Multi-factorial tests in tax appeals

A new decision from the Upper Tribunal contains some essential reasoning on how appeal courts should approach errors of law in multi-factorial tests.??

The taxpayer victory in Morrison Supermarkets PLC v HMRC?[2023] UKUT 20 (TCC)??was a VAT decision and will be helpful to all practitioners and litigators in that area; but it will have much wider relevance given the increasing reliance on multi-factorial tests across the tax code.??

By way of just three disparate examples relevant to private client practitioners: domicile cases, the test of significant influence (as found in e.g. the salaried members rules for LLPs and the register of overseas entities), and recent litigation on Inheritance Tax business property relief have all referred to the need to balance multiple factors.

The case related to the question of whether health food snack bars were zero rated food or VAT-able confectionary.??

The supermarket appealed on the basis that the FTT failed to consider two relevant factors in the balancing exercise required by the multi-factorial test in point.???These were:

(1)?????????The FTT erred in law by excluding from its analysis of whether the Products were “confectionery” relevant considerations consisting of (i) the actual or perceived ‘healthiness’ of the Products and/or (ii) the marketing of the Products as ‘healthy’ products; and

(2)?????????The FTT erred in law by wrongly treating the absence of cane sugar, butter and flour from the ingredients as irrelevant to their status as confectionery.

Error of law in context of multi-factorial assessment

It was agreed – and should be widely accepted – that the statutory jurisdiction on appeals to the Upper Tribunal (s12 Tribunal Courts and Enforcement Act) requires that there is an error of law.??

The parties disagreed however on what constitutes an error of law where the particular allegation is that the FTT has omitted to consider a relevant factor in a case concerned with what is agreed and accepted to be a multifactorial test – as opposed to whether a fact or the totality of the evidence was probative.?

The Upper Tribunal reminded itself:

“That an appeal court should accord due deference to the FTT’s role in carrying out an evaluative multi-factorial exercise…”

See also Proctor and Gamble v HMRC [2009] EWCA Civ 407 per Jacobs LJ:

“Often a statutory test will require a multi-factorial assessment based on a number of primary facts. Where that is so, an appeal court (whether first or second) should be slow to interfere with that overall assessment—what is commonly called a value-judgment.”

Lewison LJ in Fage UK Ltd & Anor v Chobani UK Ltd & Anor [2014] EWCA Civ 5 made much the same point.?

In Morrison, the Upper Tribunal said:

“…we note the focus on appellate caution is directed towards to analysis of weight or matters of degree and, in the context of a multi-factorial evaluation the first-instance court or tribunal’s overall evaluation…However, the appellant points out there is nothing in these principles which suggests an appellate tribunal should defer where the fact-finding tribunal has taken account of an irrelevant factor, or as they say happened in the instant case, disregarded a relevant factor.

…

In support of the proposition that appellate caution does not apply where the criticism of the tribunal is that it took account of irrelevant factors, or disregarded relevant factors, the appellant emphasises the extract from Toulson LJ’s judgment in Pringles (at [60] - see ([31] above). There, Toulson LJ specifically assumed (before addressing the need to show perversity) that the decision was not one where the tribunal had failed to take account of relevant considerations.

HMRC submit this passage does not however deal with the required intensity of scrutiny (in other words whether perversity is required to be shown where the challenge concerns disregard of relevant factors). That argument must be rejected simply in terms of the way the relevant paragraph of Toulson LJ’s judgment ([60]) is expressed. The paragraph takes as given that the tribunal has considered the right factors and makes clear perversity needs to be shown where “evaluation of factors” i.e. the weighing up is challenged.??The plain implication is that in cases where the criticism is that a relevant factor had not been considered, that would not require deference.”

So, caution – but up to a point.??The appeal courts are not required to be so cautious to overturn the decision of a lower court or tribunal when they are persuaded that a relevant factor was ignored or an irrelevant one taken into account.?

Necessary to show additional hurdle of perversity?

Next, HMRC submitted that it is only where a tribunal has failed to take into account a matter, which no tribunal properly instructed would have left out of account, is there an error of law (i.e. perversity).?

In?Davis & Dann Ltd v HMRC?[2016] EWCA Civ 142 Arden LJ, as she then was, said:

“… On an appeal on a question of law, it is well established that an appellate tribunal whose function is restricted to questions of law cannot revisit questions of fact unless no reasonable judge could have come to that conclusion. Mr Scorey [counsel for the taxpayer] has not contended that that test applied in relation to any of these countervailing factors: there is no cross appeal in this Court. Therefore, the existence of these countervailing factors cannot determine the outcome of this appeal.”?

The UT said:

“While this decision confirms a perversity hurdle (“no reasonable judge…”) must be surmounted where the challenge concerns the factual issue of whether a factor was probative on the facts of the case, it does not suggest the question of whether, a factor was relevant, as a matter of principle, similarly faced such hurdle.

Rather, Arden LJ confirmed the question of relevance was a question of law.”

The UT relied on Teinaz v London Borough of Wandsworth [2002] EWCA Civ 1040.??The UT said:

“…the Court of Appeal confirms that …determination of what is relevant or irrelevant is a matter for an appellate tribunal, [but] determination of what weight a factor should bear is not, unless that evaluation or balancing of such factors reaches the threshold of perversity.”

