“The Appellant’s Directions provide for the Commissioners to serve witness statements before the Appellant. As explained above, the burden in this appeal is on your client and as such it is for them to prove their case. This sequence is therefore illogical. The Commissioners are entitled to be aware of your client’s witness evidence before they provide their witness evidence in reply (if any such evidence is required).”
“In view of your deletion of the final two paragraphs, please make clear HMRC’s position on sham? Is sham the basis of HMRC’s case? If so, do you agree that HMRC bear the burden of proof to show sham? If HMRC are not alleging sham, please explain clearly the basis of the decisions under appeal and the nature of HMRC’s case in defending these decisions.”
“It is for HMRC to decide which legal arguments it wants to run and to amend/expand its arguments as the case evolves. HMRC’s case has been amply explained in our Statement of Case.”
“With regards sham – Our contentions are that the payments (or a part thereof) are in fact salary, wages or “other emoluments of the employment”
“1. HMRC do not currently consider the “image rights” contracts to be sham, but HMRC reserve the right to contend sham should the need arise. 2. Consequently, HMRC currently take the view that the “image rights” contracts were enforceable contracts (of which the parties were Hull City Tigers and Joniere and) (sic) under which Hull City Tigers became obliged to make quarterly payments to Joniere. 3. HMRC consider, however, that those payments were in fact not (despite the description in the contracts) in respect of image rights, but instead were salary, wages or other emoluments of employment, assessable (so far as income tax is concerned) directly on the player under ITEPA 2003 (and, therefore, liable to deductions under PAYE and NIC). In short, it is HMRC’s position that Joniere was effectively a nominee of the player, receiving sums that were legally due to the player himself. 4. Similarly, HMRC consider that no rights were passed by Joniere to Hull City Tigers in consideration for the quarterly payments made by Hull City Tigers to Joniere under the terms of the contract. 5. HMRC’s position is based on the assertion that the amount of the payments were too excessive to be commercial (as image rights payments) and instead represent part of the remuneration of the employee for performing his duties for Hull City Tigers as a player.”
“1. HMRC reserves its position on the sham point. As we have previously said, HMRC’s case is not contingent on being able to prove an intention to deceive. It is well established that the circumstances described by Diplock LJ in Snook (i.e. sham) are not the only ones in which the court may disregard provisions in the documents which do not represent the reality of the transaction. … [HMRC then referred to the Supreme Court in Autoclenz v Belcher[2011] UKSC 41 and to the Upper Tribunal in Acornwood .] 2. We acknowledge that there is a legal document that provides HCT with a license to exploit whatever image rights in respect of [Mr Gómez] are legally held by Joniere and require HCT to pay consideration. We say that the consideration agreed is uncommercial. However, we question whether it was ever the intention or understanding of the parties that HCT would act in accordance with the rights conferred by the license agreement. Consequently, the consideration that HFC (sic) was legally required to pay should be construed as additional remuneration of [Mr Gómez], which he directed should be paid to Joniere. 3. See 2 above. 4. See 2 above. 5. This is a mischaracterisation of HMRC’s argument. Yes, we think the consideration agreed is uncommercial but see also our SoC, especially paragraphs 34-41.”
“In all the circumstances, the Club did not genuinely expect or intend to exploit the rights under the Image Agreement (sic) and to make money from them. It is HMRC’s case that the Image and Variation Agreements entered into in respect of Mr Gómez were not genuine commercial agreements and that the amounts paid in respect of the “image rights” constitute disguised employment income upon which PAYE should have been operated.”
“Essentially, we understand that (however one describes the phenomenon) HMRC’s case is founded on the basic premise that the agreements at the heart of the case do not represent the true intentions of the parties. That is something that HMRC are required to prove. Consequently, we consider that the case management directions should be redrafted to reflect that the burden of proof in this case lies on HMRC. Therefore, we would propose that the directions be revised so as to require HMRC to produce their evidence ahead of the Appellant and in due course a reversal of the order for serving skeleton arguments.”
