M3: Categorisation and listing

Test for complex categorisation 

 

“(4) The Tribunal may allocate a case as a Complex case under paragraph (1) or (3) only if the Tribunal considers that the case--
(a) will require lengthy or complex evidence or a lengthy hearing;
(b) involves a complex or important principle or issue; or
(c) involves a large financial sum.” (FTT Rules, r.23(4)).
 

Tribunal practice statement

 

“Rule 23 provides that the Tribunal may allocate a case as a Complex case only if the Tribunal considers that the case-
(a)  will require lengthy or complex evidence or a lengthy hearing;
(b)  involves a complex or important principle or issue; or
(c)  involves a large financial sum.
The Tribunal will assess whether, having regard to the nature of a particular case, any one or more of these criteria are satisfied.  In making this assessment the Tribunal will take into account all the circumstances, including the implications of the costs-shifting regime (subject to the right of the taxpayer to opt out) and the fact that cases allocated to the Complex category are eligible, subject to various consents, to be transferred to the Upper Tribunal.
If on such an assessment the Tribunal considers that a case meets the stated criteria, it will, in the absence of special factors, allocate the case to the Complex category.” (Practice Statement on Categorisation of Tax Cases in the Tax Chamber of the First-tier Tribunal, 29 April 2013).

 

Consider from the perspective of the tax tribunal but do not subdivide further

 

“It might, for instance, be said that what is a lengthy hearing for a VAT case is not to be seen as a lengthy hearing in a transfer pricing case; and it might be said that what can be seen as a large financial sum in a personal income tax case might nonetheless properly be regarded as small in the context of dispute concerning petroleum revenue tax. We do not consider that it is appropriate to adopt this refinement. It will lead to complexity and opaqueness in the allocation of cases resulting in an inappropriate use of the resources of the Tribunal (both judicial and financial) with a risk of unnecessary and disproportionate satellite litigation.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §16).

 

Gateway conditions are a matter of judgment for Tribunal

 

“In any case, it is clear beyond argument, we think, that the assessment of what is “complex” evidence or a “complex” issue within rules 23(4)(a) and (b) is a matter of judgment. The task of making that judgment is assigned to the Tribunal whose decision, if made applying the correct principles, can be overturned on an appeal to the Upper Tribunal only if it can be said that no reasonable tribunal could have reached that decision.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §25).

 

Tribunal generally accepts parties agreed allocation

 

“In most cases the question poses no difficulty, either because the parties agree on the allocation (and the tribunal, as a general rule, respects such an agreement) or because the appeal obviously is, or is obviously not, suitable for such allocation.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §7).

 

Case need not be exceptional by the standards of the tax tribunal

 

“If by use of the word “exceptional” the Judge meant no more than that the features of the case must take it out of the ordinary – ordinary in the sense of being appropriate for allocation as Standard – he cannot be criticised. However, if he meant that the case has to be exceptional by the standards of the work of the Tax Chamber as a whole, we think that that would be wrong. It is perfectly possible for a significant number of cases in the Tax Tribunal to be allocated as Complex cases; the number may be such that it would not be right to describe each and every one of them as exceptional.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §36).

 

(a) Lengthy or complex evidence

 

Consider from the perspective of the tax Tribunal

 

“Again, what may be complex (in the sense of difficult) for expert tax judges sitting in the Tax Chamber – for instance to understand some aspect of building construction in the context of capital allowances – may be entirely simple for an expert judge in the Technology and Construction Court.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §13).

 

Limits of Tribunal discretion

 

“It would be perverse to say that a hearing of ½ day could ever be lengthy or that a 3 month case was not lengthy.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §24).

 

Examples: hearing length

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“Even if a case is capable of being capable of allocation as Complex by virtue only of involving a “lengthy hearing”, we see a four day hearing as being very much on the borderline and note that a large number of cases that could not possibly be described as complex in accordance with the ordinary meaning of that word (such as “mark-up” appeals) last more than that. In any event, we are not satisfied that a four day estimate is accurate and think, on what we know at present, that it ought to be capable of disposal within 3 days.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §57).

