Wired Orthodontics Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 July 2020 |
| Neutral Citation | [2020] UKFTT 290 (TC) |
| Date | 08 July 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 290 (TC)
Judge Amanda Brown
Andrew Thornhill QC and Ben Elliott instructed by Enyo Law LLP appeared for the appellant
Adam Tolley QC and Charles Bradbury counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Procedure – Application for disclosure of communications between HMRC instructing solicitor and HMRC expert – Scope of without prejudice and litigation privilege – Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 5(3) – Interpretation of CPR 35.10 and 35.12.
The First-tier Tribunal (FTT) refused an application for the disclosure of communications between HMRC's instructing solicitor and an expert witness.
In a substantive appeal concerning an employee benefit trust, the Tribunal had directed that the appellants' independent expert and HMRC's independent expert should separately prepare and serve a report on the availability of a corporate tax deduction under UK GAAP. The reports were to be exchanged simultaneously and then the experts were to meet and produce a joint statement setting out the matters on which they agreed and disagreed.
While preparing the joint statement, the appellants became concerned that HMRC's expert's instructing solicitor had interfered with the independent expert regarding the production of the joint statement. The appellants applied to the Tribunal under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 5(3) for the disclosure of documents and information passing between HMRC's instructing solicitor and HMRC's appointed expert witness. The stated purpose of the disclosure was to establish the credibility and, more specifically, the independence of HMRC's expert to determine whether to challenge the reliability of the expert's opinion on the GAAP Issue.
HMRC objected to the application, contending that the exchanges between the experts were protected from disclosure by without prejudice privilege (WPP) and as such may be referred to only with their consent.
Based on the FTT's review of the communications and the drafts of the expert report and in light of the imperative that experts be independent, the FTT considered that there was prima facie evidence of impermissible interference by HMRC in the finalisation of the joint statement. And at the very least there was a perception of such interference.
The Tribunal however rejected the submission that all communications between the instructing solicitor and an expert whilst the experts were agreeing the joint statement were open. The fact was that CPR 35.10 and relevant practices were silent on the status of communications between solicitor/client and the expert during the preparation and discussion of a joint statement because such communications are not generally permitted. The Tribunal therefore refused the application for disclosure of the relevant communications between HMRC solicitors and HMRC's expert witness because there was no basis on which to lift the protection provided by WPP.
The Tribunal dismissed the application.
The Tribunal did however express concern that the circumstances giving rise to this application were cause for considerable concern. While HMRC cannot simply appoint expert accountants employed in practice as experts because of the apparent or actual conflict of interest it has historically been accepted that HMRC will therefore appoint experts employed by HMRC as the lesser of two evils. However, in the circumstances, 'it is absolutely imperative that the independence of the expert is preserved, and that independence is seen to be preserved'. The perception in this case of, at the very least, potential inappropriate interference with the independent evidence of an expert witness “is seriously prejudicial to HMRC's position in cases such as these and should be avoided at all costs”.
While the FTT found potential inappropriate interference by HMRC's solicitor with the independent evidence of an expert witness, it ruled against the disclosure of communications because of the protection provided by without prejudice privilege.
[1] This is an application by Wired Orthodontics Limited (“Wired”) made pursuant to rule 5(3) Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“FTT Rules”) for disclosure of documents and information passing between the solicitors for HM Revenue & Customs (“HMRC”) and their appointed expert witness.
[2] The present application arises in the context of a dispute concerning a transaction under which Wired and each of Ian Hutchinson and Susan Bessant (together “the Employees”) entered into a tripartite agreement with an employee benefit trust (“Trust”). Pursuant to that agreement Wired agreed to purchase an asset for the relevant Employee subject to those Employees undertaking an obligation to pay the value of the asset to the Trust.
