RBS – HMRC's application for specific disclosure refused
In Royal Bank of Scotland Group Plc v HMRC  UKFTT 321 (TC), the First-tier Tribunal (FTT) refused an application by HMRC for a direction requiring the taxpayer to provide specific disclosure.
HMRC refused a claim by the Royal Bank of Scotland Group Plc (RBS) to deduct input tax in relation to 536 trades in VAT periods 06/09 and 09/09 of carbon credits under the EU Emissions Trading System.
HMRC relied on the principle in Kittel  STC 1537, having decided that it was satisfied that the transactions in question were connected with the fraudulent evasion of VAT (MTIC fraud) and that RBS either knew, or should have known, that this was the case. The total input tax denied was some £86 million.
The transactions were entered into by two traders employed by RBS Sempra Energy Europe Ltd (SEEL), which was at all material times an indirect subsidiary of RBS and a member of RBS's VAT group. The transactions were with five different counterparties, two of whom were the subject matter of High Court proceedings: Bilta (UK) Ltd & Ors v Natwest Markets Plc & Anor  EWHC 546 (Ch) (Bilta).
The Bilta proceedings weree not concerned with the right to claim VAT input tax. The claimants in that case were a number of insolvent companies who claimed that directors of those companies, in breach of their fiduciary duties, participated in MTIC fraud.
It was common ground between the parties that RBS had already disclosed to HMRC a large amount of material. In particular, in September 2018 it provided to HMRC the disclosure that it gave in the Bilta litigation, which consisted of some 30,000 documents. The disclosure exercise in Bilta involved identifying potentially relevant documents through electronic keyword searches of the data of 89 individual and group custodians. These electronic keyword searches returned some 1.25 million documents and some 460,546 audio recordings (over 3,500 hours), which were then reviewed to determine which of the items were to be disclosed. Additionally, for the purposes of the current appeal, RBS carried out further electronic searches using additional keywords which led to the subsequent disclosure of a further 6,454 documents. RBS also disclosed a part of the Bilta trial bundle. The disclosure also included some 490 audio recordings, and certain other material.
HMRC was concerned that only 2.5% of the 1.2 million documents reviewed in the Bilta disclosure exercise had been disclosed and that only 0.1% of the audio had been disclosed. In HMRC's view, RBS had not provided an adequate explanation of how the disclosure exercise had been conducted and in particular, what criteria were used when reviewing the 1.2 million items identified by the keyword searches in the Bilta disclosure exercise.
HMRC therefore applied to the FTT, under Rule 5(3)(d) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273) (the Rules), for a direction requiring RBS to disclose specific documents and information which it considered relevant to the proceedings (the Application).
The Application was dismissed.
In dismissing the Application, the FTT noted that HMRC's submissions assumed, implicitly, that RBS was under an obligation to disclose all relevant material and that an order for specific disclosure should be granted if it can be shown that the material sought was relevant. More particularly, HMRC suggested that:
(1) in complicated cases concerning major financial institutions, there should be a presumption that both parties would disclose not only the documents on which they intend to rely (as required by Rule 27 of the Rules (in those cases which have been categorised by the FTT as Standard or Complex)) but also all relevant documents;
(2) that the primary criteria in considering an order for disclosure is relevance; and
(3) documents and information which might assist or undermine a party’s case, or lead to a “train of enquiry” that might do the same, should be considered to be relevant.
The FTT did not agree with HMRC. In the view of the FTT, there may be circumstances in which it would be appropriate for it to direct specific disclosure, for example, where disclosure had fallen short of that required by Rule 27 of the Rules. However, the following five conditions would generally need to be satisfied before an order would be made:
1) the material sought was necessary in order for the case to be dealt with justly;
2) the material was likely to exist and is in the other party's control;
3) the material had not previously been disclosed;
4) the material was likely to be found and disclosed if an order for specific disclosure was made and complied with (that is, if the order for specific disclosure requires a party to make a reasonable search for material, the search will likely lead to identification and disclosure of the material sought); and
5) an order for specific disclosure would be proportionate given the importance of the case and the time and cost required to comply with the order.
The FTT concluded that HMRC had not satisfied the first of these conditions, and as such, it was not necessary for it to consider whether the other conditions had been satisfied.
HMRC argued in this case that Rule 27 of the Rules is not intended to address the subject of disclosure as such, but rather is concerned with the evidence that a party relies upon. The FTT rejected that argument.
Rule 27 is the standard provision in the Rules for disclosure in Standard and Complex cases (which was the disclosure regime that applied in this case), unless and until the FTT directs otherwise. Although the FTT has the power, pursuant to rule 5(3)(d) of the Rules, to impose broader disclosure obligations, in order for it to exercise its power to direct disclosure going beyond the requirements of Rule 27, the FTT must be persuaded that it is appropriate in the circumstances of the particular case to depart from the default regime in Rule 27.
The Rules have been enacted for important as well as simple cases, and the regime in the FTT is intended to be different from that under the CPR. The fact that a case is large, complex, and involves a large sum of money is therefore not, of itself, a sufficient reason to depart from the usual disclosure regime.
The FTT considered that an example of material that would satisfy condition 1 would be material which if put in evidence could potentially affect the outcome of the case in some material respect. That would include, for instance, material that would be evidence of a significant fact of which evidence is otherwise lacking, or of which the already available evidence conflicts. On the other hand, material that would be evidence relevant only to a non-controversial issue, or evidence that would merely confirm the significant amounts of already available evidence that is overwhelmingly one way, would be difficult to characterise as material that is necessary to deal with a case justly.
The decision can be viewed here.