Upper Tribunal guidance on witness evidence in missing trader VAT fraud cases

Out-Law Legal Update | 30 Jul 2019 | 2:23 pm | 7 min. read

The Upper Tribunal has given guidance on witness evidence in MTIC VAT fraud cases, confirming that inadmissible opinion evidence need not be struck out or redacted from witness statements in tax tribunals as the tribunals can admit evidence which would not be admissible in a court and can give it the weight they consider it is worth.
  • Inadmissible opinion evidence need not be struck out or redacted from witness statements in tax tribunals
  • Taxpayer wanting to cross examine witnesses must identify parts of statements it does not accept
  • Elbrook Cash and Carry Limited v HMRC [2019] UKUT 0201 (TCC)

Where a taxpayer advances no positive case on tax loss issues and simply puts HMRC to proof, it can only require HMRC witnesses to attend the hearing for cross examination if it has identified passages in witness statements it does not accept. The taxpayer does not need to say why.

The Upper Tribunal (UT) has given guidance in relation to witness evidence in missing-trader intra-community (MTIC) VAT fraud cases in a recent case management decision concerning Elbrook Cash and Carry Limited (Elbrook). The decision considers:

  • the extent to which inadmissible evidence in witness statements should be struck out or redacted; and
  • in what circumstances HM Revenue & Customs' (HMRC's) witnesses should be required to attend the substantive hearing, where a taxpayer has not advanced a positive case that disputes the facts set out in those statements.

Elbrook appealed against HMRC's decisions to revoke its registration as an owner of duty registered goods and deny its claim for input tax credits for VAT on the basis that transactions that it entered into were connected to the fraudulent evasion of VAT, and it knew or should have known of this.

Where HMRC denies input tax credits on this basis, the burden is on HMRC to prove on the balance of probabilities that:

  • there was a tax loss;
  • that tax loss resulted from fraudulent evasion;
  • the transactions by the taxpayer were connected to that evasion; and
  • the taxpayer knew or should have known this.

HMRC must provide evidence to satisfy each of the four limbs. It does this by providing witness statements from officers of HMRC who have investigated the taxpayer's supply chains and the alleged fraud.

The taxpayer then has the right to file its own witness statements. It is fairly common, however, for taxpayers (such as Elbrook) to advance no positive case on the first three issues (the VAT loss issues), instead putting HMRC to proof on them. Only the fourth limb of the test – knowledge or constructive knowledge – is therefore typically addressed in response evidence.

Generally, after the exchange of witness statements, a taxpayer must then comply with the 'Fairford directions'. These are case management directions formulated by the UT in the 2014 case of HMRC v Fairford Group plc.

The Fairford directions require the taxpayer to notify HMRC before the final hearing, as to whether it disputes HMRC's case on the VAT loss issues. If a taxpayer raises no positive case, serves no evidence challenging HMRC's witness statements; or does not identify the respects in which HMRC's witness statements are disputed, the First-tier Tribunal (FTT) can refuse to permit a taxpayer the right to cross-examine those witnesses.

The reason for this is that the principal objective of the Fairford directions is to enable the final hearing to be listed for an appropriate length of time taking into account the number and identity of witnesses that need to be called to give evidence.

Here, Elbrook purported to comply with the Fairford directions by stating that, in effect, it did not accept any of the underlying matters of fact in HMRC's witness statements, which would mean that all the HMRC witnesses would need to attend the hearing. HMRC took the view that this did not constitute proper compliance and filed an application for Elbrook's appeal to be struck out.

Elbrook objected to the strike-out application and filed an application for sections of HMRC's witness statements be struck out or redacted as they contained inadmissible opinion evidence; expert opinion without permission first having being sought from the FTT for its admission; comments on the credibility of witnesses and hearsay evidence.

The applications were heard together at a case management hearing before the FTT in 2018. It found that:

  • while it was "disappointed" to find that HMRC's witness statements contained opinions and conclusions drawn from the facts, it was not necessary to direct that the offending parts of the statements be redacted or struck out as the FTT is "quite capable of distinguishing between the evidence on which a conclusion falls to be drawn by the tribunal and an attempt by a witness to draw that conclusion themselves"; and
  • whilst Elbrook's appeal was not struck out, it was precluded from cross-examining HMRC's witnesses whose evidence solely concerned the VAT loss issues due to the absence of detail given by Elbrook regarding which factual elements of the statements were disputed.

