Dr Stephen Daly

Oxfam’s tag a bag scheme, whereby you make a claim for gift aid on donations of goods rather than just cash, has come under scrutiny from the tax community. It has been claimed by some that the scheme falls foul of the law. But HMRC’s guidance explicitly makes an allowance for it (see: Chapter 3.42 Claiming Gift Aid when goods are sold by, and the proceeds gifted to, charities of HMRC’s ‘Gift Aid’ guidance). If the scheme does indeed fail under the law, surely there is a defence in saying that HMRC took the taxpayer up the garden path?

Not quite.

The doctrine of legitimate expectations is the most developed tool to prevent public authorities from reneging on representations made to citizens. There are broadly two limbs to the doctrine and if satisfied, a public authority will be bound to its representation. Put in the context of tax, it means that HMRC will be to a position it has represented to a taxpayer if (i) the representation was clear, unambiguous and devoid of relevant qualification and (ii) reneging on that position would be so unfair as to amount to an abuse of power.

However, where HMRC’s representation to the taxpayer has been based upon an incorrect assessment of the law, the second limb of the legitimate expectations test will be more difficult to satisfy. As has been often quipped by the courts (first stated by the great Lord Bingham (then LJ) in MFK Underwriting), the taxpayer’s only prima facie expectation is that she will be taxed in accordance with the law. If a taxpayer has relied upon an HMRC representation to her detriment such that she would have to sell assets to pay the tax properly due, it may be considered so unfair as to amount to an abuse of power for HMRC to seek to enforce the law. As was held in the case of Hely-Hutchinson (a case on which I have written in greater detail in the second issue of this year’s British Tax Review), it may also be so unfair as to amount to an abuse of power to insist upon the strict legal position against one person, but not another where their tax affairs are identical.

If HMRC were to turn around and change its interpretation of the Gift Aid rules accordingly, applying the revised view across the board, the legitimate expectations argument would likely offer little consolation, as Oxfam already found out to its detriment in 2010 (h/t Aisling Donohue) (see the judgment here paragraphs 45-60). And if that state of affairs seems slightly unfair, then you’ll understand what inspired my PhD…

The above quote is apparently to be found above the entrance to the IRS headquarters at 1111 Constitution Avenue, Washington DC and is attributed to Oliver Wendell Holmes. But there are many other variants that are equally attributed to the “The Great Dissenter”, such as “I like to pay taxes. With them I buy civilization”; “Taxes are the price we pay for civilization” and most intriguingly, a quote sometimes attributed to his father Oliver Wendell Holmes Sr, “I hate paying taxes. But I love the civilization they give me.”

The only real source of substance which can be readily found in relation to this quote is from a dissenting speech (of course!) in a 1927 US Supreme Court case:

“It is true, as indicated in the last cited case, that every exaction of money for an act is a discouragement to the extent of the payment required, but that which in its immediacy is a discouragement may be part of an encouragement when seen in its organic connection with the whole. Taxes are what we pay for civilized society”

What does this quote tell us about Oliver Wendell Holmes’ true attitude to taxes? It seems to suggest a more nuanced relationship than either love or hate, which the various incarnations of the quote suggest. It is somewhere between. An understanding of the need, but equally perturbed to the extent that the “exaction” discourages. As he proceeds to state in that case, underlining his familiarity with the “exaction”:

“to earn one’s livelihood by any lawful calling certainly is consistent, as we all know, with the calling being taxed” [emphasis added]

And deep down in our hearts, I don’t believe that we love paying taxes either. Intellectually we understand the importance of tax. Very few would decide amongst us to locate ourselves in the kinds of places, for instance, where taxes fall below 20% of GDP. However, when I go to the shop and pick up a can of Coke (well, Diet Coke-my teeth definitely cannot handle the sugar and I can’t handle another scolding from my dentist), I can’t say that I’m delighted that I pay VAT of 20%. Likewise I would frankly be much happier if I didn’t get a massive bill for council tax every year. And it really is massive when compared to my income – my effective income tax rate for last year was 0%!

But taxes do pay for civilization. They pay for our essential services, schools and health. They pay for the kind of services that I know are indispensible in the fight to increase social mobility, tackle poverty and reduce inequality, issues that I genuinely care so deeply about. But that equally doesn’t mean I’m happy to see public funds squandered and improperly used. I’m annoyed as the next person about expenses’ fiddling or pointless garden bridges. Bringing this back to my council tax woes for a minute, go to Google Maps and click on Finsbury Park (not the actual park or the tube station, just the area). You see it? You see the rubbish bin overflowing in the picture? I’m not exactly overjoyed that my massive Council Tax bill goes towards that non-collection of rubbish.

So what is there that can be learned from this? The first thing that could be attempted is to try to circumvent this inherent dislike of tax by not calling things taxes. But when there’s a political incentive from the opposing side to undermine any such attempts, this seems fairly futile. To this end, note how the “spare room subsidy” became the “bedroom tax” or the “community charge” the “poll tax”, as Stian Reimers cites in a brief, punchy article which more than merits a reading (h/t Jolyon Maugham QC). Even then, it’s not clear that the wool can be pulled over the electorate’s eyes even if a different label sticks. The introduction of the ‘water charge’ in Ireland has been met with a prolonged and popular campaign of protest for instance.

