When is a case complex?
The allocation of a case to the First-tier Tribunal is an important step in any tax appeal and a new case, J SM Construction Ltd v HMRC [2015] TC 04641, has given some guidance in this area.
Case track allocation
There are four categories of tax appeals namely:
- Default Paper;
- Basic;
- Standard; and
- Complex.
Broadly speaking, Default Paper cases apply to the simplest types of tax appeals such as certain types of fixed penalties. As the name implies, these cases will usually be disposed of without a hearing. Basic cases are a little more complex and cover areas such as penalties for incorrect returns under paragraph 15 Schedule 24 Finance Act 2007 (except appeals against penalties for deliberate action). They will usually require a hearing with minimum exchange of documents prior to that hearing.
Standard cases are defined, rather briefly, in the rules of the First-tier Tribunal (“FTT”) (rule 23(2)) as those which ‘will usually be subject to more detailed case management and be disposed of after a hearing.’
Rule 23(4) provides that the FTT may allocate a case as Complex only if it considers that:
‘(a) the case will require lengthy or complex evidence or a lengthy hearing;
(b) the case involves a complex or important principle or issue; or
(c the case involves a large financial sum.’
The facts
JSM is an engineering contractor working in the utilities sector. From around 2008 onwards, JSM began to work as a main contractor offering a range of services, including the design, supply and installation of high-voltage cabling.
JSM entered into ‘framework contracts’ with its customers. These contracts set the terms of the work that JSM might be asked to undertake but did not guarantee any particular amount of work. As a result, although JSM employed some 110 staff, variations in the levels of work meant that JSM was often required to supplement its own workforce with subcontracted labour.
In 2009 and 2010, JSM engaged a provider of labour known as Goldflex Solutions Limited (‘Goldflex’) to supply labour to JSM for it to use to fulfil its contracts with its customers. Between September 2009 and May 2010, JSM paid Goldflex around £1.3 million for services supplied. On 22 June 2010, Goldflex became insolvent and a liquidator, Mr Katz, was appointed.
On 20 July 2010, HMRC decided to refuse JSM’s claim for a repayment of input tax of £89,365.13 for the period 03/10. JSM appealed against HMRC’s decision on 15 September 2010.
Mr Katz, acting as liquidator of Goldflex, initially pursued JSM for outstanding sums in respect of supplies of labour by Goldflex to JSM. The outstanding amounts remained unpaid and, on 6 May 2011, Mr Katz issued a credit note to JSM in respect of all the invoices that Goldflex had issued to JSM between 17 September 2009 and 3 June 2010 on the ground that Goldflex had not supplied any services to JSM.
On 17 March 2011, HMRC made a further decision to deny input tax deduction by JSM in respect of all Goldflex invoices during the periods 09/09, 12/09 and 03/10. JSM appealed to the tribunal against this decision on 5 January 2012. The Notice of Appeal filed on 5 January 2012 included submissions that the appeal should be allocated as a Complex case. Notwithstanding those submissions, but without any formal decision, the tribunal allocated the case to the Standard category.
On 21 May 2015, JSM applied under rule 23(3) of the FTT Rules for its appeal to be re-allocated as a Complex case on the grounds that it met all of the criteria set out in rule 23(4) for re-allocation as a Complex case. JSM made the application because it wished to bring the appeal within the costs regime in rule 10(1)(c) of the FTT Rules. HMRC opposed the application on the ground that the appeal does not fall within any of the criteria in rule 23(4).
The appeal is listed for a six day hearing between 18 and 25 January 2016. JSM has served witness statements from five witnesses. HMRC do not currently propose to call any witnesses. The document bundle for the hearing is still the subject of discussion between the parties but it seems likely that there will be at least four, perhaps five, lever arch files of documents.
The FTT’s decision
The FTT stated that the only question was whether JSM was entitled to deduct the VAT shown on the Goldflex invoices. JSM was arguing that it received supplies of labour services from Goldflex and incurred input tax, which it is entitled to deduct, when it paid Goldflex for those services and HMRC contended that Goldflex did not supply any services to JSM or, alternatively, that the VAT on the supply by Goldflex is not input tax of JSM because the charge to VAT is not evidenced and quantified by documents or other information specified by HMRC. HMRC made no allegation of fraud against JSM and simply argued that the issue by Mr Katz of a credit note in respect of all the supplies purportedly made by Goldflex, which had not been challenged by JSM, conclusively showed that no VAT was properly charged by Goldflex and, thus, that JSM has no right to deduct any input tax.
The FTT cited the decision of the Upper Tribunal in Capital Air Services v HMRC [2010] UKUT 373 (TCC) (‘Capital Air Services)’ and the Practice Direction on Categorisation of Tax Cases in the Tax Chamber of the First-tier Tribunal issued by the Chamber President (Judge Bishopp) on 29 April 2013. This states:
“Rule 23 provides that the Tribunal may allocate a case as a Complex case only if the Tribunal considers that the case-
(a) will require lengthy or complex evidence or a lengthy hearing;
(b) involves a complex or important principle or issue; or
(c) involves a large financial sum.
The Tribunal will assess whether, having regard to the nature of a particular case, any one or more of these criteria are satisfied. In making this assessment the Tribunal will take into account all the circumstances, including the implications of the costs-shifting regime (subject to the right of the taxpayer to opt out) and the fact that cases allocated to the Complex category are eligible, subject to various consents, to be transferred to the Upper Tribunal.
If on such an assessment the Tribunal considers that a case meets the stated criteria, it will, in the absence of special factors, allocate the case to the Complex category.”
Against this background, the FTT was clear that the case should not be allocated to the complex category. The first criterion in rule 23(4)(a) was whether the case would require lengthy or complex evidence or a lengthy hearing. The FTT said:
‘As can readily be seen, the parties did not disagree about the nature or volume of the evidence in the case or the likely length of the hearing but, on the same view of the facts, one party, JSM, urged me to regard the evidence as lengthy and complex and the six day hearing as lengthy while the other, HMRC, sought to persuade me to regard the evidence as straightforward and the hearing as nothing out of the ordinary. Having regard to the guidance in Capital Air Services and Dreams and the submissions of the parties, I am left to form my own view. I do not regard five witness statements, none of which seemed to be particularly long, and four or five lever arch files of documents as at all out of the ordinary in the context of a case concerning entitlement to deduct input tax or in the context of cases in this tribunal generally. The volume of documents is determined by the number of invoices that are subject to challenge and the amount of correspondence between the parties. That volume does not indicate complexity as may, for example, be found in cases that involve evidence of complicated transaction chains and circular payments such as MTIC fraud cases. In my view it cannot be said that this appeal involves lengthy or complex evidence for the purposes of rule 23(4)(a). A hearing of six days is longer than the vast majority of hearings in the tribunal but, in my view, not so lengthy or unusual (especially not for a case concerning whether or not supplies in respect of which input tax has been claimed were actually made) as to justify re-allocating the appeal as a Complex case when considered on its own. In conclusion, I do not consider that this appeal involves lengthy or complex evidence or a lengthy hearing for the purposes of rule 23(4)(a) and, accordingly, it does not satisfy this criterion.’
Nor, in the FTT’s view, did the case involve a complex or important principle or issue.
‘It is clear from [14] of Capital Air Services that what is complex or important must be assessed in the context of taxation and tax appeals. I do not consider that the principal issue in this appeal, ie whether JSM is entitled to deduct the VAT shown on the Goldflex invoices, is complex or important in the context of VAT or tax appeals although it is, of course, very important to JSM. It is sort of issue that is considered by the tribunal on a regular basis. That does not conclude the question of whether the appeal meets the criterion in rule 23(4)(b) because JSM maintains that the subsidiary issues raise important principles or issues. While I accept that the jurisdiction of the tribunal and the status of credit notes are important issues in the general scheme of VAT, the points that arise in this case are neither new nor, in my view, particularly complex (in the sense of complicated). As submitted by Mr Fitzpatrick, issue of the status of a credit note has already been considered by the Court of Appeal in Brunel which, unless it can be distinguished, would seem to provide powerful support for JSM’s position. There are many authorities on the right to deduct under EU law and the tribunal is familiar and well able to deal with them. As to the issue in relation to regulation 29 of the VAT Regulations 1995, I accept Mr West’s submission that it is a straightforward point which the tribunal can decide with or without reference to the earlier decision in Maliha. In conclusion, I do not consider that this appeal involves any complex or important principle or issue for the purposes of rule 23(4)(b) and, in my view, it does not satisfy this criterion.’
The FTT further decided that the amount in dispute, £226,845 was not a significant sum in the context of tax appeals. The sum should be large by comparison with the median value of the cases which come before the Tax Chamber and are allocated to the Standard and Complex categories. This approach represented a simple and straightforward means of applying the condition and this sum was not enough to make the case suitable for allocation to the complex track.
Conclusion
Allocation to the complex track is important in that, unless the taxpayer elects otherwise, costs will generally be awarded to the winning party to a tax appeal. This case shows the care that the FTT will exercise in deciding which matters are suitable to the complex track and should be borne in mind by advisers when taking cases to the Tribunal.
Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.