HMRC cops it for unsubstantiated fraud claim
The first tier tribunal has allowed costs to be awarded against HMRC for acting unreasonably in alleging fraud by the taxpayer where none had taken place.
Taxpayer First Choice Recruitment Limited (First Choice) applied for costs [TC07227] based on HMRC’s behaviour during an appeal regarding construction industry scheme (CIS) deductions. HMRC had taken the position that First Choice should be liable to pay unpaid deductions under the CIS.
In its statement of case, filed 9 December 2016, HMRC alleged that fraud had taken place, outlining that directors of First Choice “were knowing participants in the…payroll fraud.” Reference was also made to emails that suggested First Choice were aware of the fraud taking place.
However, HMRC did not provide any evidence to support their allegation of fraud. Instead, the emails that were provided by HMRC actually confirmed that First Choice was unaware that the relevant subcontractor did not have gross payment status.
HMRC withdraw from appeal
On 6 August 2018, in advance of an appeal hearing set for 20 August 2018, First Choice served its skeleton argument. It took the position that, as HMRC had alleged fraud, the burden of proof had shifted to HMRC, for which HMRC did not have sufficient evidence to discharge.
HMRC withdrew from the appeal on 16 August 2018. Its reason behind the decision was to save time and costs. As First Choice’s skeleton argument highlighted that the burden of proof had shifted to HMRC, its prospects of successfully defending the appeal were poor.
Unreasonable conduct by HMRC
First Choice applied for costs on 25 September 2018 under rule 10(1)(b) of the tribunal procedure rules 2009.
Applications for costs in the first tier tribunal (FTT) are rare, as costs can only be awarded in specific instances, including in cases where one or more of the parties has behaved unreasonably.
First Choice contended that HMRC’s behaviour had been unreasonable. Not only was there no credible evidence upon which to base the allegation of fraud, but also that there was: “no excuse for HMRC’s litigators not to be aware that if they allege fraud, they will have to prove it”.
While HMRC accepted that an appropriately qualified and experienced caseworker would never have made such allegations, HMRC maintained that its behaviour had been reasonable.
HMRC said that, as appeals relating to the CIS are usually straightforward, they are handled by caseworkers who have experience litigating such cases but who have little experience with matters of fraud or MTIC appeals. As a result, HMRC felt that it was entirely reasonable to make such a case allocation “given that the issues under appeal did not concern fraud.”
The FTT agreed with First Choice that HMRC had been “unreasonable in defending and conducting this appeal”.
In particular, the FTT found that HMRC’s conduct in alleging fraud through reference to emails that were not produced in evidence to be egregious and commented:
“It is unacceptable for a public authority to make allegations of fraud where they have no credible evidence upon which to make even a prima facie case.”
The FTT’s condemnation went further, stating that HMRC: “should have an appropriate system of supervision and training in place to ensure that their litigators deal with matters in an appropriate manner and in accordance with the law (including the laws of procedure and evidence).”
In fact, the FTT suggested that had the matter been managed by HMRC’s solicitor’s department, then its actions might well have amounted to serious professional misconduct.
The FTT also noted that it was particularly worrying that HMRC believed its conduct to have been reasonable, and therefore implied that it would not do anything differently in future.
The FTT acknowledged, alongside First Choice, that this also raised the prospect that HMRC would “continue to make unparticularised and unsupported allegations of fraud in cases before this Tribunal, and do not propose to take any steps to remedy their failings so that this does not recur.”
Judge Nicholas Aleksander found in favour of First Choice, directing that HMRC should pay First Choice’s costs of the original CIS appeal and the costs incurred in applying for costs.
The FTT also ruled in favour of First Choice’s application to dispense from the requirement to provide a schedule of costs, on the basis that it would serve no real purpose in this case.
Not only did HMRC include an unfounded allegation of fraud in their statement of case, but they also provided no evidence to support their position.
Perhaps more concerning, however, is that this case does not resolve the question of whether HMRC’s missteps were a one-off, or if similar conduct will be displayed in future cases.