HMRC prevented from participating further in VAT appeal following failure to comply with unless order

In Ebuyer (UK) Ltd v HMRC [2023] UKFTT 00611 (TC), the First-tier Tribunal (FTT) held that HMRC had committed a serious and significant breach of an 'unless order' in respect of disclosure, and therefore denied HMRC's application for relief from sanctions and barred it from further participation in the proceedings.

Background

In 2013/14, HMRC issued decisions to Ebuyer (UK) Ltd (Ebuyer), denying the right to deduct input tax of approximately £6.7m and assessing Ebuyer to VAT of approximately £5.8m. Ebuyer appealed the decisions, arguing, amongst other things, that some of the assessments were issued beyond the one-year time limit referred to in section 73(6)(b), Value Added Tax Act 1994 (the time bar issue).

Ebuyer subsequently applied to strike out HMRC’s Statement of Case or, alternatively, for further and better particulars to be provided by HMRC. Ebuyer also applied for CPR-style standard disclosure from HMRC. Both applications were refused by the FTT. The applications were subject to appeals before the Upper Tribunal (UT) and the Court of Appeal (CoA), before whom Ebuyer was ultimately unsuccessful. An application for permission to appeal to the Supreme Court (SC) was refused in February 2018. 

In June 2015, Ebuyer also made a request for disclosure, including for progress logs and notebooks of HMRC officers. HMRC provided notes made by certain officers, but declined to provide progress logs. Ebuyer made a formal disclosure application to the FTT, which was stayed pending the proceedings in the UT and the CoA. 

Following the SC's refusal of permission to appeal, there was correspondence between the parties in relation to directions for the future progress of the appeal. In August 2019, the FTT issued directions requiring Ebuyer to serve its witness evidence by 30 September 2019. Following a number of extensions of time, Ebuyer served its witness statements on 10 January 2020, but did not serve the exhibits to those statements. 

HMRC sought the exhibits. By 18 February 2020, the exhibits were still outstanding and HMRC applied for an unless order against Ebuyer. On 16 March 2020, the FTT issued an unless order requiring service of the exhibits within 14 days. Ebuyer's appeal was ultimately struck out in accordance with the unless order. However, on 21 September 2020, Ebuyer applied for reinstatement of its appeal, which was not opposed by HMRC and on 6 June 2021, the appeal was reinstated.

In March 2021, Ebuyer made a further disclosure request and an information request of HMRC. The parties agreed directions, including a direction giving effect to the disclosure request (Direction 2). It was clear that the disclosure extended beyond the time bar issue.

In September 2021, HMRC applied for an extension of time to comply with Direction 2 until 26 October 2021, which was agreed by Ebuyer. There was then a delay in the FTT considering the application and although it was eventually granted, the FTT observed that HMRC was already in breach of Direction 2 by 10 days at the time the application was made, the appeal was very old and the interests of justice would not be served by further delays. 

Notwithstanding the comments of the FTT, on 26 October 2021, HMRC made an application for a further extension of time until 28 January 2022, on the basis that the HMRC officer with conduct of the case was on sick leave and awaiting surgery. Ebuyer consented to this further extension on the basis that no further extensions of time would be required by HMRC.

On 10 December 2021, the FTT issued an unless order providing, amongst other things, that the time to comply with Direction 2 be extended to 31 January 2022 and if HMRC failed to comply with that deadline it would be barred from further participation in the proceedings (the UO). In making the UO, the FTT again noted that it was a very old case concerning transactions undertaken more than a decade previously, that the repeated applications for extensions of time by HMRC were prejudicial to Ebuyer and other tribunal users and any further delay would not be in the interests of justice.

On 31 January 2022, HMRC wrote to Ebuyer claiming that it had made disclosure to Ebuyer as required by the UO and provided a written statement to explain certain omitted documents. The disclosure provided by HMRC specifically limited documents to those relevant to the time bar issue.

On 5 April 2022, Ebuyer applied to the FTT for a direction that HMRC be barred from further participation in the proceedings for breach of the UO. In response, HMRC submitted a notice of objection and application for relief from sanctions. HMRC accepted that it had inadvertently failed to disclose seven documents that were marked for disclosure and was therefore in breach of Direction 2 and the UO, to that limited extent. HMRC explained that the documents had inadvertently not been copied into the final version of a folder that was provided to Ebuyer because the paralegal collating the material was suffering from Covid in the days when the collation process was finalised.

FTT decision

HMRC's application was refused. 

In applying the test formulated in Denton v TH White Ltd [2014] EWCA Civ 906, the FTT concluded that HMRC's breach of the UO was serious and significant. HMRC had been in repeated breach of the FTT's directions and the documents it had failed to disclose had been requested by Ebuyer as long ago as 2015 and were potentially at the heart of Ebuyer's case. The FTT rejected HMRC's argument that Ebuyer should have brought the missing documents to its attention, concluding that there was no basis for such an obligation on Ebuyer and, more importantly, that Ebuyer not bringing the missing documents to HMRC's attention did not detract from the significance and seriousness of HMRC’s breach. The FTT also dismissed HMRC's contention that only documents relevant to the time bar issue fell to be disclosed, finding that HMRC's approach was directly contrary to the terms of the directions and its failure to provide all of the required documents made an already serious and significant breach of the UO more so.

As to HMRC's reasons for its default, the FTT observed that HMRC had had ten months to carry out the disclosure exercise and, despite the clear warning in the UO, had left the exercise to the last moment. Further, as a large government organisation, one person’s illness should not result in HMRC being unable to comply with directions issued by the FTT. The FTT therefore concluded that HMRC had not shown any good reason for its failure.

In considering all the circumstances of the case, the FTT determined that HMRC's application should be denied. The FTT noted that HMRC’s error was a repeated error to give the FTT’s directions due time and attention, and HMRC was very clearly put on notice that the delays were of real concern to the FTT. That concern was reinforced by the issuing of the UO and yet HMRC still took little action to comply with its obligations. The importance of compliance with directions issued by the FTT therefore weighed heavily against HMRC being granted any relief from sanctions.

Finally, the FTT observed that HMRC's error had significantly delayed the progress of an already very old appeal. Realistically, the case would not be listed until well into 2024 at the earliest, while without the delay caused by HMRC's non-compliance it could have been listed in 2023. While there was significant public interest in HMRC being able to pursue an appeal in which some £7m of VAT was at stake, the FTT recognised that there was also a public interest in court time being used efficiently and effectively and court orders being respected and complied with in a timely manner. HMRC was therefore barred from further participation in the proceedings.

Comment

This decision emphasises the importance of complying with directions issued by the FTT and the serious consequences that can arise when those directions are not adhered to. While an order barring HMRC's participation in proceedings is relatively uncommon, taxpayer's will welcome the FTT's firm indication as to the standard of conduct expected of HMRC and the clear message that HMRC will not be permitted to ignore time limits contained in directions with impunity.

Taxpayers who encounter breaches by HMRC of directions issued by the FTT should, in appropriate circumstances, consider making an application to the FTT for an unless order against HMRC.  

The decision can be viewed here.