 

“A hearing of six days is longer than the vast majority of hearings in the tribunal but, in my view, not so lengthy or unusual (especially not for a case concerning whether or not supplies in respect of which input tax has been claimed were actually made) as to justify re-allocating the appeal as a Complex case when considered on its own.” (JSM Construction Ltd v. HMRC [2015] UKFTT 474 (TC), §21).

 

“I do not regard a hearing of 7½ days in the context of a case where allegations of dishonesty are being made and issues of law arise as at all out of the ordinary. In my view it cannot be said that this appeal involves a lengthy hearing for the purposes of Rule 23(4)(a).” (Elder v. HMRC [2014] UKFTT 728 (TC), §26).

 

“It is in my view clear that a hearing lasting three days, whether one measures that length against some objective standard or against what might be usual for a case of this kind, cannot be described as “lengthy”, in the sense intended by the rule, nor that the calling of several witnesses, even including an expert, is out of the ordinary.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §24).

 

Examples: complexity of evidence

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“I do not regard five witness statements, none of which seemed to be particularly long, and four or five lever arch files of documents as at all out of the ordinary in the context of a case concerning entitlement to deduct input tax or in the context of cases in this tribunal generally.  The volume of documents is determined by the number of invoices that are subject to challenge and the amount of correspondence between the parties.  That volume does not indicate complexity as may, for example, be found in cases that involve evidence of complicated transaction chains and circular payments such as MTIC fraud cases.  In my view it cannot be said that this appeal involves lengthy or complex evidence for the purposes of rule 23(4)(a).” (JSM Construction Ltd v. HMRC [2015] UKFTT 474 (TC), §21).

 

(b) Complex or important principle or issue

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Complex contractual and trust relationships

 

“One of the issues before the Tribunal can therefore be described in this way. It is whether the Appellant as owner/trustee has been chartering out the helicopter in the course of a business or as an economic activity. This has to be determined following a full analysis of the fiduciary and contractual relationships embodied in the documents that were created for the purposes of the arrangements. Those documents, as briefly summarised above, produce a “complex” whole (in the second sense mentioned in paragraph 8 above)… In this connection we mention that we know of no previous VAT decisions which provide any real guidance.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §§53…54 – case categorised as complex).

 

Interest to others does not make it an important issue

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“I  can accept that the outcome of the appeal may be of great importance to Dreams, and indeed to its competitors, but I do not see how the determination of the correct VAT treatment of adjustable beds amounts to “a complex or important principle or issue”. On the contrary, it is the type of issue which the Chamber resolves routinely, in appeals which have been allocated to the Standard category. If I am right in my view that something out of the ordinary must be shown I have no doubt that this appeal does not come close to passing through this gateway.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §7).

 

Governed by existing higher authority

 

“While I accept that the jurisdiction of the tribunal and the status of credit notes are important issues in the general scheme of VAT, the points that arise in this case are neither new nor, in my view, particularly complex (in the sense of complicated).  As submitted by Mr Fitzpatrick, issue of the status of a credit note has already been considered by the Court of Appeal in Brunel which, unless it can be distinguished, would seem to provide powerful support for JSM’s position.  There are many authorities on the right to deduct under EU law and the tribunal is familiar and well able to deal with them." (JSM Construction Ltd v. HMRC [2015] UKFTT 474 (TC), §25).

 

Important but not complex satisfies gateway

 

“In the context of tax appeals relating to partnership taxation I am not persuaded that the issues in Mr Badzyan’s appeal are unusually complex. I am, however, of the view that they are “important”, in part because they would be likely to be determinative of (or materially relevant to) certain issues in relation to the Partnership assessment, and also because of the precedential weight of those issues beyond Mr Badzyan’s appeal. HMRC stated during the proceedings that the total tax at stake in relation to the Partnership was approximately £30 million and in relation to variations of the arrangements was several hundreds of millions of pounds. While Mr Gotch submits that this unfairly conflates Mr Badzyan’s appeal with other assessments, in my judgment the overlap between the principles or issues in Mr Badzyan’s appeal and those other situations does render the points at issue in his appeal important.” (Badzyan v. HMRC [2017] UKFTT 439 (TC), §43, Judge Thomas Scott).

 

(c) Large financial sum

 

Consider from the perspective of tax cases generally

 

“…what is, or is not, a large financial sum must be assessed by reference to the sort of cases undertaken in the Tax Chamber. What may be large in the context of a social security claim may be small in the context of tax disputes generally.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §15).

