[2010] UKFTT 222 (TC)

TC00523

Appeal number: LON/2004/0130

PROCEDURE – whether to allow amendment of statement of case – yes

FIRST-TIER TRIBUNAL

TAX 

	REED EMPLOYMENT PLC	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JOHN F AVERY JONES CBE (TRIBUNAL JUDGE)
JOANNA M  NEILL ACA

Sitting in public at 45 Bedford Square, London WC1 on 29 April 2010

Jonathan Peacock QC and Andrew Hitchmough, counsel, instructed by Slaughter and May, for the Appellant

Philippa Whipple QC and Richard Smith, counsel, instructed by the General Counsel and Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION ON APPLICATION

1.	This is a decision on an application by the Appellant that the appeal be allowed on the basis that the Respondents (“HMRC” which expression should be taken to include its predecessor HM Customs and Excise Commissioners) be refused permission to amend their statement of case.  The Appellant was represented by Mr Jonathan Peacock QC and Mr Andrew Hitchmough, and HMRC was represented by Miss Philippa Whipple QC and Mr Richard Smith.
2.	The background to this application, which is my understanding of the facts that have of course not yet been established, is as follows: 
(1)	The Appellant is a well-known employment agency.  
(2)	In an earlier appeal regarding the supply of nurses, which the Appellant treated as supplied as an agent, HMRC contended that they made the supplies as principal.  Both this Tribunal (or rather its predecessor) and Laws J in the High Court (see [1995] STC 588) decided that they acted as agents.  
(3)	The Appellant then claimed on 20 July 1994 that it acted as agent in respect of its businesses other than the supply of nurses in relation to which it had accounted for VAT on the basis that it acted as a principal, and claimed a repayment of VAT paid in error.  On 21 September 1994 the Appellant told HMRC that it was in process of introducing a change in invoicing to reflect agency status with the agreement of their customers.  On 7 April 1995 the Appellant wrote to HMRC saying that agency treatment (we believe meaning invoicing) has been introduced with the agreement of clients.  They consulted HMRC about retrospective agency treatment, which they said in that letter would be implemented where the contracts over the period of retrospection stipulate that an agency relationship exists, the client requests retrospective application, records are sufficient to support a claim to retrospection, the refund is repayable to the client in accordance with unjust enrichment, and adjustment would be made by the issue of credit notes.  HMRC replied on 28 May 1995 saying that “where you were acting as Agents and subject to the unjust enrichment provisions it will be acceptable to issue the appropriate credit notes.”  HMRC were invited to review the documentation and this was discussed at a meeting.  HMRC replied on 27 September 1996 agreeing the method and accounting, but raising the effect of the 3-year cap that had been introduced on 18 July 1996.  Credit notes were issued in respect of the period 1993 to 1996 that was unaffected by the 3-year cap.  No challenge was made by HMRC at the time or subsequently in respect of this period.  It will be seen that agency was raised in correspondence, particularly in the letter of 7 April 1995, but HMRC do not seem to have ever followed this up.
(4)	The Appellant made a repayment claim on 8 July 2002 in respect of the period 1991 to 1993 in the light of the Advocate General’s Opinion in Marks and Spencer (Case C-62/00).  This was accepted on 27 January 2003 subject to unjust enrichment.  An internal note by HMRC noted that they were not able to verify the figures as the Appellant had not retained their records for the period, which was then between 10 and 12 years earlier.  The claim was paid with interest.  No discussion of agency took place.
(5)	The repayment claim the subject of this appeal was made on 17 June 2003 in respect of the period 1973 to 1991.  It relates to supplies of employees other than nurses to the tax-exempt sector.  HMRC rejected this without any mention of agency treatment on the ground that the claim was based on estimates rather than actual transaction data or information.  This was confirmed after reconsideration on 16 January 2004, the additional ground of unjust enrichment also being raised.  The Appellant appealed on 11 February 2004.  HMRC’s original statement of case of 21 June 2004 argued on the basis of the 3-year cap and unjust enrichment.  No mention was made of agency.  The statement of case was amended on 29 November 2005 in relation to the 3-year cap and unjust enrichment.  Again, no mention was made of agency.
(6)	By letter of 21 May 2009 HMRC raised the agency issue, asking for all documentary evidence available relating to whether the Appellant was acting as agent or principal (including advertising, marketing and promotional material, contracts between workers and the Appellant and details of pay scales, contracts between the Appellant and its clients and details of the scale of charges, completed time sheets, pay slips and invoices as well as any other documents which evidence the relationship between the Appellant, its clients and the temporary workers).  Since the claim was for the period 1973 to 1991 HMRC cannot realistically have expected the Appellant to be able to supply this, and it is in contrast to its treatment of the period 1991 to 1993 (see paragraph 2(4) above).
