Sheep and guy walking off bridge.

HMRC have to play by the rules too!

26 March 2012

The recent decision of the First-tier Tax Tribunal ('the Tribunal') in Furukawa Electric Europe Limited v Revenue & Customs Commissioners [2012] UKFTT 129 (TC) ('Furukawa'),...

…is welcome confirmation that in resisting an appeal before the Tribunal HMRC have to comply with rules of procedure and natural justice. The case concerned the classification for customs duty purposes of electrical products incorporated into motor vehicles, but is of wider interest because of two procedural points which came before the Tribunal.

And another thing …!

It can be tempting, for both sides in any dispute, to want to raise new arguments late in the day. However, it is essential for both sides litigating a case to know what the other side's case is. For this reason the taxpayer has to submit its grounds of appeal, and HMRC has to set out its Statement of Case (and the taxpayer will often submit a detailed response to the Statement of Case). If one party raises a new argument at the eleventh hour they can gain an unfair advantage over their opponent who will not have had an opportunity to properly consider it and prepare its response to the argument (including whether to adduce evidence to rebut the new argument).

In Furukawa, HMRC sought to do just this. In fact, it was not an entirely new argument, but an argument which HMRC had run during the enquiry but then abandoned as the matter proceeded to litigation. The taxpayer, not unreasonably, assumed that HMRC no longer intended to reply upon that argument and prepared its case accordingly. The Tribunal refused to hear HMRC's new argument for the following reasons:

(1) The basis on which the taxpayer's witnesses had been examined and cross-examined did not involve any consideration or mention of HMRC's new argument, and it was not considered in the course of the expert evidence, therefore nothing in the evidence had been directed at the consideration of HMRC's alternative case.

(2) For any tribunal to arrive at a conclusion other than those specifically contended for by the parties, it would be necessary for that tribunal to be satisfied that there was a proper basis in fact for applying an alternative classification. Any decision without such a proper basis would be open to challenge on the grounds that no reasonable tribunal could have arrived at it on the actual evidence available to that tribunal.

(3) The taxpayer raised strong objections, based on the potential prejudice to Furukawa (who may have decided not to bring its appeal at all, had the new argument been maintained at the beginning of the litigation).

(4) In procedural terms, it is essential that each party should have a proper opportunity to consider, in advance of the hearing, the full case being put by its opponent. Although there may be cases where the admission of alternative arguments raised at the stage of exchanging skeleton arguments could be accepted as appropriate, it will be for the Tribunal to consider whether it is in the interests of justice for a particular alternative argument to be raised in this way. This entails considering whether doing so may cause prejudice to the other party.

Declaration of independence

The second procedural issue before the Tribunal was how much weight, if any, to give to the expert evidence of two individuals who were employed by companies associated with the Appellant taxpayer. The taxpayer did not claim that their evidence was 'independent expert evidence' as such, but invited the Tribunal to place significant weight on the opinion evidence which they adduced. HMRC argued that no weight at all should be given to their opinion evidence.

The Tribunal concluded that it should not go as far as to ignore the evidence, but they did accept that the witnesses were employed by companies associated with Furukawa and this:

"could have had the effect, whether conscious or unconscious, of drawing them towards opinions which might be more favourable to Furukawa’s case than those which wholly independent individuals with equal technical knowledge might hold".

The Tribunal decided that the proper approach to adopt is that taken in Cash & Carry v Inspector of Taxes [1998] STC (SCD). The Tribunal went on to say that "we necessarily apply considerable caution, and test their respective assertions of opinion even more rigorously than we do in evaluating opinion evidence from an independent expert".


Such a cautionary approach from the Tribunal is entirely sensible. Readers will be aware that it is not uncommon for HMRC to call one of their own employees as a so-called 'independent' expert witness in appeals before the Tribunal (as was the case in Cash & Carry). HMRC's submissions in Furukawa are therefore somewhat surprising and difficult to reconcile with their own approach in adducing expert witness evidence from persons who are not independent of HMRC. In future, taxpayers who are faced with an independent expert who is an employee of HMRC will no doubt wish to draw the Tribunal's attention to this decision and the fact that a witness' status as an HMRC employee "could have had the effect, whether conscious or unconscious, of drawing them towards opinions which might be more favourable to [HMRC's] case than those which wholly independent individuals with equal technical knowledge might hold".

The Tribunal's decision is to be welcomed and is a timely reminder to HMRC that they must abide by the procedural rules and cannot expect preferential treatment from the Tribunal in future appeals should they choose (as they frequently do) to adduce expert evidence from witnesses who are employees of HMRC.

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