Whilst an exact definition of Parliamentary sovereignty is unlikely to find consensus amongst lawyers, one accepted tenet is that Parliament has legislative supremacy – it may enact any law which it chooses. Parliament for instance, adopting Ivor Jennings’ famous example, can legislate to ban smoking on the streets of Paris. Of course this law will have no effect, but Parliament can still say that it is a law validly passed.

To that end, where taxpayers find themselves worried about the scope of powers provided by Parliament to HMRC, this is the starting point for any argument. The best that a taxpayer can hope for is that the power granted to HMRC is incompatible with EU law – if that is the case it is void given that EU law has supremacy (given effect in the UK by virtue of the ECA 1972). If EU law cannot be invoked, then the protections available to taxpayers lie in judicial interpretation.

For instance, a taxpayer can argue that rights protected by the European Convention on Human Rights are breached by virtue of the exercise of some power by HMRC. Judges in that case are under an obligation to try to read the power in light of the ECHR – to try to give it an interpretation which is compatible with the ECHR. But if it is not possible to so do, then HMRC will not be acting unlawfully as it is simply Parliament’s will that HMRC should act in such a manner (see Human Rights Act 1998, s. 6(2)).[1] Remedying the incompatibility lies in the hands of politicians not justices. Of course the taxpayer can take the case to the European Court of Human Rights which can grant damages. But it still won’t mean that the law is invalid, nor that HMRC has acted unlawfully.

Practitioners, anecdotally at least (see here from 19.28), can attest to the fact that justices in the UK are very comfortable with dealing in arguments grounded in common law, thereby vitiating the need to focus solely on rights enshrined in EU law or given effect through Human Rights Act 1998. In the case of Unison, the Supreme Court arrived at the result that employment tribunal fees (as they had been calibrated) were unlawful as a matter of UK law on the basis of the constitutional right of access to the courts. The same result would have been arrived at, per the Supreme Court, through the invocation of EU law. Potential claimants were precluded from exercising their rights due to the level of the fees. For instance, before instituting a claim for unlawful dismissal, the claimant had to pay £1,200. The basic reasoning of the Supreme Court in striking down the secondary legislation went as follows:

• access to the courts is a fundamental constitutional right;
• legislation must be read in light of fundamental constitutional principles and rights;
• where legislation appears to override fundamental constitutional principles or rights, the legislation should be given a narrow reading;
• a narrow reading of the legislation in question is that the fees will be unlawful if there is a real risk that claimants ‘will effectively be prevented from having access to justice’.
• there was such a risk present and so the fees were unlawful.

This reasoning most recently came to the protection of a taxpayer in the case of R (On the Application Of Haworth) v Revenue And Customs [2019] EWCA Civ 747. The case concerned follower notices and accelerated payment notices (on which I wrote a lengthy blog in 2017). A follower notice can be issued where the principles or reasoning in a judicial ruling (which can include a tribunal decision where no appeal has been made) would deny the purported tax advantages that a taxpayer has sought to claim (FA 2014, ss. 204-205). A follower notice forces a taxpayer to amend their return accordingly, if the relevant ruling came from the Supreme Court, or to enter into an agreement with HMRC to relinquish the purported advantage, if the ruling came from any other court or a tribunal (FA 2014, s 208). Failure to take such ‘corrective action’ renders the taxpayer liable for a penalty of up to 50% of the purported advantage. An accelerated payment notice can then be issued forcing the taxpayer to pay the disputed tax upfront (FA 2014, s. 219). Ultimately a taxpayer may go on to succeed in the underlying tax dispute for which the follower and accelerated payment notices had been issued. The combination of the notices however acts as a pretty severe deterrent – in particular with the addition of the 50% penalty – to a taxpayer who wishes to continue litigating a tax dispute with HMRC.

A follower notice and an accelerated payment notice had been issued to Geoffrey Haworth on the basis of reasoning in Smallwood v Revenue and Customs Commissioners [2010] EWCA Civ 778. But given the impact of the exercise of the powers to issue these notices, the courts adopted a narrow interpretation of HMRC’s powers. Thus, it was held that it cannot be the case simply that HMRC believes that it is more likely than not that the relevant ruling (to which the follower notice related) would deny the purported tax advantage. Rather HMRC must believe that principles or reasoning in the relevant ruling would [i.e. a positive assertion from HMRC] deny the advantage.

At paragraph 66 Lord Justice Gross put it as follows:

“given the draconian nature of these powers conferred on HMRC, it is right that they should be carefully circumscribed, not least – amongst other reasons – because of their impact on access to the courts and the rule of law”

A strong Court of Appeal (Rose LJ, Simler LJ and Underhill LJ) unanimously in the case of Locke agreed with the sentiments expressed in Haworth:

“I respectfully agree with the Court in Haworth as to the caution that must be used to ensure that the serious consequences for the taxpayer of HMRC’s power to issue follower notices and accelerated payments notices mean that that power must be kept within narrow bounds.” (para 51)

There the Court also found that HMRC’s reliance upon a judicial ruling could not be used to justify the issuance of a follower notice. The taxpayer had claimed for interest relief in his tax return, based upon an interpretation of ICTA 1988, s 362(1)(a). HMRC argued that the case of Eclipse 35 stood for the proposition that such a claim should fail as the taxpayer was not carrying on a trade. In an identical factual scenario, it was found in Eclipse 35 that the film partnership was not carrying on a trade. But the need to carry on a trade is an express requirement only for relief under s. 363(1)(b), whereas s. 362(1)(a) is silent on the issue. Ultimately, it was not decided in that case whether the taxpayers underlying that partnership could have fallen within the scope of s. 362(1)(a). Not only did the case of Eclipse 35 then not stand for the direct proposition that the taxpayer’s claim in Locke should fail, but also HMRC was not entitled to be ‘of the opinion’ (FA 2014, s. 204(4)) that it was a relevant judicial ruling (FA 2014, s. 205). The scope of what may be an ‘opinion’ of HMRC is necessarily narrow the Court of Appeal held, encompassing situations where ‘the judicial ruling is still determinative of the question whether the tax advantage arises, despite those factual differences’. But it does not cover an instance where the facts are identical, but the legal arguments are materially different: here, “whether the chosen arrangements fall within section 362(1)(a) or only within section 362(1)(b)” (para 51)

The basic principle of access to the courts, particularly as it is explained in the case of Unison, brings into focus the issue of judicial review. It is incredibly costly to bring a judicial review case (£154 to apply (though critically most JR applications are rejected on paper); £385 for a reconsideration at a hearing; £770 to proceed) and the general rule is that the loser pays the other sides costs (see here para 23.1.2). At the very least, even if you have a rock solid case against a public authority, it means you must pay £924. Meanwhile a case before the First-tier Tax Tribunal is generally cost neutral. The Tribunals, Courts and Enforcement Act 2007 which established the tribunal system in its current incarnation did not elect expressly to allow the First-tier Tribunal to hear judicial review cases (for arguments that the jurisdiction of the Tribunal ought to be expanded, see my 2018 BTR article). But one must wonder whether Parliament could be understood as having intended the current situation whereby judicial review cases must be instituted in the Administrative Court, given its exclusionary effect on victims of potentially unlawful public authority action. Could a different interpretation be adopted accordingly – one which did not impinge upon the fundamental constitutional principle of access to justice?

[1] Assuming no statutory discretion to act differently.