Appeal number:TC/2015/02046 TC/2015/02043 TC/2015/02041 PROCEDURE – Respondents’ application to amend Statement of Case – supported by evidence – Appellants’ unsupported application to amend their Grounds of Appeal – reasons for making application and for any delay – whether permission should be granted in either case – yes and no DISCOVERY ASSESSMENT – whether the requirements in Sections 29 and 34 Taxes Management Act 1970 were satisfied – yes – whether Respondents prevented from raising assessment if discovery under Subsection 29(5) had grown “stale” – no FIRST-TIER TRIBUNAL TAX CHAMBER TERSAM GAKHAL Appellant - and - THE COMMISSIONERS FOR HER MAJESTY’S Respondents REVENUE & CUSTOMS AJIT GAKHAL Appellant - and - THE COMMISSIONERS FOR HER MAJESTY’S Respondents REVENUE & CUSTOMS SOHAN PAWAR Appellant - and - THE COMMISSIONERS FOR HER MAJESTY’S Respondents REVENUE & CUSTOMS TRIBUNAL: JUDGE JANE BAILEY MR WILLIAM SILSBY Sitting in public in Birmingham on 1 April 2016 Robert Grierson, of counsel, instructed by Spencer Gardner Dickins, for the Appellants Marika Lemos, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents © CROWN COPYRIGHT 2016 2 DECISION on PRELIMINARY ISSUE Introduction 5 1. By Notices of Appeal filed with the Tribunal on 26 February 2015, Mr Tersam Gakhal (the “First Appellant”), Mr Ajit Gakhal (the “Second Appellant”) and Mr Sohan Pawar (the “Third Appellant”) each appealed against the Respondents’ review decisions, dated 2 February 2015, to uphold the raising of discovery assessments under Section 29 Taxes Management Act 1970 (“TMA 1970”). Those assessments, 10 two dated 22 December 2009 and one dated 21 January 2010, were raised to recover income tax in the sum of approximately £130,000 said to be due from each Appellant for the tax year 2003/04. Background to this appeal 2. In the tax year 2003/04, the Appellants were all employed by Aeroplas (UK) 15 Limited, and (together with one other person, now deceased) were the sole shareholders and directors of Aeroplas Holdings Limited, the parent company of Aeroplas (UK) Limited. On 15 December 2003, Aeroplas (UK) Limited set up a Funded Unapproved Retirement Benefit Scheme (“FURBS”) for each of the Appellants. Once each FURBS had been set up, Aeroplas (UK) Limited made a 20 contribution of £10,000 into each FURBS. This contribution was declared in each of the Appellants’ personal tax returns for the year 2003/04. 3. On 30 December 2003, Aeroplas Holdings Limited increased its share capital by the creation of 20 “A” shares at £1 each. These shares ranked behind the ordinary shares held by the Appellants. The trustees of each FURBS successfully applied to 25 buy 5 “A” shares in Aeroplas Holdings Limited for a total cost of £1,000. Also on 30 December 2003, an interim dividend of £100,000 was declared on the “A” shares, resulting in £25,000 being paid to each FURBS. On 16 March 2004 a final dividend of £2million was declared on the “A” shares resulting in £500,000 being paid to each FURBS. No dividend was declared on the ordinary shares held by the Appellants. 30 The dividend income received by each FURBS in the year 2003/04 was accordingly £525,000. This was declared on the Trust and Estate tax return submitted for each FURBS for the year 2003/04. No mention was made of this dividend in the personal tax returns of the Appellants. 4. On 19 January 2006 an enquiry was opened into the Trust and Estate return of 35 the FURBS for each of the First, Second and Third Appellants. Correspondence relating to these enquiries continued between the Respondents and the Appellants’ agent for a considerable period with the Respondents requesting, and the agent providing, additional material. (This is set out in more detail in paragraph 77 below.) 5. On 22 December 2009 a discovery assessment for 2003/04 was raised on each 40 of the First and Second Appellants. On 21 January 2010 a discovery assessment for 2003/04 was raised on the Third Appellant. 3 6. On 18 January 2010 the First and Second Appellants each appealed against the discovery assessments raised. On 3 February 2010 the Third Appellant appealed against the discovery assessment raised against him. The ground of appeal provided for each of these appeals was that the enquiry into the return was not yet concluded, 5 and so liability to tax was not yet established. The grounds of appeal for all three Appellants were extended on 4 February 2010 to argue that there was no liability under the settlements legislation, that the arrangements were treated in the returns in accordance with the practice generally prevailing at the time, and that neither of the conditions in Subsection 29(3) TMA were met. 10 7. Correspondence continued between the parties. Eventually closure notices, closing the enquiry into each of the Appellants’ FURBS’ returns, were issued on 20 October 2014. No amendments were made to the Trust and Estate returns. The Appellants sought a review of the Respondents’ conclusions. On 2 February 2015 the Respondents issued a review decision to each Appellant, upholding the conclusion 15 that liability lay with the Appellants personally, that no amendments were required to the Trust and Estate returns, and upholding the discovery assessments raised against each of the Appellants. Chronology of the appeal 8. On 26 February 2015 each Appellant filed a Notice of Appeal against the 20 Respondents’ review decision of 2 February 2015. 9. On 1 May 2015 the Respondents served a Statement of Case for each Appellant and sought a direction joining the three appeals. On 16 June 2015 the Respondents served their list of documents for each appeal. 