Or, maybe then it’s just time to have an open and frank conversation about taxes. About the need for both horizontal and vertical equity: that those in similar positions in terms of wealth should pay similar amounts and those in different positions pay different amounts. About the need for progressivity as adjudged across the entire system of taxes and benefits. About the fact that yes it is annoying when something is taken away from you, but about how what is “exacted” will either pay for things you need, or pay for the needs of those less fortunate. Politicians, the media and lay commentators also have a duty not leap upon the introduction of de facto taxes, or increases, or decreases, as if these themselves are intrinsically bad rather than looking at our overarching goals and whether any changes conform to these.

If taxes are what we pay for civilised society, then we ought to act like a civilised society when talking about taxes.

The life cycle of a PhD is curious. It begins with an awning vision and an inspiration to make a great change to the world. That slowly whittles as time and personal crises elapse, so that closing to the end one can barely summon the enthusiasm to produce and defend a significant contribution to the field. The early days for me also were very pretentious. Far too many nights were spent in the Law Faculty ingesting classic jurisprudence works, attempting to cram a philosophical framework into an already overstretched thesis. I resolved around that time that it would be incredibly unique (yeah, cos nobody has ever thought of doing this!) to place tendentious quotes at the beginning of each chapter and so kept a document into which I would place fitting quotes that I came across. As my thinking evolved the quotes I extracted shifted from being pretentious and philosophical to anything I thought witty, poignant or even simply well expressed: from Aristotle to the Ombudsman. That bit of context explains why I now have such a mixed bag. I now place them here for all to see and get a glimpse into my weird journey as a doctoral student. Enjoy!

And please feel free to add in the comments any quotes that you like.

