hearings.
Holding and Implications
The Upper Tribunal ALLOWED the appeal in part by granting permission to admit new evidence and set aside the FTT decision in its entirety. The case was remitted for a fresh hearing before a new panel of the First-tier Tribunal with directions to clarify issues and disclosure requirements.
The direct effect is that the original VAT assessment and penalty upheld by the FTT are not final and will be reconsidered in light of the newly admitted evidence. No new precedent was established beyond the application of existing principles on admission of evidence and best judgment assessments.