 

Circumstances of party generally not relevant

 

“…a given amount of VAT may be very large indeed when viewed through the eyes of a small trader with a turnover of a few hundred thousand pounds, but may be seen as almost trivial when viewed through the eyes of an international corporation with a turnover of hundreds of millions of pounds. We do not consider that, as a general rule, the circumstances of the parties should be taken into account in this way. We say that this should be the general rule because there may be special factors which take a particular case out of the ambit of this general rule. We do not consider it helpful in this decision to attempt to give examples of what might be sufficient to amount to an exception.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §17).

 

“…I also take the view that examination of a taxpayer’s accounts to see whether the sum in issue is large, by reference to its turnover, profit, net assets or some other yardstick, is neither desirable nor practical…The Upper Tribunal [in Capital Air Services] did make it clear that it is necessary to leave out of account the fact that (to use its own examples) a large amount in the context of income tax may be modest in the context of petroleum revenue tax. It follows from what I derive from its decision that an absolute standard, that is to say one which does not vary depending on the taxpayer or the tax, is to be adopted.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §29…30).

 

Large compared to median value of tax cases

 

“The conclusion to which I have come is that the sum should be large by comparison with the median value of the cases which come before the Chamber and are allocated to the Standard and Complex categories. The adoption of that approach, it seems to me, represents a simple and straightforward means of applying the condition. In my judgment £5 million does meet that test, and in consequence rule 23(4)(c) is satisfied.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §30).

 

Limits of Tribunal discretion

 

“It would be perverse to say a case involving tax of £1,000 involved a large financial sum or that a case involving tax of £100 million did not do so.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §13).

 

Potential consequent liabilities not taken into account

 

“I do not accept Mr Fitzpatrick’s submission that I should take account of the fact that JSM would potentially be liable to corporation tax of £601,971 if its appeal is unsuccessful.  The assessment to corporation tax is not the subject of this appeal (nor of any appeal to the FTT) and I do not consider that it would be proper to take it into account for the purpose of deciding whether or not to categorise this appeal as a Complex case.” (JSM Construction Ltd v. HMRC [2015] UKFTT 474 (TC), §29).

 

Value of related appeals taken into account 

 

“On the basis of the parties’ submissions, I am satisfied that the case satisfies the condition in Rule 23(4)(b), and that having regard to the accepted similarity of a large series of other appeals regarded as depending on the outcome of the Council’s appeal, the case indirectly satisfies the condition in Rule 23(4)(c). I therefore direct that the case be allocated to the Complex category.” (Babergh DC v. HMRC [2011] UKFTT 341 (TC), §41).

 

Not a proposition of general application

 

“Even without taking account of the “indirect” arguments discussed in Babergh District Council v HMRC [2011] UKFTT 341 (TC) in relation to “the taxpaying community as a whole”, which I would not regard as a proposition of general application in relation to Rule 24(4)(c), I regard £800,000 as a relatively large sum in context.” (Badzyan v. HMRC [2017] UKFTT 439 (TC), §45, Judge Thomas Scott).

 

Examples of large sums

 

“…I regard £800,000 as a relatively large sum in context.” (Badzyan v. HMRC [2017] UKFTT 439 (TC), §45, Judge Thomas Scott – already decided to categorise as complex on the basis of important issue).

 

“In my judgment £5 million does meet that test [median value of tax cases], and in consequence rule 23(4)(c) is satisfied.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §30).

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Examples of not large sums

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“The amount at issue in this appeal is £226,845.  There are no published statistics that give the median value of appeals before the tribunal and so any judgment as to whether a particular amount is more or less than the median is necessarily one of experience and impression.  In my experience and impression of the value of appeals to the FTT generally, I do not consider that this appeal involves a large financial sum.” (JSM Construction Ltd v. HMRC [2015] UKFTT 474 (TC), §28)

 

“The total sum in issue is approximately £232,000 including interest. I cannot take into account the possibility of a penalty assessment which has not yet been made. In the context of appeals to this tribunal generally, I cannot say that this appeal involves a large financial sum.” (Elder v. HMRC [2014] UKFTT 728 (TC), §31).