• “The organisation must stop the perpetual, frenetic reorganisations driven by those wet, crew cut youngsters in the management consultancies” (Yuri Grbich, ‘After Bellinz and Ralph: A New Focus for Decision Making in the Australian Tax System’ in M Walpole and C Evans (eds)Tax Administration in the 21st Century (Prospect, 2001))
• “In a time of universal deceit – telling the truth is a revolutionary act” (Orwell)
• “History is a race between education and catastrophe” (HG Wells)
• “What fate lies ahead for those unfortunate taxpayers who, while swerving to miss the potholes on a narrow road through the hills, crash into the guardrail on a wet and dark night? The likelihood is that rather than have the yellow flashing lights of ‘tax assist1 greet them, they are more likely to be met by dark suited gentlemen alighting from an unmarked car, with pens poised and charge sheets opened” (Martin Crowe, ‘National Decisions’, ‘More Signposts Needed on Rocky Tax Road’, National Australia Bank Limited, November 1992, p. 19 noted in Joint Committee of Public Accounts, Report No. 326, An Assessment of Tax – A Report on an Inquiry into the Australian Taxation Office (1993), p. 225)
• “To tax and to please, no more than to love and be wise, is not given to men” (Edmund Burke)
• “Not being trained to umpire the debates of the economic’s profession, judges invariably decide in favor of the school of thought that coincides with their own preconceptions.” (Richard Posner, ‘Conglomerate Mergers and Antitrust Policy: An Introduction’ (1969) 44 St. John’s Law Review 529, 530)
• “Not the least evil features of the modern tax system are the army of unproductive civil servants concerned with the assessing and collecting of taxes, the enormous volume and constantly changing detail of the chaotic and largely incomprehensible body of verbiage called the law of taxation, the incomprehensible and frequently incorrect assessments, and the utterly irrational nature of the whole topic. In the law of taxation justice has no place at all” (D M Walker, The Oxford Companion to Law (1980) 1208 taken from Tony Pagone, ‘Tax Uncertainty’ (Annual Tax Lecture, Melbourne Law School, 20 August 2009) at page 2)
• “It is a truism that equity cannot be secured in taxation laws without complexity. Complex law involves complex forms of return for income and the complicated forms give rise to demands for simplification of the law.” (Robert Ewing, Annual report 1923–24 – 1924–25, 3 as cited in Leigh Edmonds, Working for all Australians 1910-2010: A brief history of the Australian Taxation Office (ATO, 2010) 75).
• “[The resignation of David Heaton from the GAAR panel] was not just bad luck or an indication that the wrong person was chosen. It is the result of a failure to create a robust institution with a clear function. That in itself is the result of rushing developments, partial consultation with busy people and lack of an underlying route map about where we are going with our tax institutions.” (Judith Freedman, ‘Creating new UK institutions for tax governance and policy making: progress or confusion?’ (2013) BTR 373, 380)
• “The only function of economic forecasting is to make astrology look respectable.” (JK Galbraith)
• “HMRC has considerable power at its disposal, but with that power comes a responsibility to act proportionately, appropriately and fairly, and with regard for the law and its own internal procedures” Ann Abraham (PHSO, Annual Report 2008-09 (HC 2008-09, 786) 12)
• “The pension appointed to be paid me at Michaelmas I have not received, and know not where or from whom I am to ask it… To interrupt your Lordship…with such petty difficulties is improper and unreasonable; but your knowledge of the world has long since taught you that every man’s affairs, however little, are important to himself. Every man hopes that he shall escape neglect” (Samuel Johnson, to the Earl of Bute, 3 November 1762)
• “Something important is being said about democracy when the only legislative chamber to perform the functions that people expect – deliberation, revision, improvement – contained not a single elected politician” (Hugo Young, Guardian, 18 December 2001)
• “There is no strong constituency that opposes complexity and, above all, no constituency that is galvanised by simplicity.” (Joel B. Slemrod, “The Simplification Potential of Alternatives to Income Tax”, Tax Notes Today, March 1, 1995.)
• ‘There is no such thing as a good tax, there is no such thing as a good tax story’ (Winston Churchill)
• “However beautiful the strategy, you should occasionally look at the results” (Winston Churchill) [disputed source]
• “Letting in the light is the best way of keeping those responsible for exercising the judicial power of the State up to the mark and for maintaining public confidence.” (Lord Toulson in Kennedy v Charity Commission [2014] UKSC 20; [2015] AC 455, [110])
• “As with most instances of judging by catch-phrase, the law evolves in three stages: (1) An extreme case arises to which a court responds. (2) The language of the response is then applied -often mechanically, sometimes cleverly- to expand the application. With too few judges experienced enough with the subject to resist, the doctrine expands to the limits of its language, with little regard to policy. (3) Such expansions ultimately become ridiculous, and the process of cutting back begins“ (Philip Areeda, ‘Essential Facilities: An Epithet in Need of Limiting Principles’ (1989) 58 Antitrust Law Journal 841, 841)
• “to lay down a law about things that are subjects for deliberation is an impossibility. Therefore men do not deny that it must be for a human being to determine such matters” (Aristotle, Politics, III.xi.8 as cited in Andrew Halpin, ‘The Theoretical Controversy concerning Judicial Review’ (2001) 64(3) MLR 500, 511 fn 21)
• “Few discoveries are more irritating than those which expose the pedigree of ideas” (Lord Acton)
• “With us, every official, from the Prime Minister down to a constable or a collector of taxes, is under the same responsibility for every act done without legal justification as any other citizen” (AV Dicey, Law of the Constitution (10th edn., 1959), 193)
• “Human nature, at its best as well as at its worst, has to be protected against itself, and where power is concerned the very existence of the possibility of restraint is a safeguard against that gradual degeneration – so easy, so insidious, often so imperceptible – by which the end justifies the means and the good in intent becomes the evil in effect. That, at all events, is the whole core of the theory of the balance of powers in our constitution” (Carleton Kemp Allen, Law and Orders (3rd edn., Stevens & Sons 1965), 297)
• “In this regards, my friend, you’re like the public, to whom one should never offer a delicate perfume. It exasperates them. Give them only carefully selected garbage” (Charles Baudelaire, Translated by William H. Crosby, The Flowers of Evil & Paris Spleen, BOA Editions, Ltd., 1991)
• “[M]an in our times has a need to preserve his identity, to refuse the total transparency of society, to maintain the privacy of his personality” (Judge Pettiti in Malone v UK (1985) 7 E.H.R.R. 14, 55)
• “But if taxation is the scourge of the twentieth century – the civilized evil as it were – we must learn to live with it.” (JRL Anderson in the Foreword to Basil Sabine, A History of Income Tax (1st edn., George Allen & Unwin, 1966), 5)
• “So the thing be understood, I am indifferent as to the name” (John Locke)
• “Nothing so undermines your financial judgment as the sight of your neighbour getting rich.” (JP Morgan)
• “Should government refrain from regulation (taxation), the worthlessness of the money becomes apparent and the fraud can no longer be concealed” (John Maynard Keynes)
• “For all its untold blessings, the harnessing of atomic energy may lead to the destruction of man’s physical world; so perfecting the instrument of income tax may destroy the structure of human society. For many God has been all-but argued out of existence, and mammon taxed out of existence: in a world without God or mammon, what is left?” (JRL Anderson in the Foreword to Basil Sabine, A History of Income Tax (1st edn., George Allen & Unwin, 1966), 5)
• “One man’s evasion is another man’s increased taxation” (Harold Wilson)
• “It was Benjamin Franklin who said that there were two certain things in this world, death and taxes. If there is anything this brief summary of fiscal history in the last 60 years illustrates, it is that, in fact, there is nothing certain about taxes, either in incidence or effect” (Basil Sabine, ‘Life and taxes 1932-1992. Part 3: 1965-1992: Reform, Rossminster and reductions’ (1993) BTR 504, 516)

*** Added 16 April 2016. A cracking link here (h/t David S. Lesperance) with a host of excellent tax quotes.

It’s been quite a week hasn’t it? Allegations of misfeasance, corruption, tax avoidance and evasion have been flying around. What’s curious about the fallout from Pandora’s Panama box is actually where we have ended up. This was a mass disclosure of documents to the press, not unlike Wikileaks and the Snowden affair, but whilst the former produced a debate about US military operations and the latter a debate about Mass surveillance, with #PanamaPapers we’ve somehow gotten onto querying whether Jeremy Corbyn declared a few hundred pounds for lecturing!

