HMRC v IA Associates Ltd

Case-management decisions concerning evidence may be overturned on appeal only where the tribunal made an error of law, including by excluding a material consideration, or reached a decision outside the generous ambit of its discretion.

Relevant evidence is prima facie admissible where it is potentially probative of an issue. The tribunal must then consider whether fairness or another sufficiently good reason requires exclusion. Generic expert evidence is not excludable merely because it is not directed to the particular transactions or is peripheral to the central dispute. Where positive and negative characteristics are merely two sides of the same evidential issue, selectively redacting the negative characteristics requires a rational justification.

HMRC appealed against a direction of the First-tier Tribunal requiring redactions to a witness statement served by Mr Fletcher, concerning the mobile-phone grey market and indicators of legitimate or fraudulent trading. The statement was generic and was intended to assist the tribunal in assessing whether transactions were fraudulent and whether IA knew or should have known that they were connected with fraudulent VAT losses.

The First-tier Tribunal considered the evidence potentially relevant but directed removal of passages concerning negative indicators, principally on fairness grounds. IA was debarred from participating in the Upper Tribunal appeal. The central issues were whether the evidence was admissible, whether its generic nature or lack of centrality justified exclusion, and whether the redactions had a rational basis.

1. The appeal was allowed. The Upper Tribunal found an error of law in the First-tier Tribunal’s decision because the redactions were perverse in the technical sense that no properly directed tribunal could reasonably have made them.

2. Under rule 15 of the First-tier Tribunal Rules, the tribunal may admit evidence whether or not it would be admissible in a civil trial. Evidence which is potentially probative of an issue is relevant and prima facie admissible. The tribunal must then ask whether there are good reasons, including unfairness, for excluding it.

3. The appellate court must identify the error of law and exercise restraint when reviewing case-management decisions. It should not infer a misdirection merely because every step in the tribunal’s reasoning is not expressed. However, material considerations wrongly left out of account, or a decision outside the generous ambit of discretion, justify intervention.

4. Mr Fletcher’s evidence was potentially relevant to whether the transactions involved fraudulent tax losses and whether IA knew or should have known of that connection. Its generic character and its lack of direct evidence about the particular trades did not, by themselves, justify exclusion.

5. The redacted negative indicators were the counterparts of the positive characteristics which remained. They therefore addressed the same evidential issue rather than a separate topic. The First-tier Tribunal gave no rational explanation for excluding them, and their removal did not provide practical benefit by reducing unfairness, cost or complexity.

6. The Upper Tribunal remade the decision under rule 12(2)(b)(ii) of the applicable procedural rules. Mr Fletcher’s evidence was permitted to be produced in its entirety, without redactions.

1. First-tier Tribunal: Judge Demack directed on 27 January 2012 that parts of Mr Fletcher’s witness statement be redacted. Written reasons were given on 23 May 2012.
2. Upper Tribunal, Tax and Chancery Chamber: HMRC’s appeal was allowed. The decision was remade and the evidence was permitted in full.