Tribunal sets aside £2 million director's liability notice as an abuse of process

In Ashley Charles Trees v HMRC [2026] UKUT 92 (TCC), the Upper Tribunal (UT) allowed the taxpayer's appeal against a director's liability notice (DLN), finding that HMRC's conduct during earlier litigation resulted in material procedural unfairness to the taxpayer.

Background

Ashley Charles Trees was the sole director and shareholder of CCA Distribution Ltd (CCA). In 2003, CCA began trading in the grey market for mobile phones.

In 2007, HMRC issued decisions denying CCA the right to deduct input tax in relation to certain transactions occurring between April and June 2006, on the basis that they were connected with the fraudulent evasion of VAT as part of a Missing Trader Intra-Community fraud. 

2020 hearing

Following a lengthy and complex period of litigation, the FTT held in 2020 that HMRC had correctly denied CCA's claims to deduct input tax in relation to the relevant transactions.

The FTT found that CCA's transactions during the relevant VAT periods were connected with the fraudulent evasion of VAT and that Mr Trees knew that the transactions were connected to such fraudulent evasion.

Importantly, no allegation of dishonesty was advanced by HMRC in these proceedings. In 2019, HMRC had confirmed in correspondence that its case was based on the Kittel test of "knew or should have known", rather than dishonesty or fraud.

Civil evasion penalties and DLN

In July 2021, HMRC issued CCA with a £1.97m civil evasion penalty, pursuant to section 60(1), Value Added Tax Act 1994 (VATA). HMRC also issued Mr Trees with a DLN, pursuant to section 61(1), VATA, notifying him that HMRC intended to recover the full amount of the company penalty from him personally on the basis that the company's conduct was attributable to his dishonesty. 

Mr Trees appealed the DLN in December 2021 and the appeal was heard by the FTT in March 2024. 

2024 hearing

Mr Trees made an application to the FTT seeking to debar HMRC from advancing the dishonesty case on the basis that it was abusive for HMRC to rely upon dishonesty when that allegation "could and should" have been raised during the 2020 proceedings. The FTT dismissed his application.

The FTT also dismissed Mr Tees' substantive appeal and upheld the DLN, applying the two-stage dishonesty test in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67, to conclude that Mr Trees' conduct was dishonest. 

In addressing the first limb of the Ivey test, relating to a person's actual state of knowledge or belief as to the facts, the FTT adopted the findings made in the FTT's 2020 decision. No further evidence was place before the FTT at the 2024 hearing to establish Mr Tree's alleged dishonesty.

Mr Tees appealed to the Upper Tribunal (UT).

Issues before the UT 

Permission to appeal was granted on seven grounds, which ultimately raised the following three core issues:

(i) whether HMRC "could and should" have litigated the issue of dishonesty at the 2020 hearing;

(ii) whether the FTT erred in its approach to the Ivey dishonesty test by relying on findings made in the 2020 decision, rather than acting as the primary fact-finder itself; and

(iii) whether the FTT erred in its application of the Ivey dishonesty test, as the findings relied upon by HMRC had not arisen from a pleaded, evidenced and particularised case of dishonesty.

UT decision

The appeal was allowed and the DLN was set aside.

The UT held that it was "inherently unjust" that Mr Trees was assured by HMRC that dishonesty was not being alleged during the 2020 proceedings, only for the evidence and findings of fact arising from that hearing to be then used as the foundation for a dishonesty case in the 2024 proceedings.

HMRC did not need to plead dishonesty in order to prove Kittel knowledge. However, if HMRC intended later to pursue section 61 proceedings, founded upon dishonesty and reliant on the same factual findings, dishonesty should have been properly pleaded in the earlier proceedings. HMRC effectively deprived Mr Trees of the procedural protections associated with such allegations, including the requirement that allegations of dishonesty are clearly pleaded and particularised, and that the taxpayer concerned should be given an opportunity to answer such allegations.

The UT concluded that the 2024 proceedings involved material procedural unfairness, as HMRC was treated as having discharged the burden of proving dishonesty through findings obtained in proceedings where dishonesty had not been alleged. This effectively placed an evidential burden on Mr Trees to rebut allegations that had not been properly pleaded.

The UT also confirmed that Article 6, European Convention on Human Rights, applied, including the right to a fair trial.

The UT rejected Mr Trees' argument that Ivey requires that both stages of the test must be undertaken by the same fact-finder, although it did observe that, except in exceptional cases, this would generally be desirable. 

Comment

The UT has confirmed in this decision that when HMRC alleges dishonesty, it must particularise its allegations properly at an early stage, particularly if it considers that section 61 proceedings may follow. Failure to do so risks a ruling that the proceedings are unfair and an abuse of process.

A copy of the decision can be viewed here.