How this has happened is entirely predictable in hindsight. The Panama Papers served to connect many high profile politicians and establishment type figures to corruption and fraud. David Cameron was connected by virtue of his father’s investment business, from which he benefitted, and was left in the end, having made a dog’s dinner of the explanations, with no option but to publish his tax return (summary). Nicola Sturgeon and Jeremy Corbyn thereafter sought to apply political pressure by releasing details of their own tax affairs, so now the zeitgeist is focusing upon scrutinising the tax affairs of politicians and hence the examination of Corbyn’s accounts.

This all leads to a more fundamental question-should politicians publish their tax returns? The momentum is certainly behind such a change and so it seems inevitable to some (including Jacob Rees-Mogg and former attorney general Dominic Grieve). But is this correct? Should politicians be forced to publish their tax returns?

My answer to this question is “yes”, but I accept that it is not without difficulty. The starting point, for me, goes back to the genesis of direct taxes in the UK. When income tax was introduced formally in 1842, it was against the backdrop of a 19th century Victorian conception of liberty.[1] Where a gentleman must be deprived of some of his earnings, there must be protections in place to ensure that no other person should know the full extent of his affairs. A gentleman’s private affairs should be kept to the greatest extent private. Several elements of the initial Income Tax Acts served to do so. The first was that tax inspectors would only be propertied people, so as to ensure that there would be no unscrupulous behaviour. The second was that the income tax would be self-assessed. The third was that income would be split according to its source (e.g land, dividends, from a trade etc), and a different office within the Inland Revenue would deal with each source. No one tax inspector accordingly would know how much income was derived from each source. Finally, the Inland Revenue would be bound by a duty of confidentiality not to disclose the tax affairs of any gentleman.

Today, we no longer require revenue officials to be persons of means. Self-assessment tax returns are only submitted by circa 15% of the population. We do not have strict delineation between the activities of the tax offices, much less a wall preventing officials from discussing investigations. More importantly, the ideals of the 19th century are not the ideals we hold firm today. A justification from the 19th century does not, without question, justify our approach to matters today. Rather we must always interrogate our principles in light of modern day circumstances. We no longer delve out Victorian punishment; women and people without property have been granted suffrage; a person’s sexuality is no longer a reason for imprisonment etc.

The question to be asked today therefore is whether privacy of one’s tax affairs serves the ends traditionally associated with privacy rights, namely, protection from the State, corporations and individuals. In the case of the State, the point is moot as the State already holds the information. As for corporations, the counter argument in favour of disclosure may be made, namely, that employees/workers would be in a greater position for negotiating wages if furnished with the remuneration details of others. Finally, individuals, it is granted, may use taxpayer information in order to target others for theft and robberies. In practice, this is not what occurs however. Having spent a year living in Norway where tax returns are published online, I can safely say that law and order do not collapse. On the other hand, transparency of information seeks to ensure lower levels of evasion as neighbours will effectively “rat” on each other to the Revenue if their lifestyles fails to match purported incomes.

Accordingly, the justification for privacy over tax affairs is on fairly shaky ground in general. Now, when combined with the question of publishing politicians’ tax affairs, the justification gets eviscerated by a countervailing public interest in ensuring propriety in public office. If the accusation here is that I would impose one rule for some and a different rule for the rest, so be it-it is not a question of horizontal equity. We already hold politicians to different rules and standards. For instance, the details of their expenses are already published. A bankrupt cannot serve as an MP. You cannot run if you are a member of the armed forces, police or judiciary. More importantly, if those who are in charge of the laws choose not to fix them, but rather take advantage of their loopholes or circumvent them (even if morally this might be agreeable), then why even have elected politicians?

Then the issue which remains is not one of principle, but rather one of practice. How would such a rule for disclosure work? Who would have to publish their affairs? Would it merely be elected politicians, or would it include members of the House of Lords? Would it only be politicians, or would it also include those that influence policy? What about journalists, think tank members, commentators or academics? The answer, for now, is surely just elected politicians: those to whom we impliedly consent, through the ballet box, to having a legislative monopoly by which we are all bound. It might be considered then whether we should roll this treatment out to the House of Lords who hold a residual legislative role, but it is worth recalling that their role operates somewhat in the negative: legislation is not promulgated in the Lords. If this distinction seems anomalous, it is a reflection of the very strange position that the Lords finds itself in the British Constitution, and that is a debate for a separate day.

Of course, the hand of increased transparency should not be overplayed. It will not in itself bring about profound changes to public confidence in politicians. The furore and accusations surrounding Cameron and Corbyn serve to highlight the problem which follows transparency: it relies upon an informed polity not to jump to rash conclusions. This will come in time. But it relies, in part, upon the media acting properly in the public interest and not in a hysteric frenzy to attract readers.

[1] Although the income tax was first introduced in 1799, it was during the Napoleonic Wars and as such, the need for revenue was largely accepted by the public as necessary for the war effort-the relevant act accordingly did not need to come equipped with the various elements later introduced to protect privacy

Full disclosure: I don’t trust today’s mega tech corporations. Undoubtedly, they provide services that we all like, and nowadays, even need. But I don’t trust the supranatural profits that they extract. That screams either market failure or monopolizing techniques, or most likely, a combination of both: surreptitious in the former, unscrupulous in the latter. And these profits largely rest and accumulate offshore.

That brings us to Panama: a tax haven not located offshore but categorised as such given the general characteristics of tax havens. Revelations this week of national figureheads and establishment leaders having financial links to this offshore destination are just another in a recent catalogue of expositions of potential tax impropriety. Of course there are legitimate reasons to use tax havens for financial matters, but they are largely eclipsed by improper ones. Coming back to multinationals then, resting profits offshore could be characterised as either depending on the approach adopted. It could be an immoral shift of otherwise taxable profits, or it could be a rational response to loopholes in the international tax framework.

Indeed, the problem of profits ending up in tax havens was the catalyst for the OECD’s recent Base Erosion and Profits Shifting project. A fundamental problem at the heart of the OECD’s project however was that it was never going to depart from the arm’s length principle. In and of itself, the principle is defensible. It is problematic however when combined with the existence of tax havens, as corporations will inevitably use the rule so as to shift profits to places where they are not taxable (or where tax is minimised). Thus it becomes apparent the crucial problem in reforming the international tax rules: tax havens and countries which operate to facilitate tax havens.

This is all the more problematic in the 21st century when so much of a large tech companies’ value is wrapped up in intellectual property. Patents are issued for products processes which are novel. Herein lies the glaringly obvious problem with applying an arm’s length principle to transactions concerning something which is patented: it attempts to find a comparator for that which is unique. This fundamental tension allows companies to price patented materials in a manner most advantageous to them. When the patent itself is held offshore, the profits follow suit.

So what’s the solution? Fundamental reform of the international tax rules? Getting tough on tax havens? Increased resources in the hands of the revenue authorities and increased co-operation? In truth there is no simple answer. But in the case of multinationals engaging in aggressive tax practices, I’ve blogged elsewhere that a resolution may lie in antitrust/competition law enforcement. It should be remembered that Teddy Roosevelt took on America’s corporate titans in the early 20th century with the Sherman Antitrust Act. There is precedence in thinking outside the box on this one.

‘Accelerated Payment Notice’ (or ‘Partner Payment Notice, nothing of substance turns on the distinction) judicial reviews are coming thick and fast (see: Rowe; Aston; Walapu). None so far have been successful before the Courts, although the first JR (Rowe v HMRC) had a fleeting success when the claimants were granted a temporary injunction against the APN, but Simler J swiftly overturned this. As an aside, I reckon at least one of these judicial reviews will make it all the way to the Supreme Court, but we’ll have to wait at least 2 more years for that to happen.

In order to understand why so many taxpayers are taking to JR, it is first necessary to revisit the statutory scheme. The APN regime broadly requires that taxpayers pay disputed tax upfront, before being able to challenge HMRC’s assessment through the normal channels. APNs may be issued, pursuant to FA 2014, s. 219 where the following conditions are satisfied:

1. Either an enquiry or appeal are in progress;
2. A tax advantage accrues from the particular arrangements; and
3. A follower notice has been issued; the arrangements are DOTAS notifiable (FA 2004, s. 311); or a GAAR counteraction notice has been issued (FA 2013, Sch. 43, para 12).

Once an APN notice has been to the taxpayer, the money becomes payable within 90 days. There is no right of appeal against the APN, but merely the right to make representations to HMRC, as a means only of objecting to either the satisfaction of the conditions or to the amount submitted to be due. After taking into account the representations, HMRC may refuse to withdraw the APN.

Think about that for a moment. The entirety of the disputed amount becomes effectively instantly payable. If an APN has been issued for a taxpayer who entered into the once, seemingly, incredibly popular film schemes, the amount due could well be into the hundreds of thousands. As Jolyon Maugham QC has pointed out, taxpayers are left with little option but to fight the APN, but without any right of appeal against the APN available, the only route which can be taken is through the Administrative Court.

But a judicial review in the context of an APN will be tricky. There are, to the author’s mind, three potential strands to any JR argument in the context. The first is that the legislation itself is incompatible with the ECHR. The second is that one of the conditions expressed in the legislation has not been properly satisfied. The third is that some implied condition has not been satisfied.

For those interested, the judgments of Simler J in Rowe and Green J in Walapu respectively, fairly comprehensively close off the chances of attack under either of the first two strands where HMRC has its ducks in a row. I wish here only to comment briefly on the third potential strand. The stated intention of the APN regime is to ‘alter the economics of tax avoidance by stripping from parties to such schemes all of the liquidity advantages that they, hitherto, enjoyed’ (Walapu, para 1). This statement, for me, is loaded with one very important caveat which ought to be implied into the operation of the regime, namely, that APNs cannot be used retrospectively as a sword as I’ve set out in a previous blog (I will come back to this retrospective element later). They are merely to shift the disputed tax prior to court adjudication.

They cannot be used in conjunction with something which renders it akin to a threat, such as, for instance, a settlement offer from HMRC. Why? Because the interposition of a settlement offer would potentially infringe the Litigation and Settlement strategy (which provides that HMRC will either accept 100% or nothing where a dispute is of an all or nothing nature) if lower than the disputed amount and, more importantly, effectively seeks to restrict taxpayers’ access to the courts (a fairly important constitutional right). Where a taxpayer is offered a settlement of, say, £100,000 payable in reasonable monthly instalments or, if she refuses, must pay, say, £200,000 within 90 days, the taxpayer is left with little choice but to accept the former. The interposition of a settlement offer effectively decides the matter, thereby placing the power to decide disputes in the hands of HMRC. In combination, it is posited that these elements would render the issuance of an APN an abuse of power.

My mind was cast to this idea when reading the judgment in Walapu. The tone of the APN letter issued to the taxpayer, to my mind, was intimidatory by implication:

“The letter went on to explain the possibility for the Claimant to settle his tax affairs without the enquiry proceeding. It emphasised that whether he settled or not was entirely a matter for him but that if he did not wish to settle “…the current compliance check will remain open”. It was explained that there was no right of appeal against the APN but that if he disagreed with the notice he could make representations to the Revenue objecting” (para 28).

It doesn’t appear that the taxpayer was actually offered a settlement by the Revenue in the case, but was merely invited to enter into talks with HMRC. Additionally, if one reads the judgment, it becomes apparent that HMRC had engaged the taxpayer more or less from the day he issued his tax return claiming the losses produced by the tax scheme he entered into. The taxpayer was made aware of HMRC’s concerns about the viability of the tax scheme from the beginning effectively, and from such point, he was on notice that HMRC would pursue his case. To this end, HMRC’s conduct in respect of Dr Walapu appeared to be entirely above board.

Additionally, from the cases I have read so far, it does not appear that HMRC put an offer on the table seeking to coerce the taxpayers to settle and remove their access to the courts. HMRC appears so far to have carefully chosen the cases it has pursued with APNs. As such, this blog is perhaps academic!

A final note on why the implied conditions attaching to APNs issued for schemes entered into before the introduction of the regime as opposed to those entered into after the Finance Act 2014 should be different. For those who enter into schemes today, it is incontrovertibly clear that the disputed tax could become immediately payable. As such, the courts are unlikely to be sympathetic to taxpayers who have taken a risk and are suffering the entirely foreseeable consequences of their actions.

It’s early morning over here in New South Wales, so I’m quite late getting around to reading up on the interstices of the UK budget. As I blogged on the issue some time ago, it seems appropriate to comment on the Chancellor’s announcement in the budget that he intends to introduce a sugar tax. The details were announced as follows:

“I am not prepared to look back at my time here in this parliament, doing this job and say to my children’s generation:

I’m sorry. We knew there was a problem with sugary drinks. We knew it caused disease. But we ducked the difficult decisions and we did nothing. So today I can announce that we will introduce a new sugar levy on the soft drinks industry.

Let me explain how it will work. It will be levied on the companies. It will be introduced in two years’ time to give companies plenty of space to change their product mix. It will be assessed on the volume of the sugar-sweetened drinks they produce or import. There will be two bands — one for total sugar content above 5 grams per 100 millilitres; a second, higher band for the most sugary drinks with more than 8 grams per 100 millilitres.

Pure fruit juices and milk-based drinks will be excluded, and we’ll ensure the smallest producers are kept out of scope. We will of course consult on implementation. We’re introducing the levy on the industry which means they can reduce the sugar content of their products — as many already do. It means they can promote low-sugar or no sugar brands — as many already are. They can take these perfectly reasonable steps to help with children’s health.

Of course, some may choose to pass the price on to consumers and that will be their decision, and this would have an impact on consumption too. We understand that tax affects behaviour. So let’s tax the things we want to reduce, not the things we want to encourage. The OBR estimate that this levy will raise £520 million.”

In my earlier blog, I had assessed the possibility of introducing a sugar tax and gave it a qualified backing provided it could be first demonstrated that an increase in price would reduce consumption in the target problem group. I had also stressed that a sugar tax should not be introduced as a standalone measure, but should come hand in hand with working with industry and education. The reason for qualified support was that the measure seems to have had some effect in other countries where similar measures have been introduced, but of course, there have likewise been myriad problems.