“The Appellants now say that they have come to realise that the burden should be reversed because HMRC is arguing sham. HMRC has stated on several occasions that whilst we reserve the right to argue sham, HMRC’s case is not primarily based on sham or contingent upon being able to prove an intention to deceive which is the test for sham. … [HMRC then repeated what they had said at point 1 in paragraph 21 above.] HMRC accept the existence of a legal documents (sic) which provides HCT with a license to exploit whatever image rights in respect of [Mr Gómez] are legally held by Joniere and require HCT to pay consideration. However we question whether it was ever the intention or understanding of the parties that HCT would act in accordance with the rights conferred by the license agreement. This is because, inter alia: 1. [Mr Gómez] did not have an “image rights” agreement with his previous club suggesting his image was of no commercial value; 2. The agreement inflated his net salary to a figure close to what he received at his previous club; 3. HCT failed to exploit or extract any value from the agreement; 4. There was no option for HCT to review the “Image Rights” agreement before renewal; 5. There was no valuation of [Mr Gómez’s] “image rights” prior to entering the agreement; 6. The agreement only related to territories outside the UK and HCT were not in a position to exploit an overseas market as a recently promoted club; 7. [Mr Gómez] was not in the elite group of recognisable sports people having only played international football once seven years previously; 8. [Mr Gómez’s] playing contract already conferred upon HCT the right to exploit his image worldwide and so the “image rights” agreement conferred no additional benefit. On the basis of the above, HMRC say that the agreement is not a genuine commercial agreement and the amounts paid in respect of “image rights” constitute disguised employment income. HMRC’s case does not rely upon having to show sham as the terms of the agreement can be disregarded if, as the evidence suggests, they do not truly reflect what the consideration was paid for.”
“19. Nevertheless, I was persuaded that a hearing could not take place unless the burden of proof was resolved in advance. It was vital for HMRC to know whether they had to open the hearing and lead evidence to establish a prima facie case of Halifax -abuse. It was vital for them to know this because if they were required to but could not establish a prima facie case, the appeal should be allowed without the appellant being obliged to refute the assessments. 20. I was also easily persuaded by both counsel that it was inappropriate for exchange of evidence to take place before the issue of burden of proof was resolved. As Mr Jones explained, and Mr Gordon agreed, if HMRC had the burden of proof, their approach to the case would be quite different. HMRC would have to call witnesses, possibly even expert witnesses, such as on valuation, to establish their case of Halifax -abuse. On the other hand, if HMRC did not have the burden of proof, they might elect (as they had done in Hilden Park 1 ) to call no evidence at all but rely on cross-examination to challenge the appellant’s evidence that there was no abuse. 21. Indeed, the appellant would need to know who had the burden of proof no later than exchange of evidence because otherwise it would be prevented from making the application which an appellant which does not have the burden of proof is entitled to make where the evidence (or lack of it) served by HMRC so indicates. And that is an application for HMRC to be barred on the grounds that its case does not have a reasonable prospect of success. The right to make such an application, where circumstances indicate that it is appropriate, is a valuable right as, if successful, it obviates the need for an appellant to prepare for a hearing it is virtually certain to win. It saves costs.”
“… the scheme of the Legislature is to entrust the decision of the facts to a tribunal of persons specially selected for the locality, and who are often in a better position than the Courts to determine the questions of fact sometimes very complicated, which may arise. … The obligation is placed, for reasons of expediency, upon the person assessed to appeal to the Commissioners if he wishes to rid himself of an assessment which is, in his view, based upon wrong conclusions of fact, and this obligation rests equally upon a person who contends that he is not chargeable as upon a person who admits that he is chargeable but not to the extent of the assessment made upon him. I am therefore of the opinion that it is for the Commissioners to decide whether or not a person assessed by the Additional Commissioners after ‘discovery’ by the Surveyor, is in fact chargeable. But there must be information before the Surveyor which would enable him, acting honestly, to come to the conclusion that a person is chargeable.”
