HMRC escapes strike out notwithstanding its unreasonable behaviour in failing to comply with directions issued by the Tribunal
In the recent case of PGPH Limited v HMRC [2016] UKFTT 46 (TC), the First-tier Tribunal (FTT) declined to exercise its powers under Rule 8 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the Rules), to strike out HMRC's case following HMRC's failure properly to comply with a direction issued by the FTT.
Background
By decision letters dated 11 June 2014 and 17 September 2014, HMRC informed PGPH Limited (the Appellant) of its decision not to allow input tax claimed in the Appellant's VAT periods 02/14 and 05/14 in the amounts of £20,227.09 and £20,354.21, respectively. HMRC issued further decision letters on 10 April 2015 in respect of periods 08/14 and 11/14.
The Appellant disagreed with HMRC's decisions and appealed. Notices of Appeal were lodged with the FTT on 23 June 2014. The Appellant's Grounds of Appeal were not specific stating, amongst other things, that it had "followed the principles of VAT".
HMRC served its Statement of Case on 2 February 2015 and its list of documents on 13 March 2015.
On 13 April 2015, the FTT issues a set of standard directions dealing with such matters as, for example, lists of documents and witness statements.
On 10 April 2015, HMRC wrote to the Appellant firstly noting the Appellant's failure to provide documents previously requested and secondly informing the Appellant that although the decision to reduce the 02/14 and 05/14 repayment claim to nil remained unchanged the grounds for the decision had changed. The new ground for disallowing input tax was stated to be the application of the option to tax under the anti-avoidance measure contained in paragraphs 12-17, Schedule 10, VATA 1994. In HMRC's view, the Appellant's option to tax on the property in question "should be 'dis-applied' as the circumstances surrounding the grant to Smart Medical Clinics Ltd are caught by the above anti-avoidance test. The ‘disapplication of the option will mean that [the Appellant's] supplies of 13 Crescent Place will become exempt and the company cannot recover input tax attributable to the property."
On 16 April 2015, HMRC applied to the FTT for permission to amend its Statement of Case (due to the change in its grounds for the decisions) and for new directions to be issued.
The Appellants had been unrepresented. It appointed solicitors who wrote to the Tribunal on 13 May 2015, objecting to HMRC's application to have the standard directions set aside and for permission to amend its Statement of Case. As HMRC had not supplied them with a draft Amended Statement of Case, they were not in a position to properly consider the application.
On 19 June 2015, Judge Dean issued new directions which required, amongst other things, that HMRC serve a draft Amended Statement of Case, together with revised draft directions, by 10 July 2015.
On 9 July 2015, HMRC applied to the FTT for a direction that:
1. the current direction that it serve an Amended Statement of Case by 10 July 2015, be suspended;
2. within 28 days the Appellant provide Amended Grounds of Appeal in response to HMRC's correspondence of 10 April 2015;
3. within 28 days thereafter, HMRC provide an Amended Statement of Case.
The reason for HMRC's application was stated to be that the grounds for its decision had changed but this has not been taken account of in the Appellant's Grounds of Appeal and it was not clear on what grounds the Appellant sought to challenge HMRC's decision.
The Appellant objected to HMRC's application arguing that it was, in effect, an appeal against Judge Dean's earlier directions dated 19 June 2015. The objection also noted that it was not clear whether the original grounds on which HMRC issued its decision letters were being maintained.
On 1 September 2015, the FTT wrote to the parties informing them that HMRC had to comply with the directions issued on 19 June 2015.
HMRC failed to comply with these directions. The Appellant applied to the FTT to bar HMRC from taking further part in the appeal, pursuant to Rule 8 of the Rules.
The FTT's decision
The Appellant argued that HMRC's conduct has been so poor that the FTT should exercise the ultimate sanction of barring HMRC from taking any further part in the proceedings. The Appellant was a small business which could not afford the delays in cash flow it had suffered as a result of its VAT repayment claim having been delayed. It had also been put to the unnecessary expense of contesting HMRC's unmeritorious applications.
Whilst the FTT noted that HMRC's conduct had been unreasonable, it did not think it was sufficient to warrant a barring order under Rule 8. The FTT referred to HMRC v BPP Holdings Limited [2014] UKUT 496 (TCC), in which Judge Bishopp referred to a barring order as a "last resort". In the view of the FTT, Rule 8 only permitted it to make a barring order where HMRC had failed to co-operate with the FTT to such an extent that it cannot deal with the proceedings fairly and justly. The FTT could not conclude, in the circumstances of the instant case, that the appeal could no longer be dealt with fairly and justly. The FTT therefore refused the Appellant's application.
Comment
HMRC can consider itself fortunate that the FTT did not bar it from further participation in the proceedings. The judge was not impressed with HMRC's conduct, commenting in his judgment that that he regarded its behaviour to "have fallen short of that expected from a government department".
A strike out under Rule 8 is not readily obtained and is a sanction of 'last resort'. However, where HMRC has failed to comply with a direction issued by the FTT, taxpayers should consider applying to the FTT for an 'unless' order which would enable an application to be made under Rule 8 for HMRC to be barred from taking further part in the proceedings.
The Judge also made it clear to the parties that the FTT expects time limits to be strictly adhered to and that any attempt to use procedural methods as a way of delaying appeals coming to a hearing will not be tolerated.