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(d) Discretion

 

Discretion arises if gateway condition is satisfied

 

“The discretion whether to allocate an appeal to the Complex category arises, as the rule makes clear, only when one or more of the conditions specified by sub-rule (4) is satisfied; but it is apparent from the manner in which the rule is drafted that, even if that hurdle is overcome, the tribunal is still required to exercise a discretion.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §6).

 

General rule: cases satisfying a gateway condition should be classified as complex

 

“The general rule should, we consider, be that a case capable of being allocated as Complex ought to be so allocated. Any discretion to allocate other than in accordance with that general rule should be exercisable only in the light of special factors.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §30).

 

But the FTT has taken a different view

 

“I mentioned, at para 12 above, the apparent indication by the Upper Tribunal that, absent “special factors”, an appeal which passed through a gateway should be so allocated. I do not, however, think that is what the Upper Tribunal intended, at least if “special factors” is taken to imply some exceptional circumstance. It is not consistent with the manner in which rule 23(4) is drafted, as I explained it at para 6 above, and it is inconsistent with what the Upper Tribunal said in Capital Air Services, at [10].” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §31).

 

Not to be based simply on FTT’s subjective view of whether costs regime would be appropriate

 

“It would be wrong, however, for a judge of the Tax Chamber to assess whether a case should be allocated as Complex by reference to his or her own subjective view about whether the case is one where there should be power to award costs. That would be to put the cart before the horse…The costs regime which applies to Complex cases applies because the case is Complex; the decision to categorise a case as Complex is not to be made simply because a judge thinks that a cost-shifting regime should be available.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §20).

 

But consequences of categorisation are relevant factors

 

“The FTT in this case did not adopt as its reference point the subjective question whether it considered the case as one in which costs-shifting was appropriate. It was first satisfied that the case fell within the relevant criteria. It then proceeded to exercise its discretion, for which it would have been required to have regard to the overriding objective of dealing with cases fairly and justly, having regard to all the circumstances. It cannot be said that the statement of intent put forward by Mr and Mrs Hills [that they would not opt out of the costs regime] was irrelevant to that consideration. It clearly was relevant, and it is indeed difficult to envisage the FTT making the direction that it did if such a statement had not been made. To do so would have been to give rise to the very situation of oneway costs shifting that Warren J described in Atlantic Electronics, at [7], as outside the policy of the FTT Rules.” (Hills v. HMRC [2016] UKUT 266 (TCC), §43, Judge Berner).

 

“Notwithstanding the observations in the preceding two paragraphs in relation to costs and transfer, it would not be right to dismiss altogether the consequences of allocation as irrelevant to the meaning of rule 23. The availability of a costs-shifting regime in all cases allocated as Complex and the availability of a transfer to the Upper Tribunal in some cases allocated as Complex (and only in cases so allocated) each inform the interpretation of what is to be seen as appropriate for allocation as Complex…In deciding whether or not to allocate the case as Complex, we consider that the judge would be entitled to take account of the costs implications of allocating as Complex and to ask himself whether it is really the sort of case where a costs-shifting regime should be available.” (Capital Air Services Ltd v. HMRC [2010] UKUT 373, §22).

 

“…it is likely to be an appellant who seeks allocation to the Complex category, and he may (indeed probably will) be motivated, at least in part, by the availability of a cost-shifting régime. I do not say that by way of criticism since I see nothing inherently wrong in an appellant’s seeking to bring himself within such a régime (there was, and still is, intense debate about whether a cost-shifting régime should be more widely available in appeals before the Tax Chamber) but to record my view that HMRC’s resistance to such allocation, on the grounds that it exposes them to a costs risk, must also be given due weight.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §16).

 

Large sum does not trump failure to pass through other gateways

 

“In essence, this appeal raises questions which are, in my judgment, fairly routine for this Chamber. Its only distinguishing feature is that there is a sufficiently large sum in issue for it to pass through the rule 23(4)(c) gateway. Mindful though I am that the Upper Tribunal in Capital Air Services did not equate “complex” with “Complex”, I have come to the conclusion that the amount of tax in issue does not “trump” the fact that, by reason of its failure to pass through the other gateways, the appeal is more suitable for allocation to the Standard category. In my judgment that is the category to which it should be allocated, and I so direct.” (Dreams plc v. HMRC [2012] UKFTT 614 (TC), §34).
 

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