HMRC barred from proceedings for failing to meet disclosure obligations

Ebuyer’s dispute, which has already been very long-running, relates to HMRC’s decisions to refuse to allow its input VAT on the basis that the transactions were connected with the fraudulent evasion of VAT and Ebuyer knew or ought to have known about the fraudulent evasion. HMRC being barred from proceedings does not mean that these have come to an end: Ebuyer’s appeal against the VAT assessments can go ahead but HMRC is not allowed to participate any further in the proceedings.

Tax expert Rachel Jones of Pinsent Masons said: “This could be a very significant advantage to Ebuyer in these proceedings because it means that HMRC cannot cross-examine the witnesses put forward by Ebuyer. While the judge in First-tier Tribunal proceedings can and often will question witnesses, the inability for HMRC to put their case on evasion to the witnesses will be a very heavy disadvantage.”

There were two elements to HMRC’s non-compliance. Firstly, seven documents which it had intended to disclose were accidentally omitted. This was attributed to the paralegal involved being ill with Covid-19 in the days running up to the deadline. HMRC conceded that it had failed to comply with the unless order to the extent of these documents, but had argued that its failure was not serious and significant: it was only seven out of 161 documents; the failure was inadvertent and the documents were eventually provided; and the failure did not delay the progress of the case to trial, such that there was no prejudice to Ebuyer.

HMRC disputed that there was a second category of non-compliance at all. HMRC argued that it had interpreted the disclosure obligation appropriately and explained how it had done so and therefore it had complied with the direction.

The unless order that was issued in this case followed many years of missed deadlines and applications for extension of time on both sides. At one stage in the proceedings, Ebuyer’s case was struck out following an earlier unless order issued against it for failing to deliver exhibits to witness statements. It applied later for the case to be reinstated and HMRC did not object to its reinstatement. A comment from Judge Bowler in the tribunal’s ruling suggests that if HMRC’s non-compliance had been limited to the seven missing documents, she might have been inclined to grant relief from sanction since “on the face of it, there is some force in the argument that HMRC should be accorded similar leeway”.

However, other circumstances of this case tipped the balance away from HMRC.

Although decisions on relief from sanctions will always be somewhat fact specific, the tribunal’s decision in this case does provide clarity on some issues, according to Rachel Jones.

Firstly, the tribunal confirmed that not every breach of an unless order will be treated as automatically “serious and significant”, but that the underlying non-compliance that led to the unless order would be taken into account along with how long it took HMRC to resolve the issue. In this case, HMRC had repeatedly failed to meet deadlines and did not fix the problem for several months.

Secondly, it is not the number of documents that were not disclosed that is relevant, rather the importance of those documents. In this case, the document were progress logs that were potentially at the head of Ebuyer’s defence and which the company had been requesting for over five years.

The tribunal also found that HMRC had not been entitled to ‘self-certify’ the relevance of documents by reference to only one of three potential issues within the litigation, namely the time-bar issue. The directions that HMRC were required to comply with explicitly extended to cover documents beyond the time-bar issue and therefore HMRC’s repeated failure to deliver those documents was a serious and significant failure because those documents went to the heart of the dispute.

“The tribunal was clearly unimpressed with HMRC’s repeated failures in this case and its attempts to place reliance on the health of one paralegal in the few days running up to the deadline, particularly in the context of having received previous instructions from the tribunal that the health of one individual was unlikely to be considered a good reason,” said Jones.

“This is a lesson for all parties: the tribunal expects you to be ‘galvanised into action’ if it has had to issue an unless order, so you need to show that you have made every effort to meet your deadlines and prepare for the unexpected in order to meet them. The consequence for a taxpayer is even more significant because it could result in their whole appeal being struck out, which means that the matter is resolved in HMRC’s favour,” she said.