10. On 23 June 2015 the appeals of the First and Second Appellants were joined 25 and Directions issued for the preparation of the appeals for hearing. Witness Statements were directed to be served by 28 August 2015, with simultaneous exchange of skeleton arguments no later than 14 days before the hearing. The Appellants’ agent confirmed on 1 August 2015 that the Appellants were content to rely upon the Respondents’ list of documents, and would not be providing an 30 additional list. 11. On 17 August 2015 the Respondents applied for consecutive exchange of witness evidence on the basis that they could not respond until they had seen the Appellants’ evidence. On 5 October 2015 the Appellants were directed to serve their witness evidence by return, with the Respondents to serve any witness evidence in 35 response within 28 days. Also on 5 October, the appeal of the Third Appellant was joined to the appeals of the First and Second Appellants. 12. On 22 October 2015 the Appellants’ agent wrote to the Tribunal to state that the Appellants did not intend to serve any witness evidence but that they would serve their Statement of Case 14 days before the hearing, as originally directed. On 6 40 November 2015 the Respondents sought a further revision to the Directions, requesting consecutive exchange of skeleton arguments. The Appellants objected. 4 13. On 27 November 2015 the Tribunal directed that all parties serve their skeleton arguments no later than 28 days before the hearing, with the option to serve an additional skeleton in response no later than 14 days before the hearing. The hearing was then listed to be heard on 1 April 2016, crystallising the dates directed for 5 exchange of skeletons as 4 March and 23 March 2016 respectively. 14. On 11 March 2016 the Appellants served their Outline of Case, and the Respondents served their Skeleton argument. 15. Following receipt of the Appellants’ Outline of Case, it became clear to the Respondents that the Appellants wished to challenge the validity of the discovery 10 assessments on the basis that the returns were completed in accordance with a practice generally prevailing and so the condition in Section 29(2) TMA 1970 was satisfied. Although there had been reference in the Appellants’ expanded grounds of 4 February 2010 to Subsections 29(2) and (3), there had been no reference to any part of Section 29 in subsequent correspondence or in the Appellants’ Grounds of Appeal to the 15 Tribunal. 16. The Respondents had not set out a positive case in respect of the discovery assessments in their Statement of Case. Once they received the Appellants’ Outline arguments, and bearing in mind the decision of the Upper Tribunal in Burgess and Brimheath Developments Limited [2015] UKUT 578 (TCC), the Respondents took the 20 view that they might need to amend their Statement of Case. The Respondents required permission to make this precautionary amendment so, on 15 March 2016, they filed an application, supported by a witness statement, to amend their Statement of Case to include a positive case in respect of the discovery assessments. The Tribunal directed that this application would be granted unless there was an objection 25 from the Appellants. 17. On 23 March 2016 the Appellants filed a Response to the Respondents Skeleton argument, and also filed a document entitled “Appellants’ Skeleton Argument and Response to Respondents Statement of Case and Skeleton Argument” which pulled together the points made in the Outline of Case and their Response. The Appellants 30 also filed their objection to permission being granted to the Respondents’ application. 18. In emailed correspondence to the Appellants’ agent, the Respondents pointed out that the Appellants would also need to make an application for permission to amend their grounds of appeal if they wished to rely on Subsection 29(2) TMA 1970 to challenge the validity of the assessment. 35 19. Being concerned that it would not be possible for the necessary applications, issues relating to the discovery assessments and the substantive issues all to be addressed in a one day hearing, on 23 March 2016, the Respondents sought Directions that the substantive hearing listed for 1 April 2016 be confined to a hearing of the applications to amend and the issues raised in relation to the discovery assessments. 5 20. By Directions released on 24 March 2016, the Tribunal acceded to the Respondents’ application. It was directed that the hearing on 1 April 2016 would be confined to the following issues: a) a hearing of the Respondents’ application dated 15 March 2016 to 5 amend their Statement of Case; b) if the Respondents’ application is successful, a hearing on whether the condition in Section 29(5) TMA 1970 has been satisfied in relation to the relevant discovery assessments; c) a hearing of any application by the Appellants to: 10 i. amend their grounds of appeal to include the argument that the condition in Section 29(2) TMA 1970 is satisfied, and ii. be permitted to adduce evidence in support of such argument; d) if the Appellants’ application is successful, a hearing on whether the 15 condition in Section 29(2) TMA 1970 has been satisfied in relation to the relevant discovery assessments; and e) the determination of case management Directions to be issued in relation to the remainder of the appeal. The hearing on 1 April 2016 20 21. We heard submissions from the parties on the issues set out above in more or less the order set out in the Directions of 24 March 2016. In the event the Appellants’ application was to amend the grounds of appeal to include arguments on Subsection 29(2) TMA 1970 and also to include three other points relating to the substantive issues. As these points had not been raised in correspondence with the Tribunal, the 25 Directions of 24 March 2016 did not anticipate the possibility of the Appellants seeking to amend their substantive case as well as their case in relation to the discovery assessments. The Appellants’ application, insofar as it relates to the proposed new substantive grounds of appeal, is addressed below when we consider the appropriate case management. 