Swallow v Revenue & Customs [2010] UKFTT 481 (TC) (07 October 2010)

DIRECTIONS

These Directions and Reasons have been anonymised at the request of the parties to protect the identities of the Appellant and his advisers and certain other persons and organisations. The parties have agreed the anonymisation adopted.

I heard Mr. Dixon on behalf of the Respondents Commissioners (“HMRC”) and Mr. Bremner on behalf of Mr. Swallow (“the Appellant”) and I reserved my decision on the applications made by HMRC at the hearing. After consideration, I make the following Directions for the Reasons which appear below.

HMRC’s application for a direction that the appeal proceedings be stayed for a period of 6 months from the date of release of this Decision is ALLOWED;

The matter must be listed (if practicable, again before me) for a further case management directions hearing towards the end of that period – it is the responsibility of both parties to ensure that this is done;

HMRC’s application to extend the time for the service of their Statement of Case in the appeal is ALLOWED. The extension will be to a date 28 days after the expiry of the period of 6 months for which I have stayed the appeal proceedings.

The appeal (with effect from the date of release of these Directions for general publication) is re-allocated to the category of Complex cases pursuant to rule 23(3) of the 2009 Rules

REASONS

1. This was the hearing of an application by the Respondents (“HMRC”), for the appeal to be stayed, initially for six months. HMRC have made the application because they wish an ongoing criminal investigation being conducted by them into circumstances surrounding the marketing of the scheme which features in the appeal (known, apparently, as “the Environmental Research and Trading Scheme”) to proceed without the alleged prejudicial effects which the continuing conduct of the appeal would have on the criminal investigation. HMRC also apply for an extension of time to serve their Statement of Case. The Appellant opposes both applications.

2. I heard Mr. Dixon of HMRC Solicitor’s Office for HMRC and Mr. Bremner of Counsel for the Appellant. Two witnesses gave evidence for HMRC both orally and in the form of Witness Statements. They were Christopher Hyland, an Officer of HMRC in charge of the criminal investigation, and Michael Old, another Officer of HMRC who had had the conduct of HMRC’s case in the appeal. Both Officers were cross-examined by Mr. Bremner. I also received a Witness Statement from a Tax Partner of the Appellant’s current professional advisers, on behalf of the Appellant. This Tax Partner was not available to be cross-examined at the hearing.

The facts

3. The Tribunal was shown a “Suitability Letter” issued by Finance Co., tax planners and portfolio managers, and dated 8 March 2007, which contained the recommendation that the Appellant should consider an investment into “the Environmental Project”. The Appellant did make an investment and his Self-assessment return for 2006/07 showed two new sole trades commencing on 26 March 2007, in bio fuels research and paper pulp research respectively, both of which generated substantial losses. The Appellant apparently contributed approximately £100,000 from his own funds, paid to an accountancy firm’s client account, and invested an additional amount of approximately £350,000 advanced to him as part of the arrangements (but paid under a power of attorney to a Relevant Overseas Research Company (“RORC”), a company apparently domiciled in an African country), making a total investment of some £450,000, on which tax relief amounting to some £170,000 was claimed. The Appellant claimed a repayment of tax of about £125,000 in his return by way of “sideways” loss relief under section 380 or section 381 Income and Corporation Taxes Act 1988 (“ICTA”) against his income from employment. His tax return was received by HMRC on 10 July 2007.

4. I understand that, under the scheme arrangements, the Appellant is, or can be, protected (completely or substantially) from the burden of repaying the funds advanced, otherwise than out of the profits (if any) of the arrangements.

5. HMRC opened an enquiry into the claim for loss relief under section 9A Taxes Management Act 1970 (“TMA”) on 25 July 2007. They withheld repayment of tax, citing section 59B (4A) TMA. HMRC could have opened an enquiry at any time between the receipt of the return on 10 July 2007 and 31 January 2009.

6. A disclosure of information was made to HMRC by the Appellant’s previous professional; advisers on the Appellant’s behalf under cover of a letter sent late in 2007. Mr. Old in evidence described this disclosure as reasonable in the circumstances. It was contained in an A4 ring folder and included documents signed by the Appellant. Amongst these documents were an agreement dated 4 April 2007 entered into by the Appellant with RORC, whereby the Appellant appointed RORC as his agent in relation to the research and development of environmental crops, and RORC undertook to commission the contemplated research and development and provide its expertise and know-how with respect thereto. The document outlined the nature of the “Project” which the Appellant “wishes to undertake and [RORC] has agreed to commission” for the Appellant. A further document dated 4 April 2007 (the ‘Land Agreement’) between the Appellant and RORC set out the basis on which RORC would provide land on which the research would be carried out and would provide ‘second phase financing for developing that land on the successful conclusion of the research phase’. A further document, also dated 4 April 2007, was entered into by the Appellant with Relevant Overseas Trading Company (“ROTC”), also a company apparently domiciled in the same African country as RORC, relating to paper pulp and arranging for ROTC to purchase and sell, on behalf of the Appellant, carbon and environmental rights. The Appellant entered into further agreements with RORC and ROTC in relation to research and development connected with bio fuels. The Appellant also paid fees and commission to Relevant Overseas Marketing Company (“ROMC”). Early in 2008, HMRC wrote to the Appellant’s previous professional advisers requesting the provision of further documentation.

7. Following inconclusive discussions between HMRC and the Appellant’s agents, on 15 August 2008 HMRC sent to the Appellant a section 20B(1) TMA “precursor letter” giving a reasonable opportunity to deliver or make available further documents and particulars which were specified in a schedule to the letter.

