Effective case management before the Tax Tribunal

In this blog (which is based on an article published in Tax Journal on 30 August 2024), we look at the various stages involved in an appeal to the First-tier Tribunal (FTT) and in particular, consider the FTT's case management powers.

An appeal to the FTT broadly involves the following:

1. Categorisation of the appeal
2. Case management directions issued by the FTT
3. Considering HMRC's Statement of Case
4. Disclosure
5. Preparation of any witness evidence (including any expert evidence)
6. Preparation of a Statement of Agreed Facts and Issues
7. Preparation for the appeal hearing
8. Attending the appeal hearing

Categorisation of the appeal

Under rule 23 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the FTT Rules), when the FTT receives a notice of appeal, application notice, or notice of reference, it must issue a direction allocating the case to one of the following four categories:

I. Default Paper cases
II. Basic cases
III. Standard cases
IV. Complex cases

Default Paper cases
Default paper cases are unique because they are typically disposed of without a hearing and the appellant will prepare a written Reply to HMRC's Statement of Case. The procedure for Default Paper cases is as follows:

• HMRC provides a Statement of Case (explained in more detail below) within 42 days of the FTT sending the notice of appeal to HMRC (rule 25(1), FTT Rules). This must set out the legislative provisions under which the decision under appeal was made and HMRC's position (rule 25(2), FTT Rules).
• The appellant provides a written Reply to the FTT within 30 days of receiving HMRC's Statement of Case (rule 26(2), FTT Rules). There are no mandatory requirements for the content of the Reply, but it should set out the appellant's response to HMRC's Statement of Case and provide any further information relied on (rule 26(3), FTT Rules).

Although Default Paper cases are usually disposed of without a hearing, either party may insist that the case is determined at a hearing (rule 26(7), FTT Rules). 

Basic cases
Rule 24(2), FTT Rules, provides that HMRC does not need to provide a Statement of Case in Basic cases. Instead, subject to any direction by the FTT to the contrary, the case will proceed directly to a hearing.

Under rule 24(3) and (4), FTT Rules, if HMRC intends to rely upon grounds for contesting the proceedings at the hearing which have not previously been communicated to the appellant, it must notify the appellant of those grounds as soon as reasonably practicable after becoming aware that such is the case and in sufficient detail to enable the appellant to respond to such grounds at the hearing.

Standard and Complex cases
The procedure for Standard and Complex cases is largely the same:

• HMRC provides a Statement of Case within 60 days of the FTT sending the notice of appeal to HMRC (rule 25(1)(c), FTT Rules).
• Each party must provide to each other a List of Documents (explained in more detail below) within 42 days of receiving HMRC's Statement of Case (rule 27(2), FTT Rules).

The two key differences between Standard and Complex cases are as follows:

• Complex cases can be referred by the FTT, with the consent of the parties, to the President of the Tax Chamber of the FTT with a request that the case be considered for transfer to the Upper Tribunal (UT) (rule 28(1), FTT Rules). This might be suitable where, for example, there are two conflicting decisions of the FTT on the same issue.
• In Complex cases the unsuccessful party can be ordered to pay the successful party's costs, unless the taxpayer opts out of this within 28 days of the case being allocated as a Complex case (rule 10(c), FTT Rules).

Reclassification

Under rule 23(3), FTT Rules, the FTT has the power to re-allocate a case to a different category at any time, either on the application of a party or on its own initiative. The FTT may allocate a case as Complex only if it considers that the case:

• will require lengthy or complex evidence or a lengthy hearing;
• involves a complex or important principle or issue; or
• involves a large financial sum.

Guidance on the correct approach to categorising an appeal as Complex was provided by the UT in Capital Air Services v HMRC [2010] UKUT 373 (TCC).

Case management directions

As mentioned above, the FTT will issue directions for the continuation of an appeal once the appeal has been categorised. However, the appellant can apply to the FTT, pursuant to rule 5, FTT Rules, for the issue of bespoke directions which are designed specifically to accommodate the circumstances of the case, with the objective of moving the case forward as quickly, economically and efficiently as possible. 

Under rule 5, FTT Rules, the FTT has power to:

a) extend or shorten the time for complying with any rule or direction;

b) consolidate or hear together two or more sets of proceedings;

c) permit or require a party to amend a document;

d) permit or require a party or another person to provide documents, information or submissions to the FTT or a party;

e) deal with an issue in the proceedings as a preliminary issue;

f) hold a hearing to consider any matter, including a case management hearing;

g) decide the form of any hearing;

h) adjourn or postpone a hearing;

i) require a party to produce a bundle for a hearing;

j) stay proceedings;

k) transfer proceedings to another tribunal if that tribunal has jurisdiction in relation to the proceedings; and

l) suspend the effect of its own decision pending the determination by the FTT or UT of an application for permission to appeal.