(7)	At a directions hearing on 21 July 2009 Judge Walters QC directed the Respondents to make a decision by 31 August 2009 whether to accept the Appellants’ amended claims made on 10 March 2009 (which relates to the correction of a calculation error), 27 March 2009 [this now relates to a separate appeal (TC/2009/15468) made on 29 September 2009 for the repayment of some £63m in relation to supplies to the VAT-recoverable sector in the period 1973 to 1990 against the letter of 27 August 2009, see below], and 15 May 2009 (this was a further amendment of the figures); that the Appellant amend its notice of appeal by 30 September 2009 in the light of all relevant developments including HMRC’s decision in relation to the claims; and that by 31 October 2009 HMRC issue an amended statement of case taking account of the amended notice of appeal.  I do not know anything of the background to this hearing but it was certainly in the contemplation of the tribunal that if the claims were refused the Appellant could amend its grounds of appeal in the light of the refusal, and HMRC could amend its statement of case accordingly.
(8)	On 27 August 2009 HMRC rejected the claims in the absence of any evidence that output tax was overpaid for the period in question.  On 29 September 2009 the Appellant made an amended notice of appeal that relied on the agency argument.  
(9)	The Appellant then applied on 29 September 2009 for the appeal to be allowed on the basis that all the grounds in the statement of case for rejecting their claim had been resolved in their favour.  A further directions hearing took place on 1 December 2009 at which the time for HMRC to serve its amended statement of case was extended to 22 December 2009 and various directions were made for the hearing of the application.  This the hearing of that application  
(10)	On 22 December 2009 HMRC issued a re-amended statement of case deleting all the original contentions and raising the agency arguments, contending that the Appellant must demonstrate by evidence that the decision in the nurses appeal applied to non-nursing staff in the period in question.
(11)	I was told that many documents were destroyed in 2001 when the Appellant moved its head office from Tolworth Tower (into which the split head offices had been consolidated in 1998) to Raynes Park.  At the time of the move all documentary records at Tolworth Tower were reviewed and either destroyed or archived.  It was unlikely that pre-1991 material was then considered worth retaining.  I was also told that two contracts relating to temps other than nurses were before the Tribunal in the nurses appeal and the Appellant still has the papers in that appeal.
3.	Standing back from this recital of our understanding of the background to this application, it is clear that from 1996 to May 2009 both parties lost sight of the agency argument and concentrated entirely on the 3-year cap and unjust enrichment.  This is perfectly understandable because those were preliminary issues that HMRC then considered would defeat the claim entirely.  It is, however, strange that they did not plead the wider case in the original statement of case.  If this appeal had been the one that decided that the 3-year cap did not apply in the circumstances it is clear that HMRC would have lost the case and it would have been too late to raise the agency argument.  It is also the case that having, surprisingly in my view, allowed the credit notes for the period 1993 to 1996 and made a repayment for the period 1991 to 1993 without mention of the agency issue, HMRC may well have led the Appellant to believe that agency was not in dispute (at least for that period).  On the other hand, the Appellant was aware from the start that agency was the issue; the 3-year cap came in later.  In the letter of 7 April 1995 the Appellant stated that its claim would be limited to cases where the contracts made it clear that they were agents and records were sufficient to support a claim to retrospection.  We are now 15 years later and documents that were available in 1995 are very likely not to be available now and evidence from employees will be that much harder to obtain if this appeal proceeds.  But the Appellant was aware in 1995 that it needed to provide such evidence and the reason it may have destroyed documents was in the belief, to which HMRC contributed by not raising it on the earlier claims, that agency was not in dispute, although this was only in relation to periods from 1991 to 1996 and it would not have affected documents relevant to the quantification of the claim.  Against this, if HMRC had pleaded agency in the original statement of case of 21 June 2004 we do not consider that the Appellant would have made an application to strike it out. 
4.	Mr Jonathan Peacock QC and Mr Andrew Hitchmough contend:
(1)	The re-amended statement of case introduces entirely new arguments on agency not contemplated by the Tribunal’s direction.
(2)	The 2004 statement of case could have raised the agency argument and did not.
(3)	HMRC’s conduct in not raising the agency argument earlier gave an impression from 1995 that HMRC were not raising it and so there was no need to retain information that was available in 1995 but is no longer available.
5.	Miss Philippa Whipple QC and Mr Richard Smith contend:
(1)	Judge Walters QC gave HMRC permission to amend in the directions issued on 27 July 2009.  There was no restriction on the amendments other than that they took account of the amended notice of appeal.  The agency argument had been raised in correspondence in HMRC’s letters of 21 May 2009 and 23 June 2009 shortly before the directions.
(2)	If the amendment was not within those directions HMRC seeks to amend now.  In assessing the balance of prejudice the Appellant is prejudiced only between the original statement of case in 2004 and 2009.  HMRC and the body of taxpayers would suffer prejudice of the appeal were allowed without the Appellant demonstrating by evidence that it was entitled to the repayment.
(3)	While the Tribunal has jurisdiction to deal with abuse of process this should be exercised narrowly.  This is not a case where a matter could have been raised in earlier concluded proceedings because these proceedings are not concluded.
6.	The test to be applied for permission to amend pleadings is set out by Peter Gibson LJ in Cobbold v London Borough of Greenwich (unreported), cited in Sumitomo Corporation v Credit Lyonnais [2003] EWHC 833 (COMM) and by the Court of Appeal in Law Debenture Corporation (Channel Islands) Limited v Lexington Insurance Company [2001] EWCA Civ 1673, where the principle was stated to be not in dispute:
“The overriding objective is that the court should deal with cases justly, that includes, so far as practicable, ensuring that each case is dealt with not only expeditiously but also fairly.  Amendments, in general, ought to be allowed so that the real dispute between the parties can be adjudicated upon, provided that any prejudice to the other party or parties caused by the amendment can be compensated for in costs and the public interest in the efficient administration of justice is not significantly harmed.”
7.	The Tribunal Rules also require us to consider the overriding objective of dealing with cases fairly and justly:
“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 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 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. 
(3) The Tribunal must seek to give effect to the overriding objective when it—
(a) exercises any power under these Rules; or 
(b) interprets any rule or practice direction. 
(4) Parties must—
(a) help the Tribunal to further the overriding objective; and 
(b) co-operate with the Tribunal generally.” 
8.	We must treat the parties fairly and justly.  We do not consider that HMRC need any further permission to amend their statement of case.  The directions of Judge Walters QC seem to us to have envisaged exactly what happened and were made after the Appellant had also introduced a further significant claim of some £63m in the letter of 27 March 2009, and HMRC had raised agency in correspondence.  It was not then known whether the amended claims would be refused or, if they were, on what basis.  The Tribunal envisaged the possibility of new grounds for refusal by allowing the Appellant to amend its notice of appeal and allowing HMRC to amend its statement of case accordingly.  
9.	Even if this is wrong and we must weigh the prejudice suffered by each party, one or other party will be prejudiced whatever we decide.  If the appeal proceeds the Appellant will suffer from the considerable difficulty of providing evidence that might have been available 15 years ago.   If it does not proceed the Appellant will win and HMRC will have to make a repayment of some £4m without the Appellant ever having proved its case on the merits, but on the other hand HMRC failed to plead agency in the original statement of case of 21 June 2004 and the case might have been decided on that basis.  If it is necessary to do so we consider that the right balance would be achieved by allowing the appeal to proceed, so as not to allow the Appellant to win without ever proving its case, but taking into account the additional difficulty now facing the Appellant in providing evidence.  We cannot tie the hands of the tribunal that hears the case but we express the hope that they will be ready to accept that the position relating to later years for which there is evidence will be applied to earlier years for which there is no evidence.  Indeed this is exactly what HMRC did in relation to the 1991 to 1993 claim (see paragraph 2(4) above).  
10.	Accordingly we dismiss the Appellant’s application.
11.	Any application for costs of the application should be made in principle (without a schedule of costs) within 30 days of the date of release of this decision.
12.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN F AVERY JONES

TRIBUNAL JUDGE
RELEASE DATE: 18 May 2010