8. On 12 September 2008, the Appellant’s current professional advisers responded enclosing certain documents and information. This prompted a further informal request for documents and information from Mr. Old, dated 10 October 2008.

9. Included in this request were requests for details of how the trading in bio fuels and paper pulp was carried out together with copies of any feasibility study undertaken in these areas and information relating to the activities of RORC and ROTC, in connection with their activities in trading on the Appellant’s behalf or managing the Appellant’s trades.

10. The Appellant’s current professional advisers replied on 20 November 2008 stating in effect that much of this information could not be supplied.

11. A hearing before General Commissioners took place on 21 November 2008. At that hearing a number of matters were raised, including HMRC’s concerns about the commerciality of the trade and the actual work undertaken by RORC. The General Commissioners refused HMRC’s application to transfer jurisdiction to the Special Commissioners.

12. On 8 December 2008, Mr. Old, for HMRC, wrote to the Appellant’s current professional advisers, asking for further documentation and information, including progress reports on the trading activity to which the Appellant appeared, from the documentation already submitted, to be entitled.

13. On 12 March 2009, the Appellant’s current professional advisers responded. They provided further information. They stated that the Appellant had no reason to doubt the bona fide nature of the business model or the parties that were appointed to provide services and that the Appellant was concerned that HMRC appeared to be indicating that one or more of these businesses may in fact not be bona fide. They stated that no progress reports had as yet been received, although the Appellant had been updated as regards progress by telephone. They stated that once the research had reached the appropriate stage the Appellant would receive a report. They commented that substantial information had been provided to HMRC and yet no technical explanation had been given as to why HMRC were not satisfied that the Appellant’s loss claim was valid.

14. A further hearing before the General Commissioners took place on 25 March 2009, at which the General Commissioners acceded to the Appellant’s request to direct that a closure notice should be served. In a letter from their Clerk, dated 25 March 2009, they directed that a closure notice should be served within six months. At the hearing, HMRC had informed the General Commissioners that they were not at that time in a position to determine the following (among other) issues:

a. whether the Appellant’s activities amounted to a trade or an adventure in the nature of trade;

b. whether the trade was carried on on a commercial basis, or not;

c. whether the losses claimed were allowable having regard to section 74(1)(a) ICTA – that is, whether the expenditure was wholly and exclusively laid out for the purposes of the trade;

d. whether the UK Generally Accepted Accounting Principles had been applied to the trade;

e. what the relationship between the Appellant as trader and other parties was;

f. whether there was pre-ordination and circularity in the transaction;

g. the extent of the actual work done by the research and development company, if any.

15. Following that hearing, and on the basis that they had only six months to continue the enquiry, HMRC (through Mr. Old) on 8 April 2009 requested the Appellant’s current professional advisers to provide further information and documentary evidence and that they should prioritise their reply “so that we are able to try and deal with all outstanding matters before a closure notice is issued”. Mr. Old added that he would be in a position to provide “an explanation in respect of the technical aspects” once he had received and considered all the outstanding documents and particulars. That request for priority was repeated by Mr. Old in a telephone conversation with the Appellant’s current professional advisers on 29 April 2009.

16. A “precursor” letter relative to a contemplated approved notice to require production of documents and information under para. 1, Sch. 36, FA 2008 was sent to the Appellant by Mr. Old on 21 May 2009, there having been no substantive response to his request to the Appellant’s current professional advisers dated 8 April 2009. A schedule to the letter detailed the documents and information required.

17. In an undated letter, but stamped as received by HMRC on 9 June 2009, the Appellant’s current professional advisers wrote complaining about HMRC’s decision to proceed under para. 1, Sch. 36, FA 2008, rather than issue an “unapproved notice which would be subject to appeal”. They made the point that HMRC already had all relevant documents in the Appellant’s power or possession relating to the matter. HMRC had requested the Appellant to provide narratives of certain matters relating to how changes to the projects or research were discussed and made and how the Appellant had made decisions relative to the projects or research and what actually took place in the Appellant’s trade. The Appellant’s current professional advisers argued that it was not within HMRC’s power to require the Appellant to produce such narratives.

18. The Appellant’s current professional advisers wrote on 17 June 2009 replying to HMRC’s letter of 8 April 2009, stating that all documents in the Appellant’s power or possession had been provided and no further information was given.

19. HMRC (through Mr. Old) responded to the points raised in the Appellant’s current professional advisers’ undated letter, in a letter dated 21 July 2009. He justified HMRC’s procedures in the case by reference to the tax at risk, the use of a marketed avoidance scheme involving many individuals, the Appellant’s current professional advisers’ practice of appealing (using the same wording for each appeal) all formal information and documentation requests and the replies received to previous information and document requests in this particular case.

20. This exchange gave rise to a telephone conversation between Mr. Old and the Appellant’s current professional advisers on 10 September 2009 in which they asked if the provision by the Appellant of the narratives requested would make a material difference to the conclusion which HMRC would reach in its closure notice. Mr. Old replied that “in all honesty, I could not say it would make a difference” but he added that it would contribute to the completeness of the case and it would probably put the Appellant in a better light in future proceedings if he could be seen to have provided all the information and documents which HMRC had asked for. On this basis, the Appellant’s current professional advisers said that they would advise the Appellant of the position and it would be left to him “to comply or otherwise”.