The FTT's powers must be exercised with regard to the ‘overriding objective’, which is to ensure that a case is dealt with ‘fairly and justly’ (rule 2, FTT Rules). In this regard, this means (rule 2(2)):

"Dealing with a case fairly and justly includes—

a) dealing with the case in ways which are proportionate to the importance of the case, the complexity of the issues, the anticipated costs and the resources of the parties;

b) avoiding unnecessary formality and seeking flexibility in the proceedings;

c) ensuring, so far as practicable, that the parties are able to participate fully in the proceedings;

d) using any special expertise of the Tribunal effectively; and

e) avoiding delay, so far as compatible with proper consideration of the issues."

Considering HMRC's Statement of Case

For Standard and Complex cases, HMRC is required to provide a Statement of Case within 60 days of the Notice of Appeal being sent to HMRC by the FTT. This must set out the legislative provisions under which the decision under appeal was made and HMRC's position (rule 25(2), FTT Rules). 

HMRC's Statements of Case tend to be a hybrid of pleading and narrative of the evidence. The role of pleading is that it establishes the key areas of dispute between the parties and it should assist the parties in their preparation for the appeal hearing.

The qualitative analysis to be expected from a Statement of Case will depend on the complexity of the matters in dispute. If the appellant considers that HMRC's Statement of Case is not sufficiently detailed to enable a proper understanding of the case the appellant has to meet, they can apply to the FTT for a direction requiring HMRC to provide further and better particulars of its Statement of Case. The FTT can make such a direction under rule 5, FTT Rules, but it will only do so if it considers the request is justified and proportionate.

The FTT Rules do not impose any requirement for the appellant to provide a Statement of Case. 

Disclosure

Under rule 27(2), FTT Rules, each party must prepare a list of documents which are in their possession, or over which they have the right to possession, or the right to take copies and which the party providing the list intends to rely upon or produce in the proceedings. Under rule 27(3), FTT Rules, the party providing the list must allow the other party to inspect or take copies of the documents on their list.

The key difference between this approach and general civil litigation is that the parties only have to disclose the documents upon which they intend to rely. A possible reason for this difference is that during the course of an HMRC investigation it is likely that the taxpayer will have been required to disclose all statutory records that must be held and retained for the purposes of filing a tax return, and HMRC is able to obtain extensive information from taxpayers and third parties by issuing information notices under Schedule 36, Finance Act 2008.

Whilst there is no obligation in the FTT Rules to disclose more than the documents which support your case HMRC, as a public department, is also subject to an overarching duty of candour. In Calltel Telecom Ltd v HMRC [2007] UKVAT V20266, the tribunal said that, whilst HMRC should not disclose every piece of documentation that they might conceivably have possession of, they were of the view that: "the Commissioners should offer more than the rules require, whether or not a specific direction has been made".

In Kyriakos Karoulla (trading as Brockley's Rock) v HMRC [2018] UKUT 255 (TCC), the FTT upheld a ‘best of judgement’ assessment by HMRC against the appellant taxpayer for under-declared VAT and associated penalties in respect of takings from its fish and chip shop. On appeal, the appellant sought to admit originals of till rolls and records relating to card purchases on the till for the relevant period. This evidence was only supplied by HMRC to the appellant shortly before the commencement of the oral hearing of the application for permission to appeal. The UT commented on the nature of HMRC's disclosure obligations as follows:

"32. In any event, in the normal course HMRC should have disclosed these source documents, not only to Karoulla but also to the FTT, in accordance with its duty of candour. It is trite that the duty of candour is a concept derived from and developed in the area of judicial review. However, as HMRC will be well aware, it is long-established practice that HMRC usually accept that the duty applies to them in normal tax appeals".

Under rule 16(1)(b), FTT Rules, either party can apply to the FTT for the other party to disclose documents or classes of documents. It will then be a matter for the FTT to determine whether further disclosure should be ordered. In HMRC v Ingenious Games LLP [2014] UKUT 0062 (TCC), Sales J (as he then was) said [68(iii)]:

"According to the usual standards of justice in heavy civil litigation, such as these proceedings, it is just and fair for a party to see documents held by its opponent relevant to that opponent's pleaded case in order to see whether they undermine that case or support the party's own case in opposition." 

