Dr Stephen Daly

The Guardian and The Telegraph have posted articles in the last week picking up the quandary of buy-to-let landlords. By a combination of changes in the summer budget and autumn statement, the previously lucrative venture whereby landlords would purchase property with the sole intention of renting has now been placed “in the red”. Landlords could previously claim tax relief on mortgage interest payments at the marginal rate, but from April 2017 to 2020, this will gradually be reduced to 20% (the ‘Clause 24’ change). “Wear and tear allowance” previously allowed landlords to deduct 10% from rental profits, but from April 2016 will only be granted for costs actually incurred. Meanwhile, George Osborne used the autumn statement to increase stamp duty on purchases of buy-to-let and second homes by 3%.

Landlords unsurprisingly are less than happy with the legislative changes. A group representing 250 landlords is seeking to launch a legal challenge by way of judicial review of the Finance (No. 2) Act 2015 enacting the ‘Clause 24’ change to mortgage relief (see: s. 24). As The Guardian reports, the group claims that the measure breaches Human Rights Law and EU Law, whilst The Telegraph reports the group as claiming that the move flouts “a long-established principle of taxation that expenses incurred wholly and exclusively for the purposes of the business are deductible when calculating the taxable profits”. It would seem from these statements that the claims pivot upon establishing that the new legislation breaches either Article 1, Protocol 1 of the European Convention on Human Rights (‘A1P1’), some common law right or EU State Aid Law. These are my rough guesses based upon very rough information. Although the former two will have little prospect of success in the courts, the latter EU Law point could well have some bite. This will be used as a springboard for a more general discussion about the development of EU State Aid Law.

Human Rights Law

A1P1 provides as follows:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No-one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

Although facially it would appear that A1P1 is engaged every time there is a tax change, the hurdles for satisfying the threshold necessary for a claim to succeed are in fact “very high” (Stanley Burnton J in R (on the application of Federation of Tour Operators, TUI UK Limited, Kuoni Travel Limited) v Her Majesty’s Treasury [2007] EWHC 2062, paragraph 154). Member States are granted a “very wide margin of appreciation” in matters of economic and social policy (James v UK (1986) 8 EHRR 123, paragraph 42) and in order to succeed under A1P1, it must be proved that a tax increase was “devoid of reasonable foundation” (National & Provincial Building Society and Others v United Kingdom (1997) 25 EHRR 127, paragraph 80; Gasus Dosier-und Fördertechnik GmbH (1995) 20 EHRR 403, paragraph 62)).

When applied to the case at hand, the argument that the tax change on buy-to-let properties breaches A1P1 seems unsustainable. There is a clear policy initiative underlying the change, in addition to the fact that it will raise revenue. Landlords might be aggrieved but that is very far from the threshold of lacking any reasonable foundation.

Common Law

The reason why economic and social policies enshrined in primary legislation are almost immune from challenge under the ECHR relates to the primary constitutional principle of Parliamentary Sovereignty (that Parliament should have the ultimate say, in this case, upon national matters of social and economic policy). This will also be sufficient to neuter any potential challenge on the basis of the common law. It is not possible that a common law right that “expenses are wholly and exclusively deductible” could constrain Parliament’s constitutional power to enact primary legislation (Wheeler v Office of the Prime Minister [2008] EWHC 1409 (Admin), paragraph 41; Rowe v HMRC [2015] EWHC 2293, paragraph 95).

EU Law

It is under EU State Aid provisions however that the landlords might actually have a case. I’ve blogged elsewhere about State Aid Law (here, here and here) and am fascinated by what I see as an overextension of the law in the area. It might seem strange that a provision originally introduced to prevent states from intervening in the single market by favouring their own national undertakings and industries over others could be used to challenge (effective) tax hikes, but that is the strange direction that the law has been taken.
State aid arises where:

• there has been an intervention by the State or through State resources
• the intervention gives the recipient an advantage on a selective basis
• competition has been or may be distorted;
• the intervention is likely to affect trade between Member States.

The first condition would be satisfied here by reason of the fact that the Government has introduced the change in primary legislation (Cases T-211/04 Commission v Government of Gibraltar [2011] ECR I-11113). The third and fourth conditions are today to be taken almost as read according to the caselaw (Case C-730/79 Philip Morris Holland [1980] ECR 2671; though see Joined Cases T-515/13 and T-719/13 Spain and Lico Leasing v Commission where the Commission was scolded by the General Court for not sufficiently demonstrating distortion or effect on trade h/t @AislingTax). For instance, in Eventech (C-518/13 Eventech v The Parking