21. “A closure notice, dated 29 September 2009, was served by Mr. Old. The closure notice stated that Mr. Old had now completed his enquiry into the Appellant’s tax return for 2006/07 and that his conclusion was that no trade losses arose in the year from the described activities ‘Bio-Fuels” and “Paper Pulp” and that the loss claim for each described activity was invalid. The amendment to the Appellant’s return was the cancellation of loss relief claimed in the aggregate sum of £318,500. The Appellant’s repayment claim was refused.

22. An appeal to the Tribunal against the amendments made by the closure notice was made by the Appellant on 3 December 2009. The appeal was allocated by the tribunal service to the “Standard” category on 11 February 2010. Following rule 25(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the Rules”) HMRC’s Statement of Case should, the Tribunal was told, have been delivered by HMRC by 12 April 2010. This was not done.

23. Meanwhile, the Tribunal was told, in the summer of 2009 the schemes of which HMRC are aware which involve research trades conducted through RORC as outlined in the “Suitability Letter” in the Appellant’s case, were referred to those officers of HMRC (of which Mr. Hyland is one) whose responsibility is the carrying out of HMRC’s statutory role of establishing if there is evidence for making a charging recommendation to the Crown Prosecution Service. Those officers formally ‘adopted’ the cases in the autumn of 2009 and a criminal investigation began. The officers conducting the investigation had obtained information which led them to believe that fraudulent returns had been submitted to HMRC in relation to the schemes.

24. Mr. Hyland told the Tribunal that the schemes were introduced in late 2004 and early 2005 and then were carried out by limited liability partnerships. This had changed following legislation in Finance Act 2007 and taxpayers embarking on sole trading operations then featured. He was aware of 19 limited liability partnerships and 360 sole traders affected. He estimated that tax of about £42m. was at risk in relation to the limited partnerships and that an unknown amount, possibly to be reckoned in millions or tens of millions of tax, was at stake in relation to the sole traders.

25. Mr. Hyland confirmed that the Appellant himself was not under investigation and that he had not seen anything that led him to believe that the investors (of whom the Appellant was one) knew that the scheme was fraudulent. Other people behind the scheme (described by Mr. Hyland as including the architects, facilitators and advisers to the arrangements) are, however, under investigation, and the Tribunal is aware that an Adviser who has advised the Appellant in relation to the scheme has been interviewed by HMRC under caution. The criminal investigation is into whether the offences of cheating the public revenue, conspiracy to cheat, money laundering and fraud by misrepresentation have been committed in relation to the submissions of tax returns and claims to HMRC by the limited liability partnerships and sole trading operations concerned. Mr. Hyland said that the allegation in any criminal proceedings may be that no trading activities actually took place.

26. Mr. Hyland told the Tribunal that HMRC’s practice in the conduct of ongoing criminal investigations is that any related civil functions (such as, in this case, Mr. Old’s investigations and preparation for the Appellant’s tax appeal) would be suspended for the duration of the criminal investigation and any resultant proceedings, and that the officers concerned with such civil functions (including Mr. Old and Mr. Dixon) would not be made privy to the material being gathered in the criminal investigation. He also said that those officers of HMRC in charge of a criminal investigation review in every case whether they can disclose information before any charges are made. In this case this has not yet been done.

27. A detailed information in support of an application for six search warrants under the Police and Criminal Evidence Act 1984 was sworn by Mr. Hyland before H.H. Judge Paget QC at the Central Criminal Court on 8 February 2010. The warrants were duly issued and were executed by HMRC officers on 11 February 2010. Further search warrants were also obtained and executed on that day. Amongst the premises searched were:

· the principal place of business for ROMC and the 19 limited liability partnerships involved, being the address, from which the activities of the sole trade businesses (including the Appellant’s business) were coordinated;

· the principal place of business of a particular firm of chartered accountants who have provided services to these businesses;

· the offices of the firm of which the Adviser referred to in paragraph 25 above is a member.”

28. On 13 April 2010 (after the time for delivering a Statement of Case in the appeal had expired) Mr. Dixon, for HMRC, wrote to the Tribunals Service making formal application for a stay of proceedings in the appeal. He stated that the reason for applying for the stay was that the matter was subject to a criminal investigation, and that to continue with the appeal would prejudice the criminal investigation. He added that investigators were considering a considerable amount of documents obtained under search warrant. This was opposed by the Appellant’s current professional advisers on behalf of the Appellant, by a letter to the Tribunal Centre dated 15 April 2010, requesting a directions hearing. On 5 May 2010, HMRC applied to the Tribunal for an extension of time to deliver their Statement of Case ‘until the application for a stay of proceedings has been determined’.

29. Mr. Dixon told me that the Appellant’s appeal is the only appeal featuring the scheme of which the Tribunal is currently seised. He said that other taxpayers who invested in the scheme “effectively stand behind” the Appellant.

The submissions

(a) HMRC

30. Mr. Dixon’s submissions in support of his application for a stay of the appeal proceedings were as follows:

31. First, he submitted that there was a public interest in the accurate determination of the Appellant’s tax liability and that could only be served if the material gained and to be gained in the criminal investigation is deployed in the appeal proceedings and, following HMRC’s practice, such material would not be made available to those preparing for and conducting on behalf of HMRC the civil proceedings connected with the appeal, while the criminal investigation was ongoing.