“This charge is not true”, or something of that sort. I cannot follow that. The “end of the day” may come quite early in the day. At the conclusion of this case, were there any facts before the Special Commissioners to justify their conclusion? There were none. It was not the fault of the Appellant because the duty was upon the Commissioners of Inland Revenue to put the necessary facts before the tribunal. At Common Law, in the King’s Bench Division, the question of the burden and the right or duty to begin frequently arises. It does not mean that the plaintiff has always to begin. One asks the question: If no evidence is given, who wins? That settles the question of the burden of proof. It seems to me, on these authorities, the answer to the question is clear: namely, if no evidence is given the Appellant must win, because the result of the giving of no evidence is that there are no facts before the Special Commissioners to enable them to form any view. In this case there was no material before them which could justify their confirming the direction.”
“[60] … Surely at that point [the taxpayers] can say: We have done enough to raise a case that Eulalia was not resident in the UK. What more can the Special Commissioners expect from us? The burden must now pass to the Revenue to produce some material to show that, despite what appears from everything which we have produced, Eulalia was actually resident in the UK.”
“32. As the Judge pointed out, the Revenue had produced no positive material to show where the central control and management of Eulalia was. It was not enough (as the Judge thought) for the Revenue to criticise the lack of evidence from some of those at Price Waterhouse and ABN AMRO who had been involved in the transaction in 1996. The Special Commissioners had said that they would not have been assisted, to any material extent, by oral evidence of events then some seven years in the past. Nor was it enough to demonstrate, as counsel for the Revenue had done convincingly, that the steps taken were part of a single tax scheme, that there were overall architects of the scheme in Price Waterhouse, and that those involved all shared the common expectation that the various stages of the scheme would in fact take place. As the Judge observed, those matters were not denied. Taken together they did not, of themselves, lead to the conclusion that Eulalia was resident in the UK. 33. In Rhesa Shipping Co. SA v. Edmunds[1985] 1 WLR 948 , Lord Brandon of Oakbrook pointed out ( ibid , pp 955H-956A) that a judge is not bound, always, to make a finding one way or the other with regard to facts averred by the parties: He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden. But that is not a course which should be adopted unless owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take. It is a feature of tax litigation not least where the litigation arises from a tax avoidance scheme that, in the first instance, the facts are likely to be known only to the taxpayer and his advisers. The Revenue will not have been party to the transaction; and will know only those facts which have been disclosed by the taxpayer or others; following, perhaps, the exercise of the Revenues investigatory powers. I have no doubt that there are cases in which the evidence before the Special Commissioners is so unsatisfactory that the only just course for them to take is to hold that the taxpayer has not discharged the burden of proof which s 50(6) TMA 1970 has placed upon him. But, equally, I have no doubt that the Judge was correct, for the reasons which he gave, to hold that the present case was not one of those cases. There was no reason to think that the material facts had not been disclosed; and the Commissioners did not hold that it was for that reason that they were unable to decide the question of residence. I agree with the Judge that, in the present case, the third alternative to which Lord Brandon referred in Rhesa Shipping was not one which was properly open to the Special Commissioners.”