30 Decision in respect of the applications to amend 22. We first address the issues common to the parties’ applications to amend and then consider each application, which necessitates a brief consideration of the prospects of success of the proposed new case. After determining the applications, we consider any arguments admitted before us in relation to Section 29 TMA 1970. 35 Finally we address the other points raised in discussing the appropriate case management of this appeal. 23. It will be necessary to make reference to Sections 29 and 34 TMA 1970 as they applied in 2009/10. The relevant parts of that legislation are set out in the Annex to this decision. 6 Applications for permission to amend a document 24. It is clear that the Tribunal has the power to allow a party to amend its case. This is set out in Rule 5(3)(c) of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (“Procedure Rules”) which provides: 5 5.—(1) Subject to the provisions of the 2007 Act and any other enactment, the Tribunal may regulate its own procedure. (2) The Tribunal may give a direction in relation to the conduct or disposal of proceedings at any time, including a direction amending, suspending or setting aside an earlier direction. 10 (3) In particular, and without restricting the general powers in paragraphs (1) and (2), the Tribunal may by direction— (c) permit or require a party to amend a document; 25. Rule 2(3) of the Procedure Rules requires us to give effect to the over-riding objective when exercising any power under the Rules. The over-riding objective, as 15 set out in Rule 2(1), is as follows: 2.—(1) The overriding objective of these Rules is to enable the Tribunal to deal with cases fairly and justly. (2) Dealing with a case fairly and justly includes— (a) dealing with the case in ways which are proportionate to the 20 importance of the case, the complexity of the issues, the anticipated costs and the resources of the parties; (b) avoiding unnecessary formality and seeking flexibility in the proceedings; (c) ensuring, so far as practicable, that the parties are able to 25 participate fully in the proceedings; (d) using any special expertise of the Tribunal effectively; and (e) avoiding delay, so far as compatible with proper consideration of the issues. 26. Following the decision of the Court of Appeal in BPP Holdings v HMRC [2016] 30 EWCA Civ 121 we consider it acceptable for the Tribunal to have regard to the approach adopted under the Civil Procedure Rules as useful guidance when considering how to proceed in the Tribunal. In the recent decision of this Tribunal in Moreton Alarm Services (MAS) Limited v HMRC [2016] UKFTT 192 (TC), concerning an application made on the first day of the substantive hearing to amend 35 the Respondents’ Statement of Case, the Tribunal adopted a similar approach. 7 27. In Moreton Alarm Services the Tribunal considered and applied the principles set out in Quah v Goldman Sachs International [2015] EWHC 759 (Comm). Quah concerned an application by the claimant, made three weeks before the first day of the trial, to amend her particulars of claim. At paragraphs 36 to 38 of Quah, Mrs Justice 5 Carr set out the relevant principles in determining whether permission to amend should be granted: 36. An application to amend will be refused if it is clear that the proposed amendment has no real prospects of success. The test to be applied is the same as that for summary judgment under CPR Part 24. Thus the 10 applicant has to have a case which is better than merely arguable. The court may reject an amendment seeking to raise a version of the facts of the case which is inherently implausible, self-contradictory or is not supported by contemporaneous documentation. 15 37. Beyond that, the relevant principles applying to very late applications to amend are well known. I have been referred to a number of authorities : Swain-Mason v Mills & Reeve [2011] 1 WLR 2735 (at paras. 69 to 72, 85 and 106); Worldwide Corporation Ltd v GPT Ltd [CA Transcript No 1835] 2 December 1988; Hague Plant Limited v Hague [2014] EWCA 20 Civ 1609 (at paras. 27 to 33); Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 928 (QB) (at paras. 4 to 7 and 29); Durley House Ltd v Firmdale Hotels plc [2014] EWHC 2608 (Ch) (at paras. 31 and 32); Mitchell v News Group Newspapers [2013] EWCA Civ 1537. 