The Chancellor in his announcement acknowledged the multitude of practical issues. To this end, he plans to grant exemptions for fruit juices, milk-based drinks and small producers; he pointed out that the cost might not necessarily be passed on to consumers and (h/t Professor Freedman) quite paradoxically, the Chancellor champions the measure as both changing behaviour whilst simultaneously bringing in £500mil (of course, that is an OBR estimate, which has about as much credibility these days as the Catholic Church). Additionally, the Chancellor acknowledged the role that industry should play in reducing sugar intake. However, it was not actually explained (and perhaps Treasury has had its own impact assessment performed which has yet to see the light of day) why the Chancellor has faith that this measure will actually reduce sugar consumption in the target problem group. The IFS is similarly minded that evidence of effect is needed (page 31):

“While this policy may seem an attractive solution to the growing problem of obesity- and diet-related illness, it should be carefully evaluated in order to avoid generating unintended consequences such as worsening other aspects of dietary health. Diet is multifaceted, which makes designing policy to improve nutrition relatively difficult: while smoking each cigarette, for example, is associated with harm and little obvious good (beyond the immediate gratification of the smoker), consumption of some products that contain sugar also involves the intake of nutrients that can contribute to a healthy diet. This makes the consequences of a broad based tax on sugar uncertain; further evidence of the possible effects is needed”

Taking these together, I am willing nevertheless to support the Chancellor’s punt on the sugar tax. Yes, it is a headline-grabbing measure that masks the grimmer details of the budget. Yes, it is very unfortunate that the Chancellor did not disclose in greater detail the reasons underpinning his faith in the ability of the measure to actually work. Yes, there will likely be many problems with the implementation and producers are likely to get up to all kinds of shenanigans to avoid the imposition. Yes, history is generally not on his side in terms of changing consumer behaviour through the indirect tax system. But the studies from overseas provide reason for, in the least, guarded optimism on the utility of the measure. Far from being the first time that the exchequer is willing to take a punt on a measure, the additional 24p levy on soft-drinks is dwarfed by the various expensive, ill-thought through measures introduced generally during the biannual (even triennial) tinkering with the tax system.

So if it turns out not to work, it can just be scrapped. 

Judicial Review is an area of law which requires restraint on the part of the courts. Unlike statutory appeals which endow the court with the right to resolve disputes between parties, reviews assess the integrity of decisions against which the legislature has not provided a statutory right of appeal. From a constitutional perspective, it is notable that Parliament has saw fit that the court should be the arbiter in the former, but that the authority to arrive at decisions in the latter should reside with a public body. As such, courts should be cautious in the case of reviews so as not to undermine the wishes of Parliament. In the case of expertly constituted public authorities, the case for judicial restraint is particularly powerful.

In two recent papers, both now available on SSRN, I take a look at recent actions on the part of HMRC in the area of judicial review. In a paper to be published in the April edition of Public Law (find here), I assess HMRC’s actions against the background of the dispute between common law constitutionalists and modified ultra vires theorists. In brief, I argue that in exceptional circumstances HMRC does not feel bound by the ultra vires hurdle so as not to effectuate substantive legitimate expectations. Such an exceptional state of affairs would arise in the case of significant unfairness to the taxpayer. This runs counter to the longstanding notion that there cannot be a legitimate expectation if it requires the public body to act beyond its powers. Tax aficionados may recall the controversial Al-Fayed case in this regard.

In a second paper published in the March issue of British Tax Review (find here), I look at the recent High Court decision in R (Hely-Hutchinson v HMRC). The question for the court was whether HMRC could frustrate a legitimate expectation in circumstances which would lead to significant unfairness to the taxpayer. The court balanced the duty of fairness against the duty to collect taxes and held in favour of the taxpayer. A limitation in the judgment however lies in the failure to specifically acknowledge the ultra vires point highlighted in the Public Law article. The case is under appeal and no doubt this problem will be visited in the Court of Appeal.

When I moved to the UK in 2012, it was just after Jimmy Carr had been engaged in that notorious tax scheme scandal. Since then the public’s interest in tax has been characterised by a series of ebbs and flows, rarely moving out of the spotlight and, sometimes, for weeks on end, occupying the Zeitgeist (ed: the joy of running a blog is that you can mix metaphors to your heart’s content) We are currently riding a flow. But at times like this, in the midst of leaked information, speculation and accusation, there tends to be collateral damage. Innocent victims are sucked into the chaos and everything becomes about tax. Policies can be driven by tax considerations without thought for the broader consequences.

Against this backdrop, my mind last week turned to Country by Country reporting. The basic idea is that multinationals should have to share the information which dictates how much tax they pay in each country they operate in. Armed with more information about their tax affairs, revenue authorities can co-ordinate to prevent issues such as (double) non-taxation, lawmakers can better address the flaws in the international framework and citizens can either be confident in the robustness of the system and integrity of multinationals or, if dissatisfied with either, can apply pressure to both to ensure everybody plays the game fairly.