32. Secondly, he submitted that there was a public interest in preserving the integrity of the criminal investigation, and any prosecution and trial, and that this would not be served by allowing the appeal to proceed simultaneously with the criminal investigation. He argued that a decision of the Tribunal upholding the Appellant’s claim (and supported, so far as factual issues were concerned by findings reached on the balance of probabilities) would undermine a prosecution seeking to prove beyond reasonable doubt that the same claim was fraudulent. He was apprehensive that the Tribunal could decide that the Appellant had proved his entitlement to relief on the balance of probabilities, by reference to the documents disclosed, which did not address the issue of whether trading activities had actually been carried out on the Appellant’s behalf by RORC.

33. In this connection he foresaw difficulties if the appeal was heard while the criminal investigation and proceedings were ongoing, namely that HMRC might need to choose between revealing information sensitive to the criminal investigation at the hearing of the appeal, and alternatively holding back probative material which might help its case in the hearing of the appeal.

34. He also foresaw the difficulty of HMRC being obliged to put its case in the criminal proceedings (as it then understood it) to persons who were currently subject to an ongoing criminal enquiry, and having to cross-examine in the appeal proceedings suspects under criminal investigation and/or already charged on the very matters relevant to the investigation or charges.

35. Thirdly, Mr. Dixon submitted that there is a public interest in protecting the interests of defendants and potential defendants (in possible criminal proceedings) whose interests may be prejudiced by the hearing of the appeal. He points out that the interests of the Appellant are not coincident with the interest of the suspects, yet many of the suspects, he says, are possible witnesses of fact for the Appellant in the appeal. He cited the decision of Judge Avery Jones in Global Active Holdings Ltd. v HMRC [2006] UKVAT V19715, where a civil tax appeal was stood over for nine months pending civil proceedings against the same persons who were appellants in the tax appeal.

36. Fourthly, he submitted that there is a public interest in protecting the Crown from an accusation that it has abused civil proceedings to further a criminal investigation and/or trial. Presumably such apprehended accusations would be made by suspects who were witnesses in the civil tax appeal proceedings.

37. Fifthly, he submitted that plainly the factual basis of the criminal investigation is relevant to the appeal, notwithstanding that the Appellant himself is not a suspect. He says that to argue otherwise (as has been argued on behalf of the Appellant) is to assert that even if the promoters of the scheme have committed fraud on HMRC, this has no bearing on whether the Appellant should be entitled to the benefit of the scheme.

38. Sixthly, in submitting that the question must be decided according to the balance of public interest, he said that the decision of the VAT tribunal not to stay an appeal in comparable circumstances in McNicholas Construction Company Ltd. v Commissioners of Customs and Excise (VTD 14975) led to the later collapse of the related prosecutions. He contends that Mote v Secretary of State for Work and Pensions [2007] EWCA Civ 1324, on which the Appellant relies, can be distinguished.

39. Seventhly, in assessing the balance of public interest, he urged me take account of a lack of cooperation with the enquiry on the part of the Appellant’s agents, as deposed to by Mr. Old, particularly in the six months pending the issue of the closure notice as directed by the General Commissioners. He commented that the Appellant has been very expeditious in pursuing his repayment claim and his appeal, noting that the window for opening an enquiry into his return for 2006/07 did not close until 31 January 2009 and before that date the Appellant had already applied for a closure notice direction. He emphasised the complex nature of the criminal investigation, particularly in relation to information which would have to be gathered from foreign jurisdictions.

40. Finally, under the heading Caveat Emptor, he submitted that I should recognise that the Appellant had adopted an aggressive tax avoidance scheme and should therefore be taken to have assumed the risk of a lengthy enquiry. He went on to contend that the Appellant must also be taken to have assumed the risk of such an enquiry turning up evidence of fraud and grounds for a criminal investigation against others involved in the scheme and a concomitant risk of delay in dealing with any appeal against a refusal by HMRC of his claim for repayment of tax.

41. In relation to the delivery of HMRC’s Statement of Case, he submits that the Tribunal should direct that that requirement is also deferred pending the conclusion of the criminal investigations, because HMRC’s case is likely, in the nature of things, to change in the light of discoveries made in the course of the criminal enquiry.

(b) The Appellant

42. Mr. Bremner notes that the Tribunal’s power to stay proceedings (under rule 5(3)(j) of the Rules) is to be exercised in accordance with the overriding objective, which is to deal with cases fairly and justly and, in particular, by ‘avoiding delay, so far as compatible with proper consideration of the issues’ (rule 2(2)(e)).

43. He referred me to Mote v Secretary of State for Work and Pensions and McNicholas Construction Company Ltd., and invited me to refuse a stay, which was the course taken by the Tribunal in the latter case. He cited Jefferson Ltd. v Bhetcha [1979] 1 WLR 898 (CA) at 905 (Megaw LJ) for the proposition that an appellant has the right to have his appeal processed, heard and decided by the Tribunal and that the burden is on HMRC to show that it is just and convenient to interfere with that right.

44. He referred me to R v Panel on Take-overs v Fayed [1992] BCLC 938 (CA) and 947 (Neill LJ) for the proposition that the power to stay a civil action on the ground that its continuation may prejudice the fairness of the trial of other proceedings is a power which must be exercise with great care and only where there is a real risk of serious prejudice which may lead to injustice. He also cited Panton v Financial Institutions Services Ltd. [2003] UKPC 86 at [11] to similar effect.

45. He submitted that HMRC had not in this case showed any justification for interfering with the Appellant’s right to have his appeal heard and determined by the Tribunal. He pointed out that the Appellant is not a suspect in the criminal investigation, and will not be a defendant in criminal proceedings, even if criminal proceedings are eventually brought in relation to the scheme.

