Jafari – HMRC criticised for breach of its duty to assist the Tribunal

In Jafari v HMRC [2019] UKFTT 692 (TC), the First-tier Tribunal (FTT) has  criticised HMRC for failing in its duty to bring relevant authorities to its attention.

Background 

Mr Jafari (the taxpayer) appealed against the following closure notices and discovery assessments:

(1) a discovery assessment dated 24 February 2016, in respect of the tax year 2008/09;

(2) a purported closure notice dated 24 February 2016, in respect of the tax year 2009/10 (HMRC subsequently acknowledged that this was invalid);

(3) a purported discovery assessment dated 15 August 2018, in respect of the tax year 2009/10;

(4) a closure notice dated 25 February 2016, in respect of the tax year 2010/11;

(5) a discovery assessment dated 26 February 2016, in respect of the tax year 2011/12;

(6) a discovery assessment dated 26 February 2016, in respect of the tax year 2012/13; and

(7) a discovery assessment dated 26 February 2016, in respect of the tax year 2013/14.

In each case, the closure notices and discovery assessments related to the under-declaration of income from the taxpayer's property interests.

FTT decision

For reasons which the FTT did not go into and with its agreement, the taxpayer withdrew his evidence and submissions. As a consequence, the FTT dismissed the taxpayer's appeal in respect of the 2010/11 closure notice and each of the discovery assessments, except for the discovery assessment relating to the tax year 2009/10 (the 2009/10 assessment), in respect of which the taxpayer's appeal was allowed.

At the hearing, the FTT asked Mrs O'Reilly (HMRC's representative at the hearing and a member of HMRC's Solicitor's Office) for further details regarding the 2009/10 assessment. It was informed that HMRC:

(1) had erroneously issued a closure notice on 24 February 2016, in respect of the 2009/10 tax year, notwithstanding that there was no enquiry open into that tax year to close; and

(2) had belatedly realised that the said closure notice was invalid and purported to cure the defect by issuing a discovery assessment on 15 August 2018, pursuant to section 29, Taxes Management Act 1970 (TMA).

The FTT then asked Mrs O'Reilly to explain the date and circumstances of the 'discovery' HMRC had made. The FTT was informed that the discovery had been made on or around 24 February 2016, when the purported closure notice had been issued. 

On the basis of the documents before it, HMRC’s written pleadings and Mrs O’Reilly’s responses to its questions, the FTT made the following findings of fact:

(1) HMRC discovered an insufficiency to tax in respect of the 2009/10 tax year no later than the 24 February 2016; and

(2) there was no new discovery between that date and when HMRC issued the discovery assessment on 15 August 2018.

The FTT reminded HMRC that the Upper Tribunal in Beagles v HMRC [2018] UKUT 380 (TCC) and both the Upper Tribunal and the Court of Appeal in Tooth v HMRC [2019] EWCA Civ 826, had confirmed that in order to be valid, a discovery of an insufficiency to tax pursuant to section 29, TMA, must retain its essential 'newness', which is to say that it must not be 'stale'.

It was clear to the FTT that Mrs O'Reilly was familiar with these authorities. 

The FTT noted that the burden is on HMRC to establish the validity of a discovery assessment. The fact that the taxpayer had not pleaded staleness was, therefore, irrelevant. In the view of the FTT, the 2009/10 discovery assessment was plainly stale. It was at least 30 months old from the date of the discovery. 

HMRC reiterated to the FTT its publicly stated position that the concept of "staleness" is unsound and devoid of any statutory authority, to which the FTT commented (at [18]-[19]) that:

"It is clearly open to HMRC to consider that certain decisions of the Tribunals and Courts mis-state tax law. That includes whether or not the concept of “staleness” should pertain to s.29 discovery assessments. HMRC is a party to each such case and can exercise its appeal rights if it wishes. But as I said to Mrs O’Reilly, subject to any extant appeals, the law to be applied by this Tribunal is that authoritatively promulgated by the Tribunals and Courts. 

