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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.

22nd Nov 2019
Tax Writer
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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.”

Egregious conduct

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.

Worrying implications

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.”

The decision

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.

Commentary

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.

Replies (19)

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By Justin Bryant
22nd Nov 2019 13:20

Another slap on the wrist for HMRC by an FTT judge here: http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j11423/TC...

What incentive is there for HMRC to act fairly/justly against taxpayers? None basically.

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Replying to Justin Bryant:
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By itp3e
25th Nov 2019 14:34

… Except a load more tribunal decisions like these.

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Replying to Justin Bryant:
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By itp3e
25th Nov 2019 14:39

… Except a load more tribunal decisions like these.

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By peterdell
22nd Nov 2019 14:12

Well I can answer the conclusion, they have displayed similar conduct in the case I am dealing with.

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By Trethi Teg
22nd Nov 2019 15:40

Yet another example of how HM Robbers and Crooks are totally out of control and no one is prepared to hold them to account. They are now above the law.

I have seen numerous examples where HMRC have deliberately told lies, issued guidance which is deliberately intended to decieve, bully people into paying monies that are not due etc and it seems to be getting worse. The outcome - the boss gets a knighthood.

God help us all if Jeremy (and his puppet master John McDonnell) gains control of the this bunch of b******s!!!

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Replying to Trethi Teg:
By SteLacca
25th Nov 2019 08:40

Trethi Teg wrote:

God help us all if Jeremy (and his puppet master John McDonnell) gains control of the this bunch of b******s!!!

Because the Tory's have made such a good job of things?

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Replying to SteLacca:
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By Trethi Teg
25th Nov 2019 10:50

"Because the Tory's have made such a good job of things?"

The point I was trying to make was simply that Mr DcDonnell would be absolutely desperate to gather every penny he can to fund his utopian dreams. He would therefore fully support HMRC in their efforts to "maximise" the tax take, by fair means or foul. He has already displayed his hatred of business and anyone he considers has to much money and he would welcome HMRC becoming his "enforcers" and would probably personally fund the "lead pipes" which will probably be added to their armoury shortly.

Finally if you think Labour will do a better job than even your local village idiot then you clearly do not suffer from an abundance of good judgement.

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Replying to Trethi Teg:
Hallerud at Easter
By DJKL
27th Nov 2019 18:07

Yes, but at least he is not alleged to have said "F*** business", that honour goes to B******* Boris , and Jeremy is not , by his stated goals, intending to try to emulate said Boris by endeavouring to ratify a complete trade package with the EU in only nine months.

Neither is my choice, frankly if I want competence despite my disliking her party's position on independence I would rate Nicky miles above both of them and she even has a couple of unusable hospitals- says it all, JC is economically ignorant and Boris has been turned to the Dark Side and. it appears. cannot do detail.

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By Mikolaj
25th Nov 2019 10:19

What have 'First Direct' got to do with this case? 3'rd paragraph, 2'nd line.

A Typo.... needs correcting before the legal people start sniffing.

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Replying to Mikolaj:
By Rebecca Cave
25th Nov 2019 12:35

I've fixed the typo, thanks for spotting that.

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By tedbuck
25th Nov 2019 10:25

I think the problem lies very simply in the fact that HMRC have lost the trained staff with the move to digitalisation. About a year ago I had a case where HMRC were trying to recover money which wasn't due to them through a coding adjustment. ( Oh! You've had that one too, have you?) Two telephone calls to HMRC produced absolutely nothing as the call handlers didn't understand what I was saying although it really wasn't difficult. The third call at least produced someone intelligent enough to see the problem but he said he would have to refer it to 'the back room boys'.

Before digitalisation this would have been sorted on the first call.

Sometimes progress isn't progress. Especially if HMRC sticks its collective head in the sand thus exposing its thinking parts.

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Replying to tedbuck:
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By flightdeck
25th Nov 2019 11:41

Agreed. The public sector are obsessed with pursuing, frankly, ego projects at great expense with little and even negative effect. If they had to sweat to earn money they would run their organisations better. I don't see how a bank of computers capable only executing run-of-the-mill scenarios is a good response to something quite as multidimensional at HMRC.

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By Mr J Andrews
25th Nov 2019 11:20

I recall a case of fraud which involved the backdating of documents. The outcome in favour of the Revenue was quite correct. The fraudsters received their just desserts.
I now continue to maintain that the Revenue are guilty of fraud with their backdating of documents. Tax Return notices allegedly issued on 6 April are received later and later owing to the HMRC computer batching system meaning they are not issued and consequently delivered until some 6 to 8 weeks later. Consequently the date of issue is wrong. Fact .
The Revenue do not accept my contention , in the mistaken belief that a document / notice prepared for issue on a certain date is good enough to satisfy the ''date of issue''.
One wonders what the FTT would consider as reasonable conduct should the push come to a shove following a late filing penalty appeal owing to fraudulent conduct by HMRC.

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Replying to Mr J Andrews:
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By johnjenkins
25th Nov 2019 11:44

I must point out that you are wrong with the "date of issue". Those Tax Returns that HMRC have in their knowledge to be completed at 6/4 (by following 31st Jan) will show that as the issuing date, which is correct. I have always found that any return needed to be issued afterwards (new business etc.) will always have the date that HMRC have set -up (issued) the return. The fact that they are not delivered 6-8 weeks later is irrelevant.

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Replying to Mr J Andrews:
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By jamiea4f
25th Nov 2019 17:00

Based on letters I regularly receive from HMRC which are undated or simply have the month and year on them I'd say they have a real problem with "dating" anything. Clients have received letters in June purporting to have been issued in "April" asking them to complete tax returns..

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By itp3e
25th Nov 2019 14:33

Based on the tribunal summation and the general attitude of HMRC in approaching this case it is disappointingly all too likely that HMRC's future conduct regarding these matters will continue to leave a lot to be desired.

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Chris M
By mr. mischief
25th Nov 2019 19:29

Two basic things in professional correspondence we can all surely agree on:

1. An accurate date which is a specific day, not a month.
2. An address capable of being replied to, should the recipient wish to write back.

How hard can it be HMRC?

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By whitevanman
25th Nov 2019 21:38

There are only certain, "specialist" sections within HMRC that are permitted to deal with cases involving fraud (or suspected fraud) and I very much doubt this case was dealt with by one of them (if it was, what follows applies doubly so!!).
It follows that, generally speaking, the word should not be used by other sections (and more cases like this really should not arise).
The thing that is worrying therefore is that (a) the person working the case seems to have been unaware of this (or even what constitutes fraud), (b) that persons manager, who must have approved much of the casework etc, seems to have been likewise unaware, (c) the person who reviewed the case prior to it being listed for tribunal must have been similarly ignorant and (d) the person who presented the case at tribunal seems to have been both unaware of all this and so poorly trained as to be incapable of spotting it and apologising and correctly setting out the case.
Hands up if you believe there is any hope things will get better!

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Replying to whitevanman:
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By john gates
26th Nov 2019 09:04

I have hope but very little expectation! My recent dealings with individuals at HMRC in the Fraud teams (who generally with CIS and labour cases) show that many are working part time or are retiring shortly. As they continue to lose experience as a result of the age profile; it is made worse by moving people to new offices miles from their homes. The new Chairman has his work cut out for sure.

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