46. Mr. Bremner said that the Appellant was being caused serious financial prejudice by the delay in resolving the dispute. He reminded me that the repayment claim relates to the year ended 5 April 2007 and that the enquiry was opened on 25 July 2007, almost three years before the hearing. He commented that throughout HMRC has refused to make any repayment to the Appellant, even on a provisional basis, and that, given the prevailing very low level of interest rates, he will not receive any real compensation for the delay if he is successful in the appeal.

47. He pointed out that the burden in the appeal will be on the Appellant to prove that the conclusions stated in the closure notice are wrong (section 50(6) TMA). He said that the issues in the appeal will (or are likely to) be (1) whether there was a trade; (2) If so, whether that trade was pursued on a commercial basis with a view to profit; and (3) If so, whether the expenditure in issue was incurred in the course of the trade. He submitted that what the Tribunal would be considering at the hearing of the appeal would be the transactions and activities undertaken by the Appellant and not transactions and activities undertaken by third parties and/or the conduct of third parties. That being so, he contended that it was very difficult to see (and HMRC had not explained) how the hearing of the appeal would cut across any potential criminal proceedings against third parties.

48. Mr. Bremner submitted that HMRC in the evidence led in support of their application had done nothing more than make assertions as to the potential relationship between the criminal investigations and the appeal and speculate as to the potential for prejudice to be caused to criminal investigations and/or proceedings if the appeal is heard and determined by the Tribunal in normal course. HMRC had, he contended, provided no evidence that any real risk of unjust prejudice would be caused (whether to the Appellant, to HMRC or to third parties) by the continuation of the appeal.

49. He submitted that HMRC had shut their eyes to possible measures that the Tribunal could take which could, if there was a real concern that prejudice might be caused to the criminal investigation and/or proceedings, deal with that concern. He mentioned the possibility of the Tribunal ordering that the appeal take place in private, and/or that the Tribunal’s decision on the appeal could be anonymised.

50. For these reasons, he submitted, HMRC had failed to discharge the burden on it to show any basis for interfering with the Appellant’s right to have his appeal heard and determined in ordinary course.

51. Alternatively, Mr. Bremner submitted that as the thrust of HMRC’s arguments and evidence seemed to be that it was the hearing of the appeal which was likely to cause prejudice to the criminal investigation and/or proceedings, then if (contrary to his main submissions) the Tribunal should apprehend that there is a real risk that the hearing of the appeal would cause such prejudice, then the hearing of the appeal could be deferred for as long as the Tribunal thought appropriate, but the preparatory work for the appeal – starting with the delivery of HMRC’s Statement of Case – could proceed as normal. In this way, disclosure and the production of witness statements could be got under way without delay. He cited Re DPR Futures Ltd. [1969] 1 WLR 778 (Ch) at 790 (Millett J) as an example of a case where such an approach was taken.

52. Mr. Bremner asked the Tribunal to require HMRC to deliver its Statement of Case within 28 days of the hearing of the application, noting in particular that there is no need for HMRC to recite exhaustively (or, indeed, in detail) in their Statement of Case the evidence on which they rely in opposing the appeal.

Discussion and Conclusion

53. I accept Mr. Bremner’s submission that the Tribunal has a duty to deal with cases fairly and justly and to avoid delay so far as compatible with proper consideration of the issues.

54. There appear to me to be two points which I must address in deciding whether to direct any stay in these appeal proceedings. The first is whether it is ‘just and convenient’ (Jefferson Ltd. v Bhetcha) to direct a stay in order to ensure that the Tribunal can deal with the appeal fairly and justly. The burden is on HMRC to show that it is. The second is whether it would be proper and right to direct a stay in order in some way to assist the criminal investigation (which does not concern the Appellant except indirectly in relation to its effect on the appeal) and any resulting criminal proceedings. Again, the burden is on HMRC to show that it would be proper and right to direct a stay for this reason.

55. I take the first of these points first. Mr. Bremner submitted that the Tribunal at the hearing of the appeal would be considering the transactions and activities undertaken by the Appellant, not transactions and activities undertaken by third parties and/or the conduct of third parties. Mr. Dixon’s response is that it is clearly wrong to suggest that if the promoters of the scheme have committed fraud on HMRC, this has no bearing on the Appellant’s entitlement to the loss relief claimed. He described the Appellant as the beneficiary of the alleged fraud and HMRC as its victim.

56. My conclusion on this point is that there is (or may be) a substantial overlap in relation to the factual issues relevant in the Appellant’s appeal proceedings and any contemplated criminal proceedings. The agency agreement between the Appellant and RORC expressly envisages that RORC as the Appellant’s agent ‘will commission the research and development contemplated hereby’. The trade which the Appellant asserts he has commenced could not be the mere appointment of RORC as his agent (even if RORC deceived him as to its activities), but must be the research and development commissioned by RORC on the Appellant’s behalf. Therefore whether in fact RORC has or has not commissioned research and development on the Appellant’s behalf seems to me to be a point of fact which is of fundamental relevance to the Appellant’s claim for loss relief.

57. I bear in mind that at the hearing of the appeal, the burden of proof of his entitlement to loss relief will be on the Appellant (section 50(6) TMA). HMRC would be entitled – and duty bound – to put the Appellant to proof of the substantive nature of his activities which he argues amount to a trade for tax purposes. Therefore it might be said that a stay of the hearing of the appeal was not necessary to ensure its fair and just disposal. HMRC could simply wait to see what evidence the Appellant produced in its Witness Statements to the effect that RORC had in fact carried out activities and transactions on the Appellant’s behalf which amounted to trading activities of the Appellant, and cross-examine on that basis.

