03 December 2024

Explain yourself! The duty of candour in tax litigation

Ben Elliott and Arthur Wong investigate the scope of this important duty.

The duty of candour is of critical importance in judicial review proceedings – both in terms of the burden that it places upon both parties and its strategic importance in ensuring that a claimant has been provided with complete explanation of the decision under challenge. Recent cases provide clarification of the relevant principles but also illustrate the challenges (both legal and practical) in their application. This article is focused on the duty of candour in relation to tax litigation (where HMRC will generally be the defendant), but the principles are of general application in cases against government departments.

The Scope of the Duty

At its core, the duty of candour is a duty placed on public authorities to assist the court with a full and accurate explanation of the reasoning process underlying the decision under challenge and the facts relevant to the issue the Court must decide (R (oao IAB) v Secretary of State for the Home Department (“IAB”) [2023] EWHC 2930 (Admin) at [12]; Secretary of State for Foreign and Commonwealth Affairs v Quark Fishing Ltd [2002] EWCA Civ 1409 at [50]); its foundation is the principle that the relationship between the courts and public bodies is one of partnership and therefore there is a common aim in maintaining the highest standards of public administration (R v Lancashire CC ex p. Huddleston [1986] 2 AER 941 at 945c), in addition to promoting open government (IAB at [36]).

The duty of candour also serves a practical justification, namely to prevent the need for applications for disclosure or extensive disclosure (the ordinary CPR rules on disclosure do not apply to judicial review – R (Al-Sweady and ors) v Defence Secretary [2009] EWHC 2387 (Admin) at [28]). Properly applied, the duty ensures that the public body has volunteered and placed before the Court all relevant material to enable the court to determine whether the public authority has acted lawfully.

Important practical points:

• The duty of candour applies prior to the Court’s consideration of whether to grant permission for judicial review and is a continuing duty (the ‘Permission-Stage’ Principle: R (Police Superintendents’ Association) v Police Remuneration Review Body (“PRRB”) [2023] EWHC 1838 (Admin) at [10(9)]. As stated in the Treasury Solicitor’s ‘Guidance on Discharging the Duty of Candour and Disclosure’ (a highly quotable publication setting out the obligations that the Government lawyers accept apply to them): “The duty of candour applies as soon as the department is aware that someone is likely to test a decision or action affecting them. It applies to every stage of the proceedings including letters of response under the pre-action protocol, summary grounds of resistance, detailed grounds of resistance witness statements and counsel’s written and oral submissions”. 
• Disclosure must not be selective but must include the unwelcome along with the helpful (the ‘Non-Selectivity’ Principle: PRRB” at [10(6)]. Correspondingly, the duty also extends to documents and information which will assist the claimant’s case or which may give rise to further grounds of challenge which might not otherwise occur to the claimant (the ‘Unpleaded-Grounds’ Principle: PRRB at [10(10)]).
• The duty does not necessarily require disclosure of documents, but equally disclosure may not always be sufficient. Whilst a witness statement summarising the content of documentation might (in some cases) be sufficient, the Privy Council has recently warned that even a conscientiously-prepared summary of a document may result in distortion and therefore it is good practice to exhibit the primary document (Pyaneandee v Lam [2024] UKPC 27; the ‘Best Evidence’ Principle: PRRB at [10(7)]). Equally, the duty to provide a full and accurate explanation of all relevant facts may in an appropriate case oblige the public body to provide a witness statement containing a true and comprehensive account of the way in which relevant decisions were made including the underlying reasoning (the ‘Information-Too’ Principle: PRRB at [10(4)]; R (Quark Fishing Ltd) v Foreign Secretary [2002] EWCA Civ 1409 at [50]).

Pressure Points

Whilst the principles are well-established (most clearly summarised by Fordham J in PRRB), their application is a frequent subject of dispute. Common points of conflict include:

• The extent of disclosure that a public body must provide at pre-action stage – HMRC often assert that any disclosure at all is disproportionate at that stage, which may be incompatible with the authorities and the Treasury Guidance.
• The extent of disclosure required in relation to the decision-making process – for a recent example, see Rettig Heating Group UK Limited v HMRC [2024] UKUT 315 (TCC) in which the Upper Tribunal did not require HMRC to disclosure internal notes and correspondence recording discussions informing the decision under challenge. However, the Upper Tribunal emphasised that such disclosure might be required in an appropriate case: “That is not to say there would not be cases where the duty to explain the decision making process or relevant facts would extend to needing to address the various steps taken, and discussions and considerations prior to the decision (for instance where there are allegations of bias, failure to consult, or improper purpose)” (at [28]).
• Cross-examination – where a witness statement has been produced by HMRC in judicial review proceedings, it is exceptional for the witness to be cross-examined; however, there are cases where cross-examination may be permitted to ensure the fair and just disposal of the claim (see R (Fluid Systems Technologies (Scotland) Ltd v HMRC [2024] UKUT 322 (TCC)).

