Karoulla t/a Brockley’s Rock: Revenue Battered on Disclosure
In Karoulla v HMRC  UKUT 255 (TCC), the Upper Tribunal (‘UT’) has ruled that HMRC have a duty of candour in proceedings in the tax tribunal. Although not the first time that this has been suggested, it will no doubt be a cause for concern at HMRC, and presents opportunities for those representing taxpayers.
Karoulla’s appeal concerned a best judgment assessment for under-declared VAT by a fish and chip shop. Just before the application for permission to appeal, HMRC produced the original till rolls from the shop, an analysis of which suggested that the under-declaration had been less extensive than that assessed.
In rejecting HMRC’s submissions that Karoulla should have applied to the FTT for an order seeking disclosure of the evidence, and that therefore the evidence could have been obtained with reasonable due diligence for use at the hearing before the FTT and was not admissible on appeal, the UT stated:
“…in the normal course HMRC should have disclosed these source documents, not only to Karoulla but to the FTT, in accordance with its duty of candour. It is trite that the duty of candour is a concept derived from and developed in the area of judicial review. However, as HMRC will be well aware, it is long established practice that HMRC usually accept that the duty applied to them in normal tax appeals. If any evidence of that is needed, the normal practice is clearly referred to in the recent decision in Gardner-Shaw UK Ltd & others v HMRC  UKFTT 313 (TC) at paragraph :
27. HMRC had accepted in the hearing before the Upper Tribunal, as they normally did in all cases, that they had a duty of candour in the Tribunal and in particular that, even if the Tribunal only ordered disclosure of documents on which each party relied, HMRC would disclose all relevant material held by them.”
This may come as a surprise to some practitioners. Previously many cases had proceeded on the basis that Rule 27 governs HMRC’s disclosure obligations, supplemented in appropriate cases by directions by the Tribunal pursuant to Rule 5 where required in order to further the overriding objective. Taxpayers frequently ask that along with the Rule 27 obligation to list material that HMRC relies upon, HMRC are ordered to provide, for example, all relevant, or all considered material.
Judicial decisions in this area have not been entirely consistent. The highest recent authority on the topic came in the Court of Appeal’s judgment in the Citibank and Ebuyer case last year. The majority having concluded that an allegation of actual knowledge in a Kittel case did not implicitly amount to an allegation of dishonesty, the entire Court concluded that the First-tier judge had not acted outside the bounds of a valid exercise of judicial discretion in making the case management decision to refuse an application by the taxpayer for a special order for disclosure. The majority reiterated that tax tribunal proceedings are not analogous to normal civil proceedings, and normal Rule 27 disclosure is likely to apply unless dishonesty is alleged, albeit acknowledging that Rule 27 should not be applied rigidly without the exercise of judicial discretion taking into account the facts of the case and the stage of the proceedings. However, the Court of Appeal made no reference to an alleged duty of candour at any point.
This judgment therefore appeared to endorse HMRC’s approach in many cases, that Rule 27 governs. That said, in the context of allegations of MTIC fraud, the Revenue generally acknowledges the propriety of disclosing material that may undermine its own case or assist the taxpayer’s case, whether or not dishonesty is alleged against the taxpayer itself.
By way of example, two years earlier in Tower Bridge GP Limited, the FTT proceeded on the principle, as agreed by the parties, that on an application for disclosure pursuant to Rule 5, it was appropriate to direct the disclosure of documents and information that are relevant to the issues in the appeal. “Relevant” in this context included material that might advance or hinder a party’s case, or which might lead to a “train of inquiry” that might do the same. The FTT acknowledged that Rule 27 was the default position, but considered that the context of that appeal – being a complicated case involving a large amount of money and a serious allegation that a major financial institution either knew or should have known that transactions in which it was involved were connected with fraud – meant that there should be a presumption that both parties would disclose relevant material to each other.
In that context the FTT found an analysis of CPR 31 useful, and “borrowed” elements of that regime, namely “standard disclosure”, “specific disclosure”, and “self-certification” in determining the relevant orders to make in respect of the particular requests before it.
In Tower Bridge GP there was a dispute as to the factual extent of relevant disclosure on the facts of the case. There was therefore no judicial discussion of the extent to which either party was obliged to disclose relevant material in advance of an application to the Tribunal, whether that was a free-standing obligation, or upon request by the other party. In other words, no “duty of candour” upon either party was considered.
However, as the FTT noted in Karoulla, the duty of candour on HMRC has recently been recognised in Gardener-Shaw UK Limited. HMRC’s acknowledgement of the broad principle extended back before the UT proceedings in that case. In the linked case of Owd Ltd t/a Birmingham Cash & Carry and others, the FTT observed,
“31. I should point out that, notwithstanding the nature and subject of the applications, HMRC accepted that, independent of any direction, they are under a duty to ensure that any documents which materially undermine their case or which materially assist the Appellants’ cases are disclosed to the Appellants.”
The appeal was against a refusal to approve the Appellants under the AWRS scheme. HMRC was seeking to amend an order for disclosure which required it to list all documents which were considered by the relevant officer in coming to their decision. This, HMRC complained, would lead to an obligation to list irrelevant material. In the subsequent appeal to the UT, HMRC relied on Citibank in asserting that there was insufficient basis for departing from the asserted “default” position that ordinarily restricts disclosure to Rule 27. Reliance was again placed on,
“HMRC’s duty of candour in the appeal and the professional obligations of the Solicitor’s Office”
to argue that the Appellants’ position would nevertheless be protected in respect of material that undermined the Revenue’s case.
It is manifest from the authorities – and not least Karoulla itself – that HMRC’s position has not always been consistent in these matters. It may be of note that counsel representing HMRC in Gardener-Shaw were well-experienced in criminal proceedings, where there would be no question of withholding material detrimental to the Crown or of assistance to the defendant, but where again there is no similar duty on the defendant.
Whilst Citibank is of course the binding authority, Karoulla and Gardener-Shaw will no doubt be cited in many future applications for disclosure from HMRC, beyond that provided for in Rule 27. It will no doubt be argued that there was no express disavowal in that case of any duty of candour upon HMRC. Yet it is difficult to square the Court of Appeal’s dicta, and their failure to acknowledge any such duty of candour, with the Revenue’s acknowledged position in Gardener-Shaw.
However meritorious it may be, the applicability of the duty of candour in all circumstances appears to be at odds with the structure and purpose of Rule 27 and the accompanying discretion imparted by Rule 5.
If correct, Karoulla represents a potentially substantial change, requiring HMRC proactively to make candid disclosure, and put before the tribunal all material relevant to the issue to be decided, in all cases. It is not quite full CPR disclosure, but it is a lot closer than Rule 27.
A further note of interest is that in Karoulla the existence of the duty of candour was wholly unnecessary to decide the issue before the Tribunal: namely whether to admit the new evidence. The UT had already found that the taxpayer had frequently requested the till rolls from HMRC, and been refused or ignored. The UT was heavily critical of HMRC’s refusal to accede to the Appellant’s requests concluding that the evidence had not previously been available to the Appellant. Whatever stance HMRC may wish to take on the principles behind its disclosure duties in any future case, it will be brave to ignore the merits of any requests from the taxpayer as measured against those principles, and instead demand automatically that the Appellant make a formal application for disclosure to be determined by the tribunal.
Chris Foulkes and Lewis MacDonald accept a range of indirect tax instructions with a specialism in VAT litigation.
  1 WLR 1524
  UKFTT 054 (TC)
  UKFTT 0411 (TC)
  UKUT 0465 (TCC)