The UT concluded:

“…perversity needed to shown as regards a challenge to an evaluation of factors i.e. the weight to be given to factors given the particular facts of the case… That question was to be contrasted with the question of legal relevance, namely whether the tribunal could be said to have been properly instructed as to what to take into account or leave out of account at level of principle.

The appellant’s grounds in this case are firmly in the latter category.

…

…we agree with Ms Sloane’s submissions that HMRC’s case, that there is an additional perversity hurdle to surmount, must be rejected. If it is demonstrated that the FTT ignored a relevant factor that will be sufficient to constitute an error of law.”

So – you need to show perversity (irrationality; see Edwards v Bairstow) to challenge how a court or tribunal evaluated various factors; but not when challenging a decision on the basis that it ignored a relevant factor or took into account an irrelevant factor altogether.??

Although the UT does not put it like this, it might help to see the first instance failure to look at the relevant factors in the second category of cases as irrational in itself.

?

Different test for materiality when looking at irrelevant considerations?

Under s12 TCEA 2007 where the Upper Tribunal finds that the making of the FTT decision “involved the making of an error on a point of law” the Upper Tribunal “may (but need not) set aside” the FTT decision.

So, the Upper Tribunal then has a discretion.?

As to how and when to exercise it, the UT said:

“The most recent higher authority in relation to the exercise of the Upper Tribunal’s discretion to set aside is?Degorce v HMRC??[2017] EWCA Civ 1427.??The issue was whether the taxpayer, Mr Degorce, who had participated in a film scheme, was carrying on a trade. It was admitted the FTT made an error (which the court described as an error of approach) in not taking account of the taxpayer’s other film-related activities because no findings regarding them had been made by a court or tribunal because they were subject to an enquiry by HMRC ([96]). The UT nevertheless declined to exercise its discretion to set aside the decision. In the Court of Appeal the taxpayer argued the UT had misstated the test as requiring that if the evidence had been approached correctly “[The FTT’s] doing so would, or at least might have affected the outcome”:

Henderson LJ considered the test of materiality will have a (([95]):

?"…crucial, and usually decisive role to play in the decision of the Upper Tribunal whether or not to set aside the decision of the FTT”.”

The UT held that?

“…the error in issue in Degorce is directly analogous to the error here. The issue of whether Mr Degorce was carrying on a trade also required a multi-factorial analysis and the relevant error concerned the FTT’s disregard of a relevant factor, which the FTT had mistakenly ruled out of account. Similarly, if the appellant’s case here is made out, it rests on the FTT wrongly ruling out a factor as irrelevant. Moreover, both errors bear the same character of being said to stem from a misconception of the law. Thus, if the appellant successfully makes out its case, that the FTT made error(s) of law by disregarding one or more relevant factors, there is no reason to adopt a different test of materiality from that adopted in Degorce.

So – the materiality of the error of law remains an important factor in whether an appeal will succeed in this area.??But this is a test of whether the decision at first instance MIGHT have been different; not whether it WOULD have been different.??That is a lower hurdle for appellants.

Having established these principles, the UT went on to apply them to the facts in point.??For anyone not concerned with the sale of healthy snacks, this is of less relevance but it is notable that:

The FTT had directed itself to ignore one of the relevant factors in terms:

“Did the FTT in fact omit to consider healthiness?

…

104.?????We reject HMRC’s submission that the FTT did, despite its self-direction to the contrary, take into account healthiness and perceived healthiness in the way suggested. The first point is that the FTT’s clear self-direction was that healthiness was??irrelevant as a factor in its overall assessment. It ought, in our view to be presumed that the FTT will act in accordance with its own direction.”

This was helpful to the taxpayer although it is not in itself a decisive factor.??This can be seen from the other error of law found to be present by the UT, where there was no such self-direction given by the FTT:

“ We therefore find there was an error of law in the FTT rejecting the relevance of such ingredients.”

Turning to the question of materiality:

HMRC argued that neither error outweighed the cumulative weight of all the other factors and submits the result would therefore have been no different.?

The UT reminded itself that

“a ‘would have been different’ test is wrong. The test is whether the decision “might have” been different (in line with Degorce).”

It then noted:

“First, it must be recognised that the multi-factorial evaluation cannot be reduced to an exercise of counting up the numbers of factors which point in a particular direction.?

Rather, the exercise is qualitative and it is possible that because of the weight ascribed to a particular factor in forming an overall impression it outweighs a number of other factors which point in the other direction.”

…

Second, we agree healthiness is a factor which may have a pervasive effect in the sense that it colours the impression of other factors.?

…

We can also see how, as Ms Sloane submitted, taking account of the nature of the ingredients and their healthiness or perceived healthiness (raw cold-pressed fruit and nuts) might colour the impression one gains from tasting the product and in particular whether its taste is like that of traditional confectionery ( for instance sweetness).

…

While it is relevant, to consider whether the decision would be sustainable on the basis of the unchallenged findings made, we do not consider a decision the products were confectionery would be possible, on the basis of the findings which can be isolated, given the qualitative nature of the findings and the pervasive effect of the impugned factors on the other findings.”