It follows that I rejected HMRC’s view on “staleness” and decided to apply the law as stated in Beagles."

Criticisms of HMRC

The FTT, in a postscript, commented on HMRC's conduct in this litigation. It stated:

"23. Having reflected after the hearing, I am disappointed that HMRC’s pleadings failed to deal with the “staleness” issue dealt with in this decision. I have no doubt that had I not raised the invalidity of the 2009/10 assessment at the hearing, it would have escaped scrutiny altogether and the appellant would have paid tax (and penalties) not properly due.

24. It is true that the paragraph from HMRC’s skeleton argument quoted at [10] above was sufficient to alert the Tribunal to the possibility that the 2009/10 assessment was invalid – but only because I had carefully read the papers in preparation for the hearing and was already familiar with the relevant cases.

25. No attempt was made to bring to the Tribunal’s attention the relevant jurisprudence on discovery assessments, which undoubtedly incorporates the concept of “staleness” as matters stand. HMRC must have been aware that the 30-month delay between the discovery being made and the assessment being issued would – most probably – have led the Tribunal to conclude that the 2009/10 discovery was “stale” (absent any subsequent new discovery), making that assessment invalid.

26. That HMRC has pending appeals which might give rise to a future change in the law is immaterial. The options open to HMRC in a case such as this are either: (1) to make an application to stay affected proceedings in this Tribunal pending the outcome of the relevant appeals; or, failing which, (2) candidly to acknowledge the position, accept the inevitable adverse decision, and apply for permission to appeal.

27. It is one thing for HMRC to take a principled stance that certain decisions of the Courts and Tribunals contain errors of law and to argue accordingly (but frankly) in affected cases. But it is quite another thing to gloss over decisions which HMRC knows but dislikes and to proceed as if they do not exist. Doing so obscures the true position and risks the Tribunal coming to a legally insupportable conclusion.

28. The latter course of action was not properly open to HMRC. In my view, in adopting it in this case, HMRC did not act with the necessary candour. In fact, regrettably, I would say that HMRC failed to meet its obligation to “help the Tribunal to further the overriding objective” of dealing with cases fairly and justly under Rule 2(4)(a) of the Rules."

Comment

Little comment needs to be added to the FTT's criticisms of HMRC in this case. 

In Weir v Hilsdon [2017] EWHC 983 (Ch), the High Court stated, at [113] and [114], that: 

"As to Ground 7, this is based on counsel’s duty to draw relevant authorities to the attention of the Court, a duty which is said in the Bar Standards Board Handbook to be “particularly important” when a litigant is acting in person ...

The duty is well established. It forms an important part of the way in which justice is administered as it enables judges to rely on counsel to place before them fairly an explanation of what the law is …  

In essence I think it is an aspect of counsel’s obligation not to mislead the court: if counsel submitted that the law was X and suppressed an authority that established that the law was not X but Y, that would be misleading."

The obligation to draw relevant adverse authorities to the Court's attention is also made clear in the SRA's ethical performance indicators for solicitor advocates: (https://www.sra.org.uk/solicitors/resources/cpd/accreditation/higher-rights-audience/Statement-of-standards-for-solicitor-higher-court-advocates).

In our recent blog on First Choice Recruitment Ltd v HMRC [2019] UKFTT 412 (TC) (which can be viewed here), we commented on the FTT's criticism of HMRC for alleging fraud against company directors when there was no evidence to support such a serious allegation. Sadly, this case is yet another example of litigation against taxpayers not being conducted to the requisite standard. 

HMRC needs to recognise that the end does not justify the means and that it is not a case of winning at all costs. HMRC is under a strict duty of candour (in both litigation relating to tax appeals and judicial review proceedings) which it must respect at all times. It is not acceptable for HMRC to fail to draw to the attention of the FTT, or the courts, relevant jurisprudence, simply because it does not agree with the law.

It is to be hoped that following this decision, HMRC will comply with its duty of candour in all future litigation and will bring relevant authorities to the court's attention, even when those authorities may adversely affect its case. 

The decision can be viewed here.