In terms of strategy, a taxpayer pursuing a claim for judicial review would be well-advised to consider prompting HMRC to make disclosure in accordance with their duty of candour and to do so as early as possible in the proceedings. There will be cases where the taxpayer believes that particular information or a certain category of documents is relevant to the issue, in which case they should request that information and disclosure from HMRC. Though the duty of candour is ultimately self-policing, the risk of (very public) censure from the Court can often be sufficient to focus the mind of HMRC on whether or not they have satisfied their obligations.

A further point that can be overlooked inadvertently is that the duty of candour applies to all parties to judicial review. The focus on the public body’s decision means that the duty will weigh most heavily on HMRC, but there will be issues which require scrutiny of the claimant’s factual circumstances, most notably when seeking to demonstrate detrimental reliance in relation to a breach of legitimate expectation.

The Duty of Candour in Statutory Appeals

The duty of candour does not apply in ordinary civil litigation: “Ordinary civil litigation is very different from proceedings in the Administrative Court. There is no duty of candour equivalent to that imposed on public bodies defending judicial review claims” (IAB at [24]). But are statutory appeals ‘ordinary civil litigation’? All such proceedings involve a challenge to a decision of a public body (usually HMRC) and there is no obvious reason why the ‘common partnership’ between the courts and public bodies should not apply equally in statutory appeals before the First-tier Tribunal.

In Kryiakos Karoulla t/a Brockley’s Rock v HMRC [2018] UKUT 255 (TCC) the Upper Tribunal observed that it is HMRC’s practice to accept that the duty of candour applies to them in tax appeals: “It is trite that the duty of candour is a concept derived from and developed in the area of judicial review. However, as HMRC will be well aware, it is long-established practice that HMRC usually accept that the duty applies to them in normal tax appeals” (with reference to Gardner-Shaw UK Ltd & others v HMRC [2018] UKFTT 313 (TC)). However, the facts of that case were arguably exceptional given HMRC had in their possession important evidence, namely the only copies of the taxpayer’s till receipts, which they had not disclosed until after the decision of the First-tier Tribunal. More recently, the Upper Tribunal in Nottingham Forest FC v HMRC [2024] UKUT 145 (TCC) observed “It is correct that HMRC has a duty of candour to the appellant and the FTT” with reference to Karoulla (albeit distinguishing it).

However, the authors are not aware of any published statement issued  by HMRC accepting that the duty of candour applies to them in tax appeals. Moreover, there are statutory appeals in which HMRC’s decision-making process is directly or indirectly in issue yet HMRC often resist making disclosure concerning their decision-making process (for a recent example, see Jeneruhl Trading Ltd [2024] UKFTT 735 (TC)).

In the authors’ view:

• HMRC have a duty to help the Tribunal further the overriding objective of dealing with cases fairly and justly (and their professional representatives have a duty not to mislead the Tribunal), but this is not the same as the duty of candour as applied in judicial review proceedings.
• In the majority of tax appeals, the better view is that the duty of candour does not strictly apply because it is the correctness of HMRC’s decision that is in issue rather than HMRC’s decision-making process, and in any event the duty would have limited application in such cases. That being said, HMRC have been recorded as accepting (or at least not disputing) in a number of cases that they treat the duty of candour as applying to them in tax appeals and, if they hold relevant evidence that is not in taxpayer’s possession, then it might be hoped that they would consider it appropriate to disclose that evidence in accordance with their duty to further the overriding objective.
• There are statutory appeals in which HMRC’s decision-making process is in issue and the Tribunal is exercising a supervisory (quasi-judicial review) jurisdiction in respect of that process (for example, under section 16(4) FA 1994). However, taxpayers should not assume that HMRC will treat the duty of candour (in its judicial review form) as applying in such cases and should make requests for specific disclosure as appropriate.

The duty of candour is an important principle in the taxpayer’s toolkit and its existence and enforcement promote both the interests of justice and the highest standards of tax administration by ensuring accountability in the administration of the tax system.

This article first appeared in ThoughtLeaders4 magazine.