“If the technical phrase “burden of proof’ had not been used by the Commissioners, in my judgment the Commissioners’ approach was understandable. As a matter of practical common sense, if the company’s documents showed no receipt or entitlement to receipt and the Commissioners accepted the oral evidence, in the absence of further evidence it would be understandable that the Commissioners would be likely to come to the conclusion that Lotus had discharged the burden of proof which was on them. This might be expressed technically as a shift in what (to my mind unfortunately) is frequently called the evidential burden of proof. The evidential burden of proof is not the same as the basic burden of proof. According to well-known principles, the burden of proof lies normally on the person alleging the fact, but in the present case it is established on the person seeking to set aside the assessment. That burden of proof in technical terms stays throughout where it starts. If on the other hand, evidence is given which in the absence of other evidence or other factors would be sufficient to discharge the burden, then as a matter of ordinary common sense and judicial method the tribunal will decide that the burden of proof has been discharged. That is all that is meant by a shift in the evidential burden. … … [The Commissioners] accepted the submission that it was incumbent on the Inland Revenue, if the burden had shifted, to prove fraud. Quite apart from the failure to identify what was the fraud, that in my judgment is a material misdirection even if the evidential burden had shifted. In my judgment the position was that the burden lay throughout upon Lotus to show that the assessment was wrong. The documents and the evidence of the executives showed no receipt or entitlement to receipt, and in the absence of other factors (and I stress those words) the Commissioners would have been entitled and I think probably bound to hold in favour of Lotus. But if the Inland Revenue showed circumstances which cast doubt on the whole position, the correct question which the Commissioners should have asked themselves was not, “Have the Inland Revenue proved fraud?” but, “In all the circumstances, including the background circumstances, the documents and the oral evidence, have Lotus shown the assessments to be wrong?”
“In a letter of14 December 1983 the Inspector notified the Appellants that a number of assessments would be made and went on to say that he had decided to make them “on the basis that there has been fraud, wilful default or neglect” on the part of the Appellant companies. … If this had indeed been the basis on which the hearing had been conducted before the Commissioners, it would indeed have been perfectly clear on general principle, without the need for recourse to specialist revenue law, that the burden of proof would rest on the Crown; and, if authority were needed on this particular field, Hudson v Humbles 42 TC 380, 384 is only one example of cases which could be called up in support. … [But] when it came to the hearing before the Commissioners, no attempt was made to advance a case [on that basis]. Rather, the matter was approached, so far as the Revenue were concerned, on an ordinary Haythornthwaite basis. If this is so, and the contrary has not, as we understand it, been asserted, the formal burden of proof was not assumed by the Revenue. The Commissioners had no ground for approaching their fact-finding functions on any other basis than that it was for the taxpayers to make the running. It is, however, contended that there is a quite different reason why the Commissioners were right in their general approach, namely, that, once the Appellants had produced their books and had called their auditors to say that the books were in order, the Revenue could displace the Appellants’ case only by putting in contention a rival account of events which necessarily involved an allegation that the taxpayers, or one or more of their senior officers, were guilty of fraud. Such an allegation, even if never explicitly articulated, must be a matter which the Revenue should prove as the party which had brought it into the arena. To express the same notion in different words, once the Appellants had made out a prima facie case that the returns were soundly based, the evidentiary burden of proof passed to the Revenue. References to a shifting burden of proof can be found in many cases. The expression may have more than one significance. In some cases it signifies that, in order to reach a conclusion on the entire dispute, the Court must successively decide two or more issues, in respect of which the burden is not consistently on the same party. An example is furnished by Slattery v Mance[1962] 1 QB 676 . Under an insurance against the risk of “fire” the insured must prove that the subject-matter was lost as a result of a fire. The right of recovery is, however, qualified by the general rule that an insured has no right of indemnity against his own deliberate and wrongful act. The claim will therefore fail, even upon proof of a loss by fire, if it is shown that the insured wilfully caused or connived in the loss. This is, however, something for the insurer to prove, not the insured to disprove. Accordingly, when the judge comes to arrive at a decision he must proceed by two stages: first, to decide whether the subject-matter is lost by fire - if this is not proved, the claim fails: then to decide whether, if so, the loss was brought about by the wilful act of the insured - if this is not proved, the claim succeeds. Thus, it may be said in one sense that the burden of proof shifts as the judge passes through the successive stages of his enquiry. In truth, however, this is an inaccurate use of language, for the dispute involves two separate issues, each with its own burden of proof, which remains unchanged throughout the course of the action. If the Revenue had pursued before the Commissioners the line of attack foreshadowed in the Inspector’s letter of14 December 1983 , the case would have fallen into this category, with the Haythornthwaite burden of proof on the Appellants and the burden of proof on the Revenue in respect of fraud, successively applied. In fact, however, the only question in issue was whether the Appellants could establish that the assessments were wrong, and the general burden rested on them alone throughout the hearing. It is, however, submitted that the concept of a shifting burden has another meaning, relative to what is called the “evidentiary burden of proof”
“It is trite law that dishonesty must be pleaded with full particulars and put to the person alleged to be dishonest … This is an essential procedural safeguard on which the courts insist. It is not open to the court to infer dishonesty from facts which have not been pleaded. Nor is it open to the court to infer dishonesty from facts which have been pleaded but are consistent with honesty.”