Aside from the issue of taxpayer confidentiality, it seems pretty unobjectionable that there should be co-operation between revenue authorities, who in turn can inform policy makers. The dissemination of the information to the public however may be problematic, but this is precisely what the European Commission is now seeking. This policy, whilst driven by tax considerations, fails to accommodate the knock on effects on competition. In general, it should be stressed, information shared with consumers is unproblematic. However, there can be specific circumstances in which the release of facially benign information can produce co-ordination on the market. In layman’s terms, this means that competitors may be able to co-ordinate their activities so as to increase price. This will depend on the nature of the market and the information itself. The European Commission set it out as follows:

“However, the exchange of market information may also lead to restrictions of competition in particular in situations where it is liable to enable undertakings to be aware of market strategies of their competitors. The competitive outcome of information exchange depends on the characteristics of the market in which it takes place (such as concentration, transparency, stability, symmetry, complexity etc.) as well as on the type of information that is exchanged, which may modify the relevant market environment towards one liable to coordination” (para 58)

The core issue is essentially whether the information exchange will reduce uncertainty as to the future conduct of competitors.

When it comes to Country by Country reporting, it is not impossible to think of situations in which the release of historic, individualised data about companies, where they operate and to which countries they sell (and in what quantity), could reduce prospective uncertainty. There are many duopolistic markets (those with primarily 2 players. For instance, look at Boeing and Airbus) or oligopolistic markets (such as pharmaceuticals, where there are few players, the market is very difficult to access and highly transparent) occupied by large multinationals. Further information in these markets specifying the precise operations of each could allow the competitors to divide up the market geographically for instance. If historic information about the companies indicated a trend in timing of price rises, then each could co-ordinate so as to increase their price at the same time in the same amount.

This is not to say that the proposals are without merit, even if the proponents might be overoptimistic as to the end results of such a regime. As Louis Brandeis once remarked, “sunlight is said to be the best of disinfectants”. More information in the market is generally a good thing. But that does not cover all cases and scenarios. In these turbulent times, it would be unwise to dive tax first into policies without, in the least, an impact assessment which actually considers, holistically, the competition effects of such proposals. This is a very modest proposal. The firms against whom Country by Country reporting is primarily aimed are large multinationals with significant market power. It would be unwise to accidentally give them further scope to extract supracompetitive profits.

**Update: In June 2016, the Impact Assessment was published (see here). Whilst it address many of the different impacts of the proposal, it failed to deal with the problem of potential co-ordination or consolidation of the market.

In the Guardian this weekend, there was a curious column which (h/t Jolyon Maugham QC) simultaneously accused Uber of both making huge losses and as having been the beneficiary of governmental tax avoidance facilitation. What the article failed to notice however is that Uber may well have committed other legal sins. With so much emphasis on tax law these days, we often fail to see the wood for the trees, or indeed, the great spectrum of illegal activities in which companies may engage. What the article revealed was in fact the proposition that Uber has been engaged in predatory pricing, an anticompetitive activity which contravenes Article 102 TFEU (leaving to one side the prerequisite of establishing dominance). The law on this matter is relatively simple. If you price your services below your own average variable costs, you are held to have priced predatorily (see: Case C-62/86 AKZO Chemie v Commission [1991] ECR I-3359). This is precisely the activity in which Uber is accused of having engaged:

“A recent article in The Information, a tech news site, suggests that during the first three quarters of 2015 Uber lost $1.7bn while booking $1.2bn in revenue. The company has so much money that, in at least some North American locations, it has been offering rides at rates so low that they didn’t even cover the combined cost of fuel and vehicle depreciation…

…sitting on tons of investor cash, Uber can afford to burn billions in order to knock out any competitors, be they old-school taxi companies or startups like Kutsuplus….

…Uber’s game plan is simple: it wants to drive the rates so low as to increase demand – by luring some of the customers who would otherwise have used their own car or public transport. And to do that, it is willing to burn a lot of cash, while rapidly expanding into adjacent industries, from food to package delivery”

This is not the first time that accusations against Uber’s activities have been misplaced. Elsewhere, authors have focused upon the question of whether Uber is an employer and as such owes duties to its employees. That’s a minor slap on the wrist compared to the antitrust implication of its structure. Uber uses an algorithm to set prices for cabbies. If Uber is not an employer, then it is fixing prices, a serious violation of antitrust law regardless of jurisdiction (for more on this, see an excellent post from colleague Dr Julian Nowag). This could cost Uber up to 10% of its annual worldwide turnover under Article 101 TFEU. In the US, the crime comes with the possibility of treble damages and incarceration. In the UK, the cartel offence under the Enterprise Act 2002, Part 6 comes with a term of imprisonment of up to 5 years.

It is an unfortunate trait of humans that we often see our own woes as most critical (a by-product of the selfish gene?) Us tax geeks in particular; we may sometimes forget that there is more to this world than tax considerations. We often close our eyes, not only to legitimate commercial reasons which influence decisions, but also to the fact that tax law is just one piece of the smorgasbord of regulations which constrains the activities of companies. With that in mind, should we turn our attention to the antitrust implications of country-by-country reporting?

Follow-up blog to come later in the week…