There are two important exceptions to the powers of the FTT to order disclosure of documents. 

The first is legal privilege, which comprises:

1. Legal advice privilege - confidential communications between lawyers and their clients made for the dominant purpose of seeking or giving legal advice; and
2. Litigation privilege - confidential communications between lawyers and their clients, or the lawyer or client and a third party, which comes into existence for the dominant purpose of being used in connection with actual or pending litigation.

Legal professional privilege applies only in relation to lawyers; it does not apply in relation to other professional advisers, such as accountants or members of the Chartered Institute of Taxation.

The second is relevance. The documents sought must be relevant to the issues to be adjudicated upon by the FTT. Relevance was described in Tower Bridge GP Ltd v HMRC [2016] UKFTT 54 (TC) as follows: "The test of “relevance” should not set an unduly high bar. Documents and information that might advance or hinder a party's case, or which might lead to a “train of inquiry” that might advance or hinder a party's case are in principle relevant".

Preparation of any witness evidence (including expert evidence)

Witness evidence

The proper identification of relevant evidence is a vital part of case preparation. If a party wishes to rely on the evidence of a witness to establish any facts that are in dispute, then the general rule is that the witness should attend the hearing and be prepared to give oral evidence. A proof of evidence should normally be taken from them, served on the other party and lodged at the FTT in good time before the appeal hearing.

Expert evidence

In some cases either, or both, parties may wish to call an independent expert witness. For example, the issue which the FTT is being asked to consider may turn on the correct accounting treatment of particular items in business accounts. In such a case, the parties may wish to call expert witnesses to give evidence to the FTT as to what is the correct accounting treatment.

In such circumstances, there are two possible approaches. The parties may each call their own expert witness, in which case the FTT should make suitable directions for service of the experts' reports (and any supplemental reports) and possibly, thereafter, for a meeting between the experts to discuss their reports to see if any issues can be agreed upon. Alternatively, the FTT may direct that the parties jointly appoint a single expert to provide evidence (rule 15(1)(c), FTT Rules).

Preparation of a Statement of Agreed Facts and Issues

A Statement of Agreed Facts and Issues can be a helpful document which should contain all relevant facts which are not in dispute. A properly prepared Statement of Agreed Facts will reduce the length of the appeal hearing and save the parties the expense of having to call witnesses of fact. It is, however, important that a party does not inadvertently agree facts for inclusion in the Statement of Agreed Facts and Issues which later prove to be prejudicial to their case and which, on reflection, they should not have agreed. Further, the parties need to carefully identify the issues which are to be determined by the FTT, since this agreement will then focus how the case progresses and is argued in the FTT. 

Preparation for the appeal hearing

Case preparation is key to understanding all the issues relevant to a dispute, and detailed preparation will assist in ensuring that all issues are properly presented and argued before the FTT. One thing that the FTT dislikes is poor case preparation and it is therefore of paramount importance that a tax appeal is properly prepared once the FTT is seized of the matter. As the burden of proof is generally on the appellant taxpayer, this task is predominantly carried out by the taxpayer or by their legal advisers on their behalf.

Generally, the FTT will issue a direction that the parties should agree a joint bundle of documentation to be referred to at the hearing. The parties will also agree a joint bundle of authorities (ie decided cases or statutory provisions relevant to their respective arguments).

In Standard and Complex cases, each party is required to assist the FTT by providing a Skeleton Argument, which is essentially a summary of the legal and factual issues on which their case is based.

Attending the appeal hearing

Under rule 29(1,) FTT Rules, in all cases other than Default Paper cases, the FTT must hold a hearing before making a decision which disposes of the proceedings  (unless the parties have consented to the matter being decided without a hearing and the FTT considers that it is able to decide the matter without a hearing).

The setting down of the case for hearing will normally be dealt with in the case management directions issued by the FTT after the appeal has been registered.

Under rule 31(1,) FTT Rules, the FTT must give each party entitled to attend a hearing reasonable notice (at least 14 days for a substantive hearing) of the time and place of any hearing and any changes to the time and place of the hearing.

Generally, in Basic cases, the FTT will set a date for a hearing without consulting the parties. This practice is not followed in Standard or Complex cases, where the FTT will normally write to the parties and ask them to estimate the length of the hearing and to provide any dates to avoid within a 'listing window'. The FTT will then write to the parties confirming the date on which the appeal will be heard.

Hearings can either take place virtually, or in person, at one of the FTT's permanent centres which are situated in London, Manchester and Edinburgh.