58. I also bear in mind that, having issued a closure notice, albeit as a result of the General Commissioners’ direction, HMRC have stated that they have concluded that no trade losses arise in the year from the relevant activities and that this conclusion was reached on completion of HMRC’s enquiry. I also note in this connection the evidence that Mr. Old told the Appellant’s current professional advisers in the telephone conversation on 10 September 2009 that he did not think it would make a difference to his conclusion if the Appellant were to provide the further information requested.

59. It was argued by Mr. Bremner that HMRC had not appealed against the General Commissioners’ closure notice direction, but had instead issued a closure notice. He contended that they should not therefore be heard to request further time to pursue their enquiries – which, in effect, is what they were doing in asking for a stay.

60. The Court of Appeal in the recent case of Tower MCashback v HMRC [2010] STC 809 (included in the bundle of authorities before me, but not referred to at the hearing) has emphasised that the jurisdiction of the Tribunal is not limited to the issue whether the reason given for a conclusion in a closure notice is correct. Therefore any evidence or any legal argument relevant to the subject matter of the conclusion may be entertained by the Tribunal subject only to its obligation to ensure a fair hearing (ibid. [41]).

61. In relation to its obligation to ensure a fair hearing, it is for the Tribunal to identify the subject matter of the conclusion (and of the enquiry). In doing so, the Tribunal must balance the need to preserve the statutory protection for the taxpayer afforded by the notification that the inspector has completed his enquiries and the need to ensure that the public are not wrongly deprived of contributions to the fisc (ibid. [38]).

62. The Court of Appeal observed that the Tribunal, in the exercise of its statutory functions, is not deciding a case inter partes but is determining the amount on which, in the interests of the public, the taxpayer ought to be taxed (ibid. [28] citing with approval R v Income Tax Special Commissioners ex p. Elmhurst (1936) 20 TC 381 at 387, [1936] 1 KB 487 at 493). This proposition to my mind negates the propriety of any approach on my part to HMRC’s interest in this matter which would treat them as a victim of the alleged fraud.

63. To my mind it is clear that the subject matter of the conclusion in the closure notice (and of the enquiry) is the existence of trading losses in the year 2006/07 arising from the Appellant’s described activities ‘Bio-Fuels’ and ‘Paper Pulp’.

64. I consider that, as I have already stated, whether in fact RORC has or has not commissioned research and development on the Appellant’s behalf is an issue of fact which is of fundamental relevance to the Appellant’s claim for loss relief.

65. I have concluded that in these circumstances a fair hearing of the appeal should be one where HMRC are in reality at liberty to deploy any evidence in relation to this issue of fact, which they may have gathered in the criminal investigation. This is so notwithstanding the fact that the burden of proof will be on the Appellant to show that he has incurred losses in a trade.

66. I am told by Mr. Hyland that the procedures under which the criminal investigation operates require that information and evidence gathered in the course of the criminal investigation is not normally released (either to a defendant or potential defendant, or to the Officers of HMRC charged with conducting civil tax appeals) before a defendant is charged. These procedures are in place to protect the integrity of the criminal investigation, Mr. Hyland and his colleagues being apprehensive that any premature disclosure of information or evidence may undermine the investigation and/or any resulting criminal proceedings.

67. I accept that there is a public interest in preserving the integrity of the criminal investigation and any prosecution and trial, which may prevent the release of documents or information gathered in the criminal investigation to Officers of HMRC charged with conducting civil tax appeals. I also accept that the relevance of this public interest to the issues I have to decide is demonstrated by the fact that search warrants have been issued by H.H. Judge Paget QC at the application of HMRC supported by a detailed sworn information in relation to the marketed avoidance scheme which features in the Appellant’s appeal.

68. On this basis it may, at least prima facie, be ‘just and convenient’ (Jefferson Ltd. v Bhetcha) to direct a stay in order to ensure that the Tribunal can deal with the appeal fairly and justly.

69. I turn now to the second point identified above, whether it would be proper and right to direct a stay in order in some way to assist the criminal investigation (which does not concern the Appellant except indirectly in relation to its effect on the appeal) and any resulting criminal proceedings.

70. From Mote v Secretary of State for Work and Pensions, I derive authority for the proposition that a relevant consideration in the exercise of my discretion is whether the continuation of the civil proceedings (the tax appeal) will give rise to a real risk of prejudice to a defendant in criminal proceedings (ibid. [31]). I add the rider, from Neil LJ’s judgment in R v The panel on Takeovers and Mergers, ex parte Fayed, that I must take great care in exercising my discretion to grant a stay and should only do so where there is a real risk of serious prejudice which may lead to injustice. Mr. Dixon would have me also consider whether a decision not to grant a stay would give rise to a real risk of prejudice to the prosecution in criminal proceedings. In my view I should consider this aspect as well because it seems to me that the crucial point is whether a decision to grant a stay or not to grant a stay would pose a realistic threat to a fair trial in any criminal proceedings resulting from the criminal investigation.

