Failure to comply with direction leads to strike out of taxpayers' appeals
In the recent case of Grindley & Others v HMRC [2016] UKFTT 0834 (TC), the First-tier Tribunal (FTT) has directed that the taxpayers' appeals be struck out for failure to comply with a direction issued by the FTT.
Background
The taxpayers' appeals were part of a number of appeals relating to tax planning arrangements known as 'Pendulum' (the Scheme). The Scheme involved the utilisation of contracts for differences and deployed a complex set of arrangements which were intended to establish a trade in derivatives in order to create a trading loss which participants in the Scheme would then be able to set-off against their general income.
HMRC issued closure notices to the taxpayers pursuant to section 28, TMA, which were appealed. The issue in the appeals was the correct characterisation of the transactions entered into and in particular, whether the transactions constituted the carrying on of trade and, if so, whether the trade was on a commercial basis with a view to realising a profit.
On 20 July 2015, HMRC applied to the FTT for directions. The application included a request for a direction that the taxpayers provide further and better particulars of their cases. HMRC contended that the further and better particulars were necessary in order to enable HMRC to understand the taxpayers' case because the grounds of appeal were inadequate. The FTT granted the application and on 18 August 2015 issued directions which included a direction that the taxpayers serve on HMRC, on or before 30 November 2015, a Reply to HMRC's Statement of Case, setting out further and better particulars.
On 27 November 2015, the taxpayers applied to the FTT for an extension of six weeks to serve their Reply, as they were in discussions with HMRC to settle their appeals.
On 11 December 2015, HMRC applied for further directions, which required the taxpayers to serve their Reply by 1 February 2016. The FTT allowed this application.
At 16:35 on 1 February 2016, the taxpayers' professional representative sent an email to the FTT requesting a further extension of time to an unspecified date to enable the taxpayers to conclude their negotiations with HMRC to settle their appeals.
In a letter to the FTT dated 10 February 2016, HMRC opposed this application on the ground that the taxpayers had not had any discussions with HMRC between 27 November 2015 and 11 January 2016 and had not made any formal offer to settle their appeals. HMRC also applied for an 'unless order', pursuant to Rule 8 of the Tribunal Rules, requiring the taxpayers to file their Reply within two weeks, failing which the taxpayers' appeals would be automatically struck out.
On 18 February 2016, the FTT issued directions which required the taxpayers to file and serve their Reply setting out further and better particulars of their case by 3 March 2016. The directions specified that failure by the taxpayers to comply with the directions may lead to the taxpayers' appeals being struck out.
On 3 March 2016, the taxpayers' representative wrote to the FTT informing it that they expected to be in a position to agree settlement with HMRC "within the next 4 to 6 weeks and possibly earlier".
No such settlement was reached and HMRC applied to the FTT for a direction that the taxpayers' appeals be struck out for failure to supply their Reply setting out further and better particulars of their case by 3 March 2016. The application was due to be heard by the FTT on 20 May 2016.
At 18:14 on 18 May 2016, the FTT received an email from the taxpayers' representative informing it that the person dealing with the matter had recently undergone intensive radiotherapy and was unable to attend the hearing on 20 May 2016 and an adjournment was sought. In anticipation of the FTT refusing to adjourn the hearing, the letter also contained a response to HMRC's Skeleton Argument for the hearing which had been served on 13 May 2016. The letter set out the history of the negotiations between the taxpayers and HMRC and the position of each taxpayer. The letter did not explain why the taxpayers had failed to observe the time limits for service of the Reply or engage with the FTT before the expiry of the time limit on 3 March 2016, or subsequently, until the letter of 18 May 2016.
On 19 May 2016, the FTT responded to the taxpayers' application for the hearing of HMRC's application to be postponed by stating that the application for an adjournment would have to be made at the hearing itself on 20 May 2016. At the hearing, the taxpayers' representative did not pursue the application for an adjournment.
FTT's decision
At the hearing, HMRC submitted that as the taxpayers had failed to comply with the direction requiring service of their Reply by 3 March 2016, their appeals should be struck out under Rule 8(3) of the Tribunal Rules. HMRC contended that BPP Holdings Ltd v HMRC [2016] EWCA Civ 121 and Denton v TH White Ltd [2014] EWCA Civ 906, demonstrated that the FTT should require parties to an appeal to comply with directions and rules to ensure the efficient conduct of proceedings and given the failure of the taxpayers to comply with the unless order their appeals should be struck out.
It was submitted on behalf of the taxpayers that the failure to serve their Reply on time was due in part to the ill-health of the person dealing with the matter. It was also anticipated that the appeals would settle and the taxpayers did not therefore wish to incur unnecessary costs.
In deciding whether to strike out the appeals, the FTT considered the three stages adopted by the Court in Denton in the light of the comments of the Senior President of Tribunals in BPP. Accordingly, the FTT considered the following:
1. the significance of the failure to comply;
2. the reason for the failure to comply; and
3. all the circumstances of the case bearing in mind the overriding objective of the Tribunal Rules, as set out in Rule 2, to enable the FTT to deal with cases "fairly and justly".
In relation to stage 1, in the view of the FTT, the taxpayers' failure to comply with the direction to provide their Reply setting out further and better particulars of their cases by 3 March 2016, was serious and significant.
With regard to stage 2, the FTT did not consider that the taxpayers had any good reason for the failure to comply with the direction until immediately before the hearing of the application to strike out their appeals. Attempting to settle the appeals did not constitute a valid reason for non-compliance with the direction.
With regard to stage 3, the FTT considered that the failure to comply with the direction and provide the Reply on time disrupted the efficient conduct of the proceedings and resulted in time and resources being wasted unnecessarily and created avoidable delay. Given the seriousness of the failure, the FTT concluded that striking out the taxpayers' appeals would be proportionate and accordingly directed that the appeals be struck out.
Comment
This decision emphasises the importance of complying with the Tribunal Rules and any directions issued by the FTT. Since Denton and BPP, the previously relaxed attitude to compliance by some litigants before the FTT is unlikely to be tolerated.
The FTT emphasised that pursuing a settlement with HMRC, whilst an entirely proper course of action, does not justify failure to comply with directions. Although it will often be appropriate to stay proceedings to enable parties to discuss possible settlement, where the proceedings have not been formally stayed, it is not acceptable for one party unilaterally to treat them as if they have been stayed. Neither HMRC nor taxpayers can adopt an approach whereby they decide whether and when to comply with directions. A party wishing to negotiate a settlement is required to comply with any issued directions unless they are waived or modified.
Given the serious consequence which may flow from non-compliance with the Tribunal Rules and any directions issued by the FTT, it is important that taxpayers obtain appropriate expert advice and assistance throughout the appeal process.
A copy of the judgment can be found here.