Ritchie - FTT guilty of procedural unfairness

In Ritchie v HMRC [2019] UKUT 007 (TCC), the Upper Tribunal (UT) has held that the First-tier Tribunal (FTT) had erred in finding that a loss of tax had been brought about by carelessness on the part of the taxpayers' professional advisers because, amongst other things, the carelessness of the advisers had not been adequately pleaded by HMRC and had not been put to any of the witnesses in cross-examination.

Background

In January 2007, Mr and Mrs Ritchie (the taxpayers) sold a plot of land on which was a house they had built, together with other buildings. 

The taxpayers sought advice from their accountant as to the tax consequences of the disposal. Their accountant referred them to a former tax inspector for advice. After meeting with the latter, the taxpayers reported back to their accountant that there was no CGT liability arising from the sale and the accountant completed the taxpayers' tax returns for the year of disposal without referring to the sale and reported no chargeable gain.  

On 12 March 2013 and 27 March 2013, HMRC issued 'discovery' assessments under section 29, Taxes Management Act 1970 (TMA) to the taxpayers, assessing each of them to CGT on a chargeable gain from the sale of the land (the assessments). The assessments were made on the basis that the gain which arose on the sale of the land was not wholly exempt under the principal private residence provisions contained in section 222, Taxation of Chargeable Gains Act 1992 (TCGA) (the PPR provisions). 

The taxpayers appealed against the assessments. The following two issues were before the FTT: 

1. to what extent was the gain on the sale of the land exempt from CGT under the PPR provisions; and
2. were the conditions in section 29, TMA, for the making of a discovery assessment and the time limit provisions in section 36, TMA, satisfied, in particular, was the loss of tax counteracted by the assessments due to the carelessness of the taxpayers or a person acting on their behalf? 

FTT decision

The taxpayers argued that the gain on the disposal of the land was exempt under the PPR provisions and that the assessments had been issued outside the normal four-year time limit provided for in section 34, TMA. HMRC argued that the gain was not exempt and that the loss of tax had been brought about by the taxpayers' carelessness and that therefore the time limit for making an assessment was extended to six years under section 36, TMA. 

It was not until its closing submissions before the FTT that HMRC argued that it was the taxpayers' professional advisers who had been careless, rather than the taxpayers themselves.

The FTT found that a larger part of the gain on the disposal of the land was exempted under the PPR provisions than had been allowed by HMRC and that the provisions of sections 29 and 36, TMA, were satisfied by reason of the carelessness, not of the taxpayers, but of their professional advisers. It reduced the chargeable gain significantly, but upheld the making of the assessments. 

HMRC appealed to the UT against the FTT’s findings in relation to the effect of the PPR provisions. The taxpayers appealed against the FTT’s findings that the carelessness condition was satisfied. 

UT decision

The taxpayers' appeal was allowed.

The UT first heard argument on the carelessness issue and concluded that the FTT had erred in law in finding that the carelessness condition was satisfied. Given its conclusion on this issue, it did not need to hear any argument on the PPR issue. 

In reaching its conclusion, the UT considered whether the FTT had been correct to conclude that the professional advisers' carelessness had been adequately pleaded. 

In its statement of case and skeleton argument, HMRC had not clearly indicated it was intending to argue that the assessments could be justified due to carelessness on the part of the professional advisers. The emphasis was on the carelessness of the taxpayers and the single reference to "advisor" did not unequivocally suggest that the advisers were acting on behalf of the taxpayers and that their actions could trigger section 36(1B), TMA. 

The UT also concluded that there was nothing in the previous correspondence between the parties that could cast those statements in a wider light.  

It was reasonable for the taxpayers' to have understood HMRC's case to be premised on their carelessness. The FTT's conclusion that the issue had been adequately pleaded was not one reasonably open to it.

The UT then considered whether the FTT had given the taxpayers an opportunity to deal with the issue of the advisers' carelessness.

The UT held that the FTT's right to investigate matters which had not been put in issue by the parties was subject to the requirements of fairness. In the instant case, it was unfair for the point to have been raised after the close of evidence without consideration of whether the taxpayers should be given an opportunity to adduce further evidence. The suggestion that the advisers had been careless, or that their carelessness had caused the loss of tax, had not been put to them. 

Although an allegation of carelessness was not as serious as an allegation of fraud, which had to be put clearly and expressly to a witness, the UT noted that there were three reasons why it should be made clear to the witness at some stage during his examination that carelessness was being alleged. The first was to alert the other party to the argument; the second was that if the witness was unclear that his conduct was at issue, he might fail to mention issues relevant to it; and the third was out of fairness to the witness. 

The UT said that a tribunal should not find a witness to have been careless without giving him an opportunity to explain his actions or contest the allegation, especially so if the professional competency of the witness was being questioned. It was not necessary to consider what re-examination might  have added to the evidence, the witnesses had concluded their evidence before the allegation was articulated, and the taxpayers were deprived of an opportunity of exploring the issue with them.

In light of its conclusions that the FTT had erred in upholding the assessments on the basis of carelessness on the part of the professional advisers, the UT considered whether it should remit the matter back to the FTT. The UT decided that it should not remit the appeal back to the FTT. Although there is a public interest in the correct amount of tax being collected, there was also a competing public interest in litigation being brought to a conclusion. The matter dated back many years and the hearing before the FTT was the opportunity for the parties to call their evidence and put their case. The question of any carelessness on the part of the advisers had not been put squarely before the FTT and it was now too late. In the view of the UT, it would be unfair for that question to be revived.

Comment

Although litigation before the FTT is less formal than litigation before the higher courts, certain rules of evidence and natural justice must be followed. This decision provides helpful confirmation of the rules of evidence and the requirement for a party, including HMRC, to plead its case properly.   

Rule 25 of the Tribunal Rules provides that HMRC must deliver a statement of case which sets out the legislative provisions under which an appealed decision was made and its position in relation to the appeal. As the UT noted, whilst an allegation of carelessness was not as serious as an allegation of fraud, it still had to be properly pleaded and tested in evidence. HMRC had failed to properly particularise its case in this regard and the FTT had erred in law in reaching conclusions based on untested allegations. 

The decision can be viewed here.