“63. In cases where the burden of proof lies on HMRC to establish fraud or dishonesty, these principles [that the relevant allegations have been pleaded with full particularity and the taxpayer has been given a proper opportunity to respond to them] undoubtedly apply in the same way as they would in ordinary civil litigation. Examples include cases where HMRC wished to make assessments to income tax outside normal time limits on the ground (before 1989) of fraud or wilful neglect undersection 36 of the Taxes Management Act 1970 , or (in the modern world) where, relying on principles developed by the Court of Justice of the European Union, they wish to deny a VAT-registered trader his otherwise incontrovertible right to deduct input tax because of his alleged participation in, or connection with, “missing trader” (or MTIC) fraud.”
“64. The present case, however, is not of that nature. It is common ground that the burden of proof lies on the Appellants to displace the closure notices issued to them by HMRC within normal time limits, and (in particular) to establish that the businesses of the relevant LLPs were carried on with a view to profit. This issue, as I have explained, is properly pleaded in HMRC’s statement of case. No burden lies on HMRC to establish that the businesses were not carried on with a view to profit. It is for the Appellants to adduce such evidence as they think fit with a view to discharging the burden which throughout lies on them.”
“23. I would accept the submission made on behalf of the claimants that, although [ Snook ] is authority for the proposition that if two parties conspire to misrepresent their true contract to a third party, the court is free to disregard the false arrangement, it is not authority for the proposition that this form of misrepresentation is the only circumstance in which the court may disregard a written term which is not part of the true agreement. That can be seen in the context of landlord and tenant from Street v Mountford[1985] AC 809 and Antoniades v Villiers[1990] 1 AC 417 , especially per Lord Bridge at p 454, Lord Ackner at p 466, Lord Oliver at p 467 and Lord Jauncey at p 477. See also in the housing context Bankway Properties Ltd v Pensfold-Dunsford[2001] 1 WLR 1369 per Arden LJ at paras 42 to 44.”
“67. … the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.”
“It is not surprising that there were oddities and uncommercial features in this scheme when the main tax hope was based on an absolute fiction, namely that the Partnership had incurred capital expenditure of 100 , 99 or 96 on scientific research, when in reality it was appreciated by all that no researchers or scientists were ever to receive contributions to their project of any more than 6 , this fiction would obviously occasion some unrealistic and uncommercial terms.”
“[264] In our judgment the change in the wording of the principal exploitation agreement from that used in the Icebreaker 1 and Acornwood iterations to that used in later cases does not alter the outcome. Each partnership made a large payment to its principal exploitation company. In return it received two things: exploitation services, and a guaranteed income stream. We accept that the principal exploitation agreement in each case led to genuine legal relations and imposed real obligations in return for consideration, and in consequence was not a sham. However, for the reasons we have given elsewhere we have concluded that the arrangement by which the principal exploitation company supposedly made a payment to the production company offset by a payment for a share of the revenues was a pretence, designed, if we may say so rather crudely, to confer some plausibility on the claim that the borrowed money was available for use in the exploitation of intellectual property rights. In our judgment it failed in that objective. [265] We are equally satisfied, despite the absence of sham, that the description of the right to assign a share of the revenue as the consideration for the guaranteed payments was also a pretence. Although we accept the point made by the appellant partnerships that it is not a relevant factor that the amount paid for goods or services, when viewed objectively and commercially, may be excessive or inadequate, we do not think that proposition compels us to disregard the evidence with which we deal in our discussion, below, of the potential for profit that, if the agreements are to be taken at face value, the guaranteed payments exceeded the true worth of the right to assign a share of revenue, as it might fairly be assessed at the time of assignment, by so large a margin that neither party could realistically have believed that the one was a fair price for the other. This was not a case of one party making a bad bargain; both parties must have known that it was no bargain at all. We also accept HMRCs argument, drawn from EV Booth v Buckwell , that it is open to them, and by extension us, to view the agreements for what they are, rather than for what they purport to be. In short, the reality is that part of the payment by each partnership to the principal exploitation company represented the price of the guaranteed income stream notwithstanding its description as something else.”
