Rejection of late appeal despite liquidator’s problems meeting 30-day window

Cases involving the interaction between tax investigations and insolvency matters sometimes flag additional points to consider.

HMRC assessments

In the case in question, HMRC alleged that company sales had been supressed and issued tax assessments and penalties in the region of half a million pounds. Shortly after the tax assessments were issued, the company went into liquidation.

There is strictly a 30-day deadline to submit appeals against assessments to HMRC, which was difficult to achieve due to the liquidation. The appeals were in fact submitted over 16 months late after the director finally secured permission for conduct of the appeal from the liquidator after providing a suitable indemnity.

HMRC does have the discretion to accept a late appeal but, in this case, it refused.

First Tier Tribunal application

An application was made to the First Tier Tribunal (FTT) asking for a direction that HMRC consider the late appeal. The FTT followed the standard three-stage approach as follows: 

1. Established the length of the delay and whether it was serious and significant. 
2. Established the reasons for the default. 
3. Evaluated all the circumstances of the case, including any prejudice in granting or refusing the application.

The application was denied on the basis that insufficient evidence was presented by the parties concerning the reasons the company had not appealed in a more timely fashion.

Upper Tribunal application

An application was made to appeal the decision to the Upper Tribunal (UT). The Appellant argued it was an unjust result, because the FTT failed to consider the practical realities and consequences that arise when a company is put into liquidation.

Examples of the considerations that ought to have been made by the FTT were raised at the UT, and included: 

• cessation of the director’s powers once the company enters liquidation, i.e., the director cannot initiate proceedings 
• a liquidator may decide it is not expedient to appeal a tax assessment, even on a protective basis, based on the current asset statement or due to lack of information to justify the costs of lodging a protective appeal 
• tension when a director seeks to take over litigation in the company’s name, as the director’s conduct prior to liquidation would be questioned by the liquidator 
• the potential options for a director to obtain control were highlighted: 
  • assignment from the liquidator (which might require specialist advice) 
  • to bring the appeal in the company’s name upon obtaining permission from the liquidator after provision of an indemnity 
  • to take action in the High Court to remove the liquidator if they did not want to pursue the appeal. 

The Appellants stated that being able to work through the above in a 30-day window was “vanishingly slight”.

The outcome

This is a sympathetic position for Insolvency Practitioners to be in. Nonetheless, the Upper Tribunal rejected the appeal, noting that:

“When legislating the 30-day time limit, Parliament would be taken to know there was a framework with these sorts of features in place, and that if it had wanted to carve out a different treatment for liquidators it could have done so but did not.”

The main reason the Appellant failed is that insufficient evidence was presented at the FTT which is the fact-finding tribunal and the place where all of the relevant facts should be heard. While plenty of delays could have occurred for the generic reasons listed, the Appellant did not sufficiently describe the particular facts and circumstances that delayed the appeals in the case in question at the relevant time. The UT commented:

“There is nothing to preclude the tribunal taking account, as part of its analysis when exercising its discretion, any particular issues that arise in a given case from a company having been put into liquidation and anything that flows from that. That will however require the appellant to advance evidence regarding the particular facts and circumstances relied on to justify the delay and in support of the appellant’s application, so that the tribunal hearing the application can evaluate those in the light of the parties’ submissions in the normal way.”

The UT therefore ruled that the FTT did not make a mistake in failing to consider the particular circumstances of companies in liquidation more generally.

Final thoughts

A director’s powers cease in a liquidation and the liquidator takes on their powers. Accordingly, a liquidator needs time to fully understand the affairs of a company and what comprises its assets and liabilities. In many instances, the recoverable value of assets cannot be immediately quantified, with assets coming to light sometime after an appointment, potentially requiring lengthy litigation, that may determine whether a distribution to creditors is paid, or not. It would be remiss of a liquidator to incur costs to review the claims of different classes of creditor (including HMRC) if it is unclear whether a distribution will be made to them. Doing so would reduce funds held for the benefit of creditors.

The 30-day timeframe is restrictively short as a liquidator is often without cash to pay the costs of seeking specialist tax advice to establish the grounds of an appeal or to enter into a “protective” appeals process. In this case the claim was assigned to a director by the liquidator and the majority of professional costs would have been incurred by them. If the appeal had been taken by a liquidator, this would be preceded by a period of review and the instruction of specialist tax accountants and tax solicitors. Each of those professionals would require payment. On paper, there is mileage in making an appeal to prevent the need to expend additional funds on multiple hearings and make a late appeal, but can the costs be covered, and can those costs be justified at an early stage of the liquidation process?

The Upper Tribunal stated that legislators would have created a carve out for liquidators. This assumes that those drafting the legislation considered the implication of the time limit at that stage. Is it not a duty of the Tribunal process to create balance where there is imbalance?

One thing is certain for cases that are destined for the tribunal, it is of vital importance to submit all the relevant facts and evidence at the appropriate time, otherwise there is no second bite of the cherry. This case emphasises the need for facts specific to the particular taxpayer and circumstances to be presented at an early stage rather than seeking to rely on delays for generic (albeit practical) reasons and underlines the importance of seeking appropriate advice.

If you would like to discuss any of the above, please contact our Tax Resolutions or Recovery Solutions teams.