Elbrook appealed both findings to the UT.

Witness statements

Elbrook submitted that the various sections of HMRC's statements should be struck out or redacted because, amongst other things:

  • The FTT had failed to address or make findings on the fact that HMRC had "deliberately and cynically flouted and abused the recognised rules" on a wide scale for preparing witness statements. This was a clear attempt by HMRC to gain improper advantage in the litigation, Elbrook argued;
  • While the FTT Rules are more informal than those in a court, evidence is not admissible in any forum unless it is relevant; and
  • The solicitors who assisted with the preparation of HMRC's statements breached their duty to ensure that the proper standards for the preparation of witness statements were observed and therefore the application should have been granted.

The UT recognised that the appropriate starting point for the FTT was Rule 15 of the tribunal rules, which sets out the wide ambit of the FTT's powers in relation to admitting evidence. It upheld the finding of the FTT, citing the UT case of Megantic Services Ltd v HMRC where it was stated that:

"… Rule 15(2)(a) of the Tribunal Rules allows the Tribunal to admit evidence whether or not the evidence would be admissible in a civil trial. It follows that the Tribunal is entitled to admit evidence which would not be admissible in a court and give it such weight, if any, as the Tribunal considers that it is worth. What weight should be given to the evidence is a matter for the Tribunal to decide in light of all the evidence at the hearing."

The Fairford directions

In relation to the FTT's finding that it should be precluded from cross-examining HMRC's witnesses on the VAT loss issues, Elbrook submitted that the FTT's decision was fundamentally flawed. It pointed out that cross-examination may be divided into two broad categories. The first category is where a taxpayer positively disputes the evidence of a witness and is entitled to put a positive case to the witness. The second category is where a taxpayer has no positive case but wishes to test the evidence, for example by pointing out internal inconsistencies or inconsistencies between the evidence of that witness and other evidence. While Elbrook could not cross-examine on the first basis, it argued that it should nevertheless be able to on the second basis. Elbrook said the FTT's decision was contrary to the basic obligation, reflected in the overriding objective in the tribunal rules, to provide a taxpayer with a fair trial.

The UT concluded that the FTT did err in law, but not for these reasons. It found that by saying in its response to the Fairford directions that it did not accept any of the underlying matters of fact, Elbrook had identified the respects in which HMRC's witness statements had been disputed; namely, in all respects.

It found that this was sufficient as while the Fairford directions require a taxpayer to "identify the respects in which the relevant statements are disputed", the word 'disputed' in this context, means 'not accepted'.

It therefore issued further guidance to the FTT on the Fairford directions, stating in particular that "in relation to HMRC witnesses dealing only with VAT Loss Issues, where the appellant does not advance a positive case and does not serve evidence challenging the evidence of the relevant witnesses, the form of direction that may be given in appropriate cases is one requiring the appellant to identify the passages in the relevant witness statements which it does not accept."

The UT said this revised formulation of the directions balances the need to protect a taxpayer from not having to reveal its cross-examination strategy before the final hearing, with the need to avoid a taxpayer (as in this case) purporting to comply fully with the direction merely by identifying thematic reasons for not accepting the evidence. If a taxpayer complied with the direction by identifying large parts of the statements, or all the statements as not accepted, and then proceeded not to cross-examine on them at the final hearing, the UT said the relevant remedy may be to impose costs sanctions.


The guidance from the UT on the practical application of the Fairford directions provides some clarification for taxpayers as to what is expected – in particular, that it is not necessary for a taxpayer to indicate on what basis it does not accept HMRC's evidence, but rather that it needs to indicate the disputed passages in the witness statements. It will be interesting to see whether, in practice, taxpayers indicate that they do not accept large parts of HMRC's witness evidence and where the Tribunal draws the line in terms of imposing costs sanctions.

The UT decision emphasises the importance of ensuring that witness statements contain only matters that are strictly relevant. Time will tell as to whether HMRC Solicitor's Office takes a more rigorous line in the drafting of witness statements and cuts down on the inclusion of statements of opinion, comments and submissions. As the UT judges point out, it is most likely to be this type of passage that the taxpayer does not accept and wants to challenge by cross examining the witness. It is therefore, to some extent, within the control of Solicitor's Office to cut down on the need to call HMRC witnesses and/or the time it would take to cross examine them by taking a stricter line when drafting the witness statements.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.