71. In McNicholas Construction Company Ltd., the main issues in the civil proceedings (a VAT appeal) were similar to those raised in the criminal proceedings – namely whether services were actually provided against invoices to McNicholas and whether the invoices were genuine. There is a similarity to the factual issues in this case which would (or are likely to) be relevant to both the civil proceedings (the tax appeal) and any criminal proceedings – namely whether trading activities were in fact undertaken by RORC and possibly others. Mr. Stephen Oliver QC (as he then was), who was the Chairman of the Tribunal, held in that case that the Commissioners of Customs and Excise had not shown that there would be any real risk of serious prejudice leading to injustice – either to the Commissioners or to McNicholas – as the result of holding the VAT Tribunal appeal before any criminal proceedings were concluded. It should be noted that the criminal proceedings in contemplation in McNicholas Construction Company Ltd. were against ex-employees of McNicholas and also, possibly, against McNicholas itself.

72. Mr. Oliver’s principal reasoning appears from the following passage in his Decision:

“The following circumstances of the present proceedings are, I think, relevant to the present issue. Firstly, there are as yet no criminal proceedings against McNicholas. The Commissioners wish to keep their position open and there is no certainty that they will decide to prosecute McNicholas; nor is it clear how long they will take to make up their minds. Second, the outstanding criminal proceedings are against other parties and there is no indication in the decided cases … that a civil action brought by one party should be stayed pending the completion of criminal proceedings against third parties, even when the third parties are its employees or ex-employees. Third, McNicholas, who could be at risk from injustice occasioned by the prior determination of civil proceedings, i.e. the tax appeal, are – unlike the applicant in [Secretary of State for Trade and Industry v Willars (1996)] – quite prepared to take the risk. This is so notwithstanding the fact that in the tax appeal McNicholas will have to prove on the balance of probabilities that the assessment is wrong; by contrast, the criminal proceedings place the higher “beyond reasonable doubt” burden of proof on the Commissioners.”

73. That reasoning applies a fortiori in this case. Here, HMRC have indicated that they will not prosecute the Appellant. Any criminal proceedings would be against third parties with a more remote connection to the Appellant than the connection between McNicholas and the third parties in that case. Also, as in McNicholas, it is the Appellant who urges that there should be no stay of the tax appeal proceedings.

74. However, Mr. Dixon told me that the subsequent history of the McNicholas litigation was unfortunate. The prosecution of the employees (or ex-employees) collapsed, the Crown Court judge taking the view that ‘the evidence disclosed in public at the VAT Tribunal and later published was an abuse of process, and the various defendants could not receive a fair trial’ – according to a report in Taxation magazine which was summarised to me.

75. Mr. Bremner countered by telling me that McNicholas had attempted to have its VAT appeal heard in private, but that its application to that effect had been dismissed. The rules give the First-tier Tribunal power to direct that a hearing, or part of it, is to be held in private if the Tribunal considers that restricting access to the hearing is justified in order to avoid serious harm to the public interest or because not to do so would prejudice the interests of justice (rule 32(2)(d) and (e) of the Rules). He also pointed out that rule 32(6) of the Rules imposes an obligation on the Tribunal to ensure that any report of a decision resulting from a hearing which was held wholly or partly in private does not disclose information if to do so would undermine the purpose of holding the hearing in private. Mr. Bremner submitted that in the present case HMRC has ‘shut its eyes’ to the potential measures which the Tribunal could take to deal with any real concern that prejudice might be caused by continuing with the hearing of the appeal in normal course.

76. I bear in mind that the judge in criminal proceedings has wide powers to ensure a fair trial, including the power to limit the evidence admitted if, in the circumstances then prevailing, it is necessary to do so for that purpose (cf. Mote at [31]).

77. Finally, the Court of Appeal in V v C [2001] EWCA Civ 1509 at [43] was dismissive of the reality of the risks to a fair trial from related civil proceedings having been conducted and determined beforehand.

78. My conclusion on this point is that HMRC have failed to discharge the burden on them of showing that the conduct of the Appellant’s tax appeal up to and including the hearing and the subsequent release of the Tribunal’s decision would necessarily give rise to a real risk of prejudice which may lead to injustice to a defendant or the prosecution in criminal proceedings and, which is probably the same thing, would necessarily pose a realistic threat to a fair trial in any criminal proceedings resulting from the criminal investigation. I consider that it would not be proper or right to direct a stay in order merely in some way to assist the criminal investigation (which does not concern the Appellant except indirectly in relation to its effect on the appeal) and any resulting criminal proceedings. Any realistic possibility of prejudice could be dealt with and effectively prevented by appropriate case management of the tax appeal proceedings, for example, by a direction that the hearing, or part of it, is to be held in private.

79. In the result, I need to conduct a balancing exercise to determine whether to grant any stay in the tax appeal proceedings (and, if so, on what terms) or to refuse HMRC’s application for a stay.

80. I regard the Global Active Holdings Limited case, where Dr. Avery Jones allowed the application of H.M. Customs and Excise for a stand-over for nine months, as a much plainer case than the present. There, the contemplated criminal proceedings were against the appellants in the tax appeal and Dr. Avery Jones’s reason for ordering the stay was that both the appeal and the contemplated criminal proceedings related to (different) carousel VAT frauds and a possible finding the in the VAT appeal that the appellants knew that they were engaged in carousel frauds could prejudice their criminal trial.

81. In favour of a stay is my prima facie conclusion that it may be ‘just and convenient’ (Jefferson v Bhetcha) to enable HMRC in reality to be at liberty to deploy in the tax appeal proceedings any evidence, which they may have gathered in the criminal investigation and are prevented from disclosing to the Officers of HMRC charged with conducting civil tax appeals before a defendant is charged. This would be to deal with the appeal fairly and justly by achieving a hearing which was fair both to HMRC and the Appellant.

