HMRC ordered to pay taxpayer's costs following improper allegation of fraud

In the recent case of Simple Solutions GB Limited v HMRC,1 not only was the taxpayer successful in its appeal, it was also awarded its costs following serious and unsubstantiated allegations of fraud made against it by HMRC.

Background

Simple Solutions GB Limited ('Simple Solutions'), which carried on a business of building houses on a speculative basis, appealed to the First-Tier Tax Tribunal ('FTT') after HMRC rejected its claim for input tax deductions in relation to VAT paid for goods and services received. The appeals were against:

1. VAT assessments made on the basis that HMRC considered Simple Solutions had wrongly reclaimed VAT in respect of goods which HMRC believed had never been supplied to Simple Solutions and for which Simple Solutions had made no payment;
2. VAT assessments in respect of VAT reclaimed, where HMRC contended no reclaim should have been made as the goods and services in question should have been zero rated; and
3. HMRC's refusal to repay VAT to Simple Solutions as HMRC considered the goods and services in question should have been zero rated, with the result that Simple Solutions should look to its supplier, rather than HMRC, for repayment.

The appeal hearing

The FTT formed the view at the start of the hearing that the assessments had been raised, not because HMRC had detected any inaccuracy or error in Simple Solutions' records, but because HMRC considered the VAT reclaims were based on false documents and were therefore fraudulent.  HMRC confirmed that this was the basis on which its case was being put.

Simple Solutions' Project Manager gave oral evidence, supported by documentary evidence. He provided explanations for the invoices and transactions that HMRC considered suspicious. Under cross examination it was put to him that certain goods had not in fact been supplied to him and that the relevant invoices had been invented for the purpose of making fraudulent VAT repayment claims. He denied this.

On behalf of HMRC an HMRC official gave oral evidence to the effect that he had visited Simple Solutions' premises and examined its records. The lack of details in these records had caused him concern. He accepted, however, that he had made no checks with Simple Solutions' suppliers.

In its closing submissions HMRC conceded that it had no evidence whatsoever of fraud or dishonesty on Simple Solutions' part. HMRC then put forward a different basis for contending that Simple Solutions' appeals should be dismissed, namely, that the invoices in question did not contain sufficient detail to satisfy regulation 14(1) VAT Regulations 1995.

The FTT's decision

The FTT accepted Simple Solutions' evidence and found HMRC's evidence "inadequate". The case that Simple Solutions had to rebut was that it had made false and fraudulent VAT repayment claims. Where such an allegation was made HMRC bore the evidential burden of making out that case, given it was improper to make such a serious allegation unless it was supported by cogent evidence. There was no such evidence. The FTT also decided that that the invoices in question contained sufficient detail to satisfy the VAT Regulations. The appeals were accordingly allowed.

Simple Solutions submitted that HMRC should pay its costs despite the fact that this case had not been allocated to the Complex category, as HMRC had made unsupported allegations of fraud and dishonesty against it.² The FTT agreed and made a costs order against HMRC on the basis that it was unreasonable for HMRC to conduct this litigation alleging fraud when no evidence was adduced in support of such a serious allegation. The FTT said that if a member of the legal profession had conducted HMRC's case in the absence of such evidence, that would have been a serious matter of professional misconduct.

Comment

HMRC has not covered itself in glory in this case. First, its investigation into the disputed supplies to Simple Solutions appears to have been inadequate as it failed to follow up on basic lines of enquiry. Second, by putting fraud and dishonesty at the heart of its case, HMRC accepted a high evidential burden that it was simply unable to meet.

It should be of some concern to practitioners and taxpayers alike that despite having no evidence whatsoever of fraud, it was not until the end of the appeal hearing that HMRC finally accepted this fact. Whilst ultimately vindicated, Simple Solutions was put to the inconvenience and expense of having to take its appeal to the FTT for determination.

This case is a timely reminder that even where a case has not been allocated to the Complex category, HMRC's unreasonable conduct may lead to a costs award being made against it.

¹ [2013] UKFTT 415 (TC) http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02809.html.

² Rule 10(1)(b) of the FTT Rules 2009/273 provides that the FTT may make a costs order if it "considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings".