Ashley Charles Trees v The Commissioners for HMRC

Where HMRC intends to rely on findings made in a Kittel appeal as the foundation for a later penalty based on dishonesty, fairness ordinarily requires dishonesty to have been pleaded and particularised in the Kittel proceedings. HMRC may prove Kittel knowledge without alleging dishonesty, but it cannot obtain findings in proceedings conducted on that basis and then use them as the primary evidence of dishonesty in later proceedings. The statutory period for issuing a penalty does not authorise a procedurally unfair use of the earlier appeal. The two stages of the Ivey test need not invariably be determined by the same tribunal, although that will generally be desirable except in exceptional cases.

HMRC denied CCA Distribution Ltd’s input-tax claims after the First-tier Tribunal found in the 2020 Kittel appeal that CCA, through its sole director Mr Trees, knew that its transactions were connected with fraudulent evasion of VAT. HMRC had expressly confirmed before that hearing that it did not allege dishonesty.

HMRC later issued CCA with a civil evasion penalty under section 60 of the Value Added Tax Act 1994 and Mr Trees with a director’s liability notice under section 61, alleging that the conduct was attributable to his dishonesty. The FTT used the 2020 findings as evidence of dishonesty and dismissed the appeal. The central issues were whether that course was an abuse of process or procedurally unfair, and whether the Ivey dishonesty test could properly be applied by reference to findings made by an earlier tribunal.

1. Appeal allowed in part. Grounds 1, 2 and 3 succeeded. The 2024 FTT decision was materially procedurally unfair, was set aside, and the DLN was set aside.
2. HMRC did not need to plead dishonesty to establish Kittel knowledge. The Kittel test and dishonesty are distinct. However, HMRC could and should have pleaded dishonesty in the 2020 Kittel appeal if it intended subsequently to rely on findings made there as the foundation for a section 61 penalty. The assurance that dishonesty was not alleged meant that Mr Trees’s evidence and the factual findings were obtained without the procedural protections applicable to serious allegations of dishonesty.
3. The rule in Henderson v Henderson is a broad, merits-based doctrine. Applying Johnson v Gore Wood & Co (a firm), the relevant question was whether dishonesty should have been raised earlier, not merely whether it could have been. The corporate relationship between CCA and Mr Trees was sufficient to make the earlier proceedings relevant to that assessment.
4. The two-year period in section 77(2) of the Value Added Tax Act 1994 did not permit HMRC to use the earlier Kittel hearing in a fundamentally unfair manner. HMRC v Kishore was distinguishable because it concerned a mis-declaration penalty which did not involve dishonesty and addressed the timing of issuing a penalty.
5. Grounds 4 to 7 failed. Ivey v Genting Casinos (UK) Ltd concerns the dishonesty test, not the composition of the tribunal. The same tribunal need not invariably determine both stages, although that will ordinarily be desirable except in exceptional cases.
6. The appeal was allowed on Grounds 1 to 3 and dismissed on Grounds 4 to 7. Any costs application was to be made under the applicable Upper Tribunal rules within one month.

• Upper Tribunal (Tax and Chancery Chamber): allowed the appeal on Grounds 1–3, set aside the FTT’s 2024 Decision and remade it by setting aside the DLN; dismissed Grounds 4–7.
• First-tier Tribunal (Tax Chamber): dismissed Mr Trees’s appeal against the DLN and refused his abuse-of-process application in the 2024 Decision dated 6 June 2024.
• First-tier Tribunal (Tax Chamber): the 2020 Kittel appeal concerning CCA was dismissed in [2020] UKFTT 222 (TC). That decision was not appealed.