“59. The second concession was that the arrangements were not a sham. Mr Davey accepted, as HMRC had accepted below, that the transactions were not a sham in the classic sense explained by Diplock LJ in Snook v London and West Riding Investments Ltd[1967] 2 QB 786 . Mr Davey however said that the fact that HMRC accepted that the documents were not shams did not mean that the legal rights and obligations arising from the documents were the same as the actual rights and obligations that the parties expressed them to create. He drew a distinction between the doctrine of sham and the doctrine of mislabelling. Thus for example a document which purports to grant a licence to a person to occupy land may be a sham if the parties intended the document to be a pretence, concealing the true transaction between the parties. However, even if a document is not a sham in that sense, it is commonplace that the labels which the parties use in their contract are not determinative of the true legal effect of what they have done: see the well known example given by Lord Templeman in Street v Mountford[1985] AC 809 of the five-pronged implement for digging, which is a fork even if the manufacturer insists that he intended to make and has made a spade; or the less well known but equally vivid example given by Bingham LJ in Antoniades v Villiers[1990] 1 AC 417 at 444B: “a cat does not become a dog because the parties have agreed to call it a dog.”
“In the Westmins ter case there were two rival explanations of the transactions between the Duke and his gardener. The first explanation is that the gardener voluntarily worked full time for the Duke for half wages and enjoyed the annuity given to him by the Duke. This explanation was accepted by the majority. … The second explanation of the facts in the Westminster case is that the gardener worked full-time for full wages and volunteered or agreed that he would not take his annuity until he had retired. Lord Atkin thought that this was the true effect in law on the facts. I agree with Lord Atkin, gardeners do not work for Dukes on half-wages. If, however, as the majority of the House concluded, the gardener voluntarily declined to accept half his wages but accepted the whole of his annuity, the financial consequences to the Duke were that he paid the annuity and the taxation consequences were that he was entitled to deduct the amount paid in computing his liability to income tax and surtax. The dictum of Lord Tomlin, applied to the obligations of the Duke, is not inconsistent with later authority. But if the dictum of Lord Tomlin implied that any tax avoidance scheme which was not a sham and not unlawful must be allowed to succeed subsequent authorities have determined otherwise. The Westminster case does not assist the Appellant in the present case. In the Westminster case the fiscal consequences claimed by the Duke corresponded to the legal consequences of the transaction as construed by the majority of this House. In the present case the fiscal consequences claimed by the Appellant do not correspond to the legal consequences of the scheme documents read and construed as a whole.”
“I see nothing in the wider purpose of the legislation, which taxes remuneration from employment, which excludes from the tax charge or the PAYE regime remuneration which the employee is entitled to have paid to a third party. Thus, if an employee enters into a contract or contracts with an employer which provide that he will receive a salary of £X and that as part of his remuneration the employer will also pay £Y to the employee’s spouse or aunt Agatha, I can ascertain no statutory purpose for taxing the former but not the latter. The breadth of the wording of the tax charge and the absence of any restrictive wording in the primary legislation, do not give any support for inferring an intention to exclude from the tax charge such a payment to a third party which the employer and employee have agreed as part of the employee’s entitlement. Both sums involve the payment of remuneration for the employee’s work as an employee.”