The Upper Tribunal supported HMRC’s argument that the burden of proof regarding best judgement assessments did not switch from the appellant to them
Jan Garioch CA discusses a recent case Awards Drinks Ltd v HMRC where HMRC suspect VAT is unaccounted for on sales of alcoholic drinks in the UK, and that the appellant’s paper trail showing otherwise is deliberate misdirection .
Background
The Upper Tribunal produced its judgement on Awards Drinks Ltd (ADL) v HMRC at the end of June 2020. At a time when trade across borders is high profile, this case involves two ‘best judgement’ assessments, totalling more than £6 million, being issued by HMRC in the belief that smuggled drinks were sold in the UK as a result of inward diversion fraud. That fraud involves goods held in duty suspension being supposedly released into a country where they face a low rate of duty, but in fact being smuggled into the UK where they are sold immediately for cash. A complex paper trail for supposed transactions in the low duty country distracts from following the true transactions.
Proceedings at First Tier Tribunal
At the First Tier Tribunal, HMRC explained their assessments were based on 1311 large cash deposits paid into ADL’s bank account through various branches spread geographically around the UK. These deposits could not be reconciled to the alternative version of events put forward by ADL, namely that it sold drinks to wholesale customers in France, around the Calais area, for cash and couriered the money to the UK for deposit. The FTT was unimpressed that there were no declarations to French Customs that cash had been moved across border to the UK by ADL or those acting on its behalf. Its concerns about ADL’s version of events were further exacerbated because French authorities reported no visible activity at the headquarters of supposed customers and failure to reach any contacts for the companies. The FTT upheld the assessments because it found no evidence that payments had been made to ADL by the customers they claimed to have, and the facts they found did not support ADL’s submissions.
Grounds for appeal to the Upper Tribunal
ADL’s appeal to the Upper Tribunal was on two grounds. Firstly, FTT erred in law by failing to conclude that ADL could not have supplied goods in the UK because it had divested itself of possession of the goods outside the UK. ADL contended that the French transaction documents which it produced at FTT had gone unchallenged. Any challenge would necessarily have implied dishonesty and the requirements to establish dishonesty would have had to be met. In ADL’s view, if HMRC wished to uphold the assessments which were based on ADL having control of the goods in the UK, then it had to plead fraud against ADL. Effectively, what ADL sought was a reversal of the burden of proof. As its second ground of appeal, ADL argued the FTT had given insufficient reason for rejecting its argument.
The Upper Tribunal’s analysis
In its search for relevant case law, the UT found an important principle in Brady v Group Lotus Car Companies plc [1987] STC 635, that the burden of showing an assessment is incorrect lies on the taxpayer’s shoulders throughout an appeal even if the circumstances are such that there may have been fraudulent conduct on the part of the taxpayer which is relevant to the liability. HMRC’s position was to refute any allegation that they were alleging fraud or dishonesty by ADL. They relied upon Brady. Contrarily, ADL argued that HMRC was misconceived to rely upon Brady to avoid the burden of proof shifting to them. Having conceded that fraud or dishonesty was not alleged against ADL, the FTT could not uphold the assessments since they would inevitably have meant that ADL carried out smuggling.
The UT agreed with HMRC that it was a non sequitur for ADL to say that because HMRC did not assert that ADL had committed a fraud, that HMRC had thus conceded that ADL had lost possession and control of the goods and could not have supplied them in the UK. Instead, the burden lay on ADL’s shoulders to show that loss of possession had happened in France. The UT refused to accept that the French transaction documents which ADL had produced were, in fact, unchallenged at the FTT. Indeed, various deficiencies had been found. The UT found no requirement for HMRC to show the documents were fraudulently produced. It had been completely reasonable for the FTT to be convinced that HMRC had undermined the picture that ADL tried to draw of genuine sale of goods to genuine customers in France. Indeed, the UT went further and decided that the FTT would have erred in law if it had ignored the countervailing evidence and relied only on the documents ADL produced to decide the case.
On the second ground that the FTT’s decision provided insufficient reasoning, the UT felt some sympathy with ADL. The UT took the view that the FTT should have recited, a least briefly, the reasons why it decided not to accept the French transaction documents at face value. From the options available in this circumstance, the UT decided to remake the FTT decision. Consequently, the assessments were upheld with the remade FTT decision being more expansive on the evidence which undermined ADL’s case.