82. Against a stay is the obvious fact that the Appellant is not a suspect in the criminal investigation. Also, I bear in mind the financial prejudice which Mr. Bremner said was being caused to the Appellant by the delay in resolving the dispute giving rise to the tax appeal. The repayment claim relates to the tax year 2006/07, although it will be recalled that the Appellant made his investment at the end of that year, on 26 March 2007. Nevertheless, the claim for repayment of tax is over 3 years old and I bear in mind that the authorities stress that a claimant (the Appellant) has the right to have his civil claim decided and it is for HMRC to show why that right should be delayed.

83. On the other hand, the facts seem to me disclose, on the Appellant’s part, a combination of a very proactive attitude to prosecuting the repayment claim (both at the stage of HMRC’s enquiry being ongoing and since the issue of the closure notice and the commencement of the tax appeal) and a marked reluctance to provide the full information and documents which HMRC (through Mr. Old) reasonably wished to consider as part of his enquiry.

84. Of course I do not criticise the Appellant (or his advisers) for adopting a proactive attitude to prosecuting the repayment claim: he and they were obviously entitled to do so. But HMRC’s case in arguing for a stay would in my view have been much weaker if the Appellant had, before the closure notice was issued, provided HMRC with as much relevant factual information as possible,

85. After the initial disclosure of information and the documents signed by the Appellant (made on 19 December 2007) which was accepted by Mr. Old as having been reasonable in all the circumstances, further information was not disclosed until 12 September 2008 (in response to a section 20B(1) TMA “precursor” letter). A further request for documentation and information was not responded to until 12 March 2009, in a way which HMRC regarded as inadequate. The Appellant’s application for a closure notice direction came before the General Commissioners on 25 March 2009, less than 2 weeks later, and less than 2 months after the expiry of the period of one year during which an enquiry could have been opened into the Appellant’s return. At that stage HMRC submitted to the General Commissioners that they had not been able to reach a concluded view on at least the 7 issues detailed above at paragraph 14 (which most relevantly included “g. the extent of the actual work done by the research and development company, if any”). Once the General Commissioners had directed a closure notice to be served within 6 months from the date of the hearing, HMRC (through Mr. Old) made renewed efforts to obtain further information and documentation to enable it to “try and deal with all outstanding matters before a closure notice is issued”. No further information was provided, and the Appellant’s representatives made difficulties about the procedure adopted by HMRC (the “precursor” letter relative to a contemplated approved notice under para. 1, Sch. 36, FA 2008).

86. In all the circumstances, I have concluded that a delay of 6 months at this stage in the continuation of the appeal proceedings would not be unfair and that the appropriate course for me to adopt is to grant HMRC’s application for the appeal to be stayed for a period of 6 months from the date of release of this Decision. The matter should be listed (if practicable, again before me) for a further case management directions hearing towards the end of the period.

87. The purpose of the stay is to allow a further 6 months for Mr. Old, or any successor officer who has charge of the conduct of the Appellant’s tax appeal on behalf of HMRC, to be provided with any evidence relevant to the appeal, which HMRC may gather or have gathered in the criminal investigation.

88. If it is not possible for Mr. Old to be provided with this evidence in the period of 6 months for which I direct a stay of the appeal proceedings, then the question of the possibility of extending the stay or making alternative case management directions can be addressed at the further hearing. I would at this stage make the point that I cannot envisage extending the stay beyond the point when any defendant is charged in the criminal proceedings, because I have concluded that the hearing and the subsequent release of the Tribunal’s decision would not necessarily give rise to a real risk of prejudice which may lead to injustice to a defendant or the prosecution or pose a realistic threat to a fair trial in any criminal proceedings.

89. I also extend the time for the service of the Statement of Case by HMRC, initially to a date 28 days after the expiry of the period of 6 months for which I have stayed the appeal proceedings.

90. I have taken account of Mr. Bremner’s submission that even if I consider that the hearing of the appeal must be delayed, HMRC should be directed to produce their Statement of Case in short order and disclosure should take place and witness statements produced and exchanged in the normal way. He cited In re D.P.R. Futures Ltd. [1989] 1WLR 778 as an example of such an approach.

91. However my reason for directing a stay in the proceedings is to give time for the Officers of HMRC having conduct of the Appellant’s appeal to be provided with further evidence. The provision of such evidence is likely to inform the way HMRC state their case. I think it would be inconvenient, and likely in the end to give rise to extra avoidable expense to both parties, if I were to direct HMRC to produce a Statement of Case on the basis of the evidence currently available if, as is at least possible, further evidence becoming available will give rise to the need to amend the Statement of Case.

92. I indicated at the hearing that the appeal was appropriate to be allocated to the category of Complex cases and that I was minded to re-allocate it. It should not have been allocated to the category of Standard cases. I therefore include a direction re-allocating the appeal under rule 23(3) of the Rules. Neither side objected to this course. This re-allocation will give rise to costs considerations under rule 10 of the Rules.

Right to apply for permission to appeal

93. This document contains full findings of fact and reasons for my decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Rules. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

First-tier Tribunal (Tax)

REVENUE AND CUSTOMS (Income Tax) Respondents

JOHN WALTERS QC

TRIBUNAL JUDGE

RELEASE DATE: 7 October 2010

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Swallow v Revenue & Customs [2010] UKFTT 481 (TC) (07 October 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00742.html Cite as: [2010] UKFTT 481 (TC)