[3] There are several live issues in the appeal. One such issue is whether Wired is entitled to a corporation tax deduction in relation to its expenditure in purchasing the assets for the Employees (“Deduction”). Central to one of the issues is whether Wired's profit and loss account and specifically the Deduction was compliant with generally accepted accounting principles (“the GAAP Issue”).
[4] Critical to the decision to be taken by the Tribunal in the substantive appeal therefore is a complete understanding of the relevant GAAP accounting treatment of the Deduction. Pursuant to directions issued by the Tribunal each of Wired and HMRC appointed independent experts to prepare reports for the benefit of the Tribunal. The directions provided that each expert prepare and serve any report on which they intended to rely. Such reports were required to contain a statement that “the expert (a) understands their duty to the Tribunal, and has complied with that duty; and (b) is aware of the requirements of CPR1 35, CPR PD 35 and the Guidance for the Instruction of Experts in Civil Claims 2014”. The reports were to be exchanged simultaneously.
[5] Having produced their reports the experts were then directed to meet and produce a statement of areas on which they agree and those of which they disagree with reasons for such disagreement.
[6] The present application arises from the circumstances in which the joint statement was prepared.
[7] The directions made by Judge Kempster in this matter on 11 March 2019 provided for the preparation of an agreed statement of facts and issues by 15 March 2019. A 9-page Statement of Facts was agreed between the parties setting out the principal features of the transactions and the chronology of the dispute.
[8] As set out above the directions also provided for preparation and the simultaneous exchange of expert reports concerning the GAAP Issue on 24 May 2019 followed by a meeting of the experts and the preparation of a joint statement setting out the matters on which they agreed and disagreed with reasons for such disagreement.
[9] The expert reports were duly produced and exchanged but not within the time limit initially directed by the Tribunal.
[10] Mr Orrock was appointed to act as the expert for HMRC. His report was provided to the Tribunal for the purposes of this application.
[11] So far as material for the purposes of this application Mr Orrock report provided as follows:
- 1.2 – identified Simon Pooley of HMRC Solicitor's Office as his instructing solicitor and identified that the instructions received were appended as Appendix D.
- 1.3 – stated that the documents and sources of information he referenced were identified in Appendix B.
- 2.2 – identifies that he was instructed that the details of the transactions in question were as set out in the documents, in particular, the Statement of Agreed Facts of which he had been provided a copy.
- 2.4 – sets out the questions on which he was asked to express his opinion.
- Section 3 sets out his understanding of the facts by reference to the Statement of Agreed Facts and the various documents with which he had been supplied. The summary runs to 4 pages of the report.
- Section 4 sets out his analysis in connection with the questions asked. The first question concerned GAAP compliance of an expense recognised by Wired in the financial statements for the year ended 30 April 2014 and the second question concerned the expense shown in the financial statements for the year to 30 April 2015 under two scenarios.
- At 4.40, in respect of the first scenario under question 2 Mr Orrock states:In my opinion no expense arises for the purchase of gold in the year ended 30/04/15. It appears to me that the substance of the arrangement involving the use of the trust means that the directions do not get an outright transfer of the £180,000, rather all they get is the use of that sum for a period of 10 years. Under these circumstances the company should recognise an asset. This means that the accounts are not in accordance with UK GAAP. …
- In paragraphs 4.42 – 4.50 Mr Orrock sets out his explanation for why an asset should be recognised effectively, and in simple terms not used by Mr Orrock, neutralising the expense.
- Section 5 sets out a summary of his conclusions. At the highest level of summary: Mr Orrock considered that in respect of question 1 the expense was not recognised in accordance with UK GAAP. In respect of the second question, under the first scenario (a) he was of the view that no expense should be recognised on the basis that an asset should have been recognised. Under scenario (b) his view was that the expenses should be recognised.
- Section 6 provides the expert declaration.
- Appendix B appears to represent the index to 4 volumes enclosing 191 documents and the Appellant's list of documents.
- Appendix D is a full copy of the instructions in the name of Simon Pooley (5 pages). The instructions set out the relevant...
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