Excise duty: disclosure to be given by HMRC in alcohol supplier approval cases

• Usual tax tribunal disclosure by HMRC not sufficient in alcohol supplier approval cases
• Standard CPR disclosure excluding documents not relied upon by HMRC that are adverse to the taxpayer's case
• Court of Appeal decision in HMRC v Smart Price Midlands Ltd [2019] EWCA Civ 841

Tax tribunal disclosure only requires disclosure of the documents the party intends to rely on. In AWRS cases the tribunal needs to consider the reasonableness of an HMRC decision and whether it gave proper consideration and weight to the information it relied upon when it made the decision.

The court said in AWRS cases disclosure should be standard Civil Procedure Rules disclosure excluding documents not relied upon by HMRC that are adverse to the taxpayer's case.The Court of Appeal has recently considered the extent of disclosure that the UK's HM Revenue & Customs (HMRC) should give in appeals over decisions to deny approval under the Alcohol Supplier Registration Scheme (AWRS). It ruled that HMRC should give more extensive disclosure than that currently required by the tax tribunal rules.

The purpose of the AWRS Scheme is to control the wholesale of alcohol (on which duty is payable) in the UK and therefore reduce alcohol tax fraud. Fraud occurs when the duty is evaded once it becomes due to HMRC; often as the goods pass through the hands of wholesalers before reaching consumers.

In order to combat this risk, HMRC administers the AWRS Scheme, which requires wholesalers to be approved in order to be able to trade. Approval will only be granted if HMRC are satisfied that the wholesaler is 'fit and proper.' The register is publically available and not only is it a criminal offence to trade without an approval, anyone who purchases from a wholesaler who is not registered also commits a criminal offence if they know, or ought to have known, of the absence of an approval.

A wholesaler may appeal a refusal of registration by HMRC to the First-tier Tax Tribunal (FTT). This has given rise to numerous appeals in the tribunal system.

Under the tribunal rules, a party is required to disclose only the documents upon which they rely in proceedings (Rule 27(2)). This generally means that HMRC is not required to disclose all of the documents that it may have considered in reaching the decision under appeal. The rule is consistent with the fact that, generally, the FTT is considering whether HMRC have correctly calculated the tax due by reference to documents provided by a taxpayer. If the tribunal disagrees with the tax calculation, it can remake the decision.

However, in some instances, such as in AWRS cases, the FTT is required to consider the reasonableness of an HMRC decision and whether it gave proper consideration and weight to the information that it had when it made the decision.

In such cases, the parties and the FTT are more likely to want to know what information HMRC had before it when it made the decision, even if that information is not expressly relied upon by HMRC. Although the FTT Rules do not provide for those documents to be disclosed, the FTT may direct that they be.

This was the background to the Court of Appeal decision in HMRC v Smart Price Midlands Ltd & Anor.  Here the court was required to consider whether a specific case management direction given by the FTT in two AWRS appeals was appropriate. The direction required HMRC to supply "a list of all documents which were considered by HMRC's officer when reaching the decision at issue in this appeal and indicating which, if any, of those documents HMRC do not rely on in this appeal, together with any other documents which HMRC intend to rely on in this appeal."

HMRC argued that this was too wide and imposed an onerous burden on it to supply documents, many of which would be irrelevant to the issues in the appeals.

In its decision, the Court of Appeal looked at the nature of the FTT's supervisory jurisdiction in various types of indirect tax cases, before focussing on AWRS appeals and the various disclosure regimes that could be applicable. These were: tax tribunal Rule 27(2) disclosure; standard disclosure under the Civil Procedure Rules (CPR); the duty of candour (applicable in judicial review proceedings) and the disclosure regime application in Upper Tribunal financial services cases.

Standard disclosure under CPR requires disclosure of the documents on which the party relies, documents that adversely affect its own case, documents that adversely affect another party's case and documents which support another party's case.

The Court of Appeal concluded that Rule 27(2) disclosure from HMRC is not sufficient in AWRS appeals. However neither were any of the other models appropriate. Rather, a direction had to be formulated taking into account:

• the conduct relied upon by HMRC in the decision and the statement of case;
• any exonerating conduct relied on by the wholesaler;
• whether there was a dispute over the facts; and
• whether there were conditions or restrictions that could be placed on an approval to protect HMRC from any risks.

Accordingly, the Court of Appeal found that in AWRS appeals HMRC should give standard CPR disclosure excluding documents not relied upon by HMRC that are adverse to the taxpayer's case.

The point at which this should be given remains as envisaged by Rule 27(2) – after the notice of appeal and statement of case have been filed. This is because while the tribunal may technically be reviewing HMRC's decision, in practice it is reviewing the robustness of the arguments as advanced by HMRC in the tribunal. That is, the arguments as defined by the refusal decision, the grounds of appeal and the statement of case.

The court recognised that this approach would avoid the need for taxpayers to incur time and cost reviewing documents that may have no bearing on the case actually advanced by HMRC in the FTT.

Accordingly, the decision upheld the taxpayers' argument that wider disclosure than that provided by the FTT Rules is required in AWRS appeals, because the FTT is exercising a supervisory jurisdiction. However, the court did not go as far as the taxpayers wanted as it did not order disclosure of everything HMRC had before it at the time of the decision. Instead the extent of disclosure will be determined by reference to the actual issues between the parties and will not cover things which HMRC chose not to rely upon in the decision letter or statement of case unless they support the taxpayer's case.

When and how the FTT exercises a supervisory jurisdiction and the associated questions it raises about disclosure – including its breadth and timing – are emerging as key issues in indirect tax appeals.

What will be interesting is to see whether a similar approach to disclosure is adopted by HMRC, or directed by the FTT, in other types of indirect tax cases where the tribunal is also exercising a supervisory jurisdiction.

There are also other instances where taxpayers may want to consider whether CPR-like disclosure is requested. For instance, where the taxpayer is challenging whether an assessment has been made within the statutory timeframe or whether it has been made to HMRC's best judgment. It is important to keep in mind, however, that there is unlikely to ever be a one size fits all approach to disclosure across indirect tax appeals and practitioners on both sides of the fence will always have to be mindful of the actual issues in dispute when considering disclosure.

Steph Bashford is a tax disputes expert at Pinsent Masons.