Tribunal's decision to debar HMRC from further action in VAT case upheld by Supreme Court

Not every judge would have come to the same conclusions as Judge Mosedale after her "full and carefully considered judgment", the Supreme Court said. However, HMRC could not "cross [the] high hurdle" required to show that her decision was unjustifiable, it said.

"Before they can interfere, appellate judges must not merely disagree with the decision: they must consider that it is unjustifiable," said Lord Neuberger, giving the judgment of the court.

"As Judge Mosedale explained, she was faced with a binary question, involving two unpalatable choices. Making the debarring order, which she described as draconian, or not making the order, which, to use the vernacular, would have meant that HMRC effectively would have got away with it. There may be force in the notion that the tribunal rules should provide for the possibility of more nuanced sanctions, such as a fine or even the imposition of some procedural advantage ... However, for the reasons I have given, HMRC's appeal must be dismissed," he said.

"It is good to see the Supreme Court upholding the tribunal judge's tough stance against HMRC's failure to comply with directions issued by the tribunal," said tax expert Steven Porter of Pinsent Masons, the law firm behind Out-Law.com. "Barring HMRC from taking part in the proceedings seems draconian, but if it had been the taxpayer who was in breach, the penalty could have been striking out, which is considerably more serious."

"This case makes it clear that, although the procedural rules in the tax tribunal are generally less prescriptive than in the High Court, failure to comply with directions and time limits can have very serious implications. This time HMRC fell foul, but next time it could easily be the taxpayer," he said.

HMRC was barred in 2014 from taking further part in the BPP proceedings; which are to do with a dispute over the VAT treatment of what BPP claims is zero-rated educational materials by another company in the group. Judge Mosedale had found that HMRC had failed to comply with a direction issued by another tribunal judge, stating that if HMRC failed to provide replies to each of BPP's questions it could be barred from taking further part in the proceedings.

BPP wanted to know the facts on which HMRC was relying, but these were only supplied once skeleton arguments were exchanged, shortly before the hearing. The tribunal judge said that HMRC should be barred from taking further part in the proceedings as "there is very clear prejudice to the appellant in not knowing HMRC's case". HMRC's conduct had also led to unnecessary delay and expense, and tribunal directions had been breached.

In coming to her conclusion, Judge Mosedale had referred to the Court of Appeal's decision on the 'appropriate sanction' for breaches of the Civil Procedure Rules (CPRs) in the 2014 Mitchell case. The judge acknowledged that the case was "not strictly relevant" but that "nevertheless it contains some useful guidance that when considering the overriding objective of dealing with cases fairly and justly". She concluded that a debarring order was "virtually the only sanction that the tribunal has", because "no one suggests in this case that costs would be an adequate remedy".

One of the reasons that the Upper Tribunal gave for overturning Judge Mosedale's ruling was her "unsound" reliance on the Mitchell case. However, the Supreme Court found that she had taken the correct approach. It said that although the cases on time limits and sanctions in the CPR should not be applied directly by tribunal judges, "the tribunal should generally follow a similar approach".

"Such an approach was adopted by Judge Mosedale, as demonstrated by the passages in her judgment [that we have cited]," Lord Neuberger said.

"I accept that the decision to make a debarring order against HMRC was tough, and I also accept that some [first-tier tribunal] judges may not have made that decision. However, the issue whether to make a debarring order on certain facts is very much one for the tribunal making that decision, and an appellate judge should only interfere where the decision is not merely different from that which the appellate judge would have made, but is a decision which the appellate judge considers cannot be justified," he said.

Being barred from taking further part in the proceedings does not mean that HMRC's assessment is set aside. What it means is that HMRC will not be allowed to appear in the tribunal to put its arguments against BPP's appeal of its tax assessment.

Tax expert Stuart Walsh of Pinsent Masons said that HMRC would now need to decide whether to bring forward a new test case on the points raised in this dispute, given the number of cases with appeals held over pending the final decision.

"It is three years since the first-tier tribunal decision was given," he said. "This has meant a considerable delay in the hearing of the substantive issues in what was effectively a test case and so has implications for other taxpayers."

"Now that HMRC can take no further part in the proceedings, it will need to decide whether to withdraw the assessment on BPP and bring forward another test case. There may be advantages for those with appeals held over pending the BPP decision on the VAT position, in seeking to become a new test case in order to have more control over the proceedings and to ensure the strongest arguments are heard," he said.