25 38. Drawing these authorities together, the relevant principles can be stated simply as follows: a) whether to allow an amendment is a matter for the discretion of the court. In exercising that discretion, the overriding objective is of 30 the greatest importance. Applications always involve the court striking a balance between injustice to the applicant if the amendment is refused, and injustice to the opposing party and other litigants in general, if the amendment is permitted; 35 b) where a very late application to amend is made the correct approach is not that the amendments ought, in general, to be allowed so that the real dispute between the parties can be adjudicated upon. Rather, a heavy burden lies on a party seeking a very late amendment to show the strength of the new case and why justice to 40 him, his opponent and other court users requires him to be able to pursue it. The risk to a trial date may mean that the lateness of the application to amend will of itself cause the balance to be loaded heavily against the grant of permission; 45 c) a very late amendment is one made when the trial date has been fixed and where permitting the amendments would cause the trial 8 date to be lost. Parties and the court have a legitimate expectation that trial fixtures will be kept; d) lateness is not an absolute, but a relative concept. It depends on a 5 review of the nature of the proposed amendment, the quality of the explanation for its timing, and a fair appreciation of the consequences in terms of work wasted and consequential work to be done; 10 e) gone are the days when it was sufficient for the amending party to argue that no prejudice had been suffered, save as to costs. In the modern era it is more readily recognised that the payment of costs may not be adequate compensation; 15 f) it is incumbent on a party seeking the indulgence of the court to be allowed to raise a late claim to provide a good explanation for the delay; g) a much stricter view is taken nowadays of non-compliance with 20 the Civil Procedure Rules and directions of the Court. The achievement of justice means something different now. Parties can no longer expect indulgence if they fail to comply with their procedural obligations because those obligations not only serve the purpose of ensuring that they conduct the litigation proportionately 25 in order to ensure their own costs are kept within proportionate bounds but also the wider public interest of ensuring that other litigants can obtain justice efficiently and proportionately, and that the courts enable them to do so. 30 28. In her submissions on behalf of the Respondents, Ms Lemos took us to extracts from the White Book on civil procedure, setting out guidance in relation to the Civil Procedure Rules (“CPR”) Part 17.3 (concerning amendments to statements of case) and CPR Part 24 (concerning the grounds for summary judgment). 29. Applying the principles set out in Quah to the two applications before us, we 35 consider the factors which we should take into account here are: a) Whether the proposed new ground has real prospects of success (and if it does not then that is determinative of the application); b) The reasons given as to why the application is made now and the explanation given for any delay in making the application; 40 c) The prejudice which might be caused to the other party if the application is permitted (recognising that there is a limited costs regime and so it would not ordinarily be possible for an award of costs to be made); and 9 d) The prejudice which might be caused to the applicant if the application is refused. 30. In weighing those four factors our principle objective is to deal with the case fairly and justly. 5 31. We do not ignore the comments in Quah that a heavy burden lies upon an applicant who comes very late in the day to seek permission to amend, and that any application which causes the substantive hearing date to be lost should be considered as being very late. Here the day which was to have been spent hearing the substantive appeals was spent hearing both parties applications to amend and upon case 10 management. Therefore both parties’ applications are brought very late and the loss of the substantive hearing date has inconvenienced the Tribunal and other Tribunal users. 32. However, as both parties wish to amend, we do not consider that either party has caused the other party injustice by the loss of the substantive hearing date; any 15 injustice which might have been done has been outweighed by the opportunity which the loss of the substantive hearing date creates for the other party to make its own application. The Respondents’ application to amend their Statement of Case 33. We look first at the Respondents’ application. The proposed amendments to the 20 Respondents’ Statements of Case set out Sections 29 and 34 TMA 1970 as they applied in 2009/10, and insert the following paragraph: HMRC will say that the requirements for issuing a discovery assessment under section 29 TMA 1970 were met in this case. An officer of HMRC formed the view that there was an insufficiency of tax in the Appellant’s 25 tax return for 2003/04. An officer of HMRC could only become aware that there was a probable insufficiency of tax assessed for that year following information received as a result of an enquiry into separate, unlinked Trust and Estate Tax Returns for 2003/04. 34. The Appellants object to the Respondents being granted permission to amend on 30 the basis that they would suffer prejudice if permission were granted. We consider prejudice below. Is there a real prospect of success? 35. We consider first the prospects of success. We note that the proposed amendment is to enable the Respondents to make a positive case concerning the 35 validity of the assessments. That positive case concerned whether there was an insufficiency in the Appellants’ self-assessments, whether the officer of the board could have been expected to be aware of the insufficiency before the time he ceased to be able to enquire into the Appellants’ returns, and (implicitly, given the inclusion of Section 34 and reference to the requirements being met) whether the discovery 40 assessments were raised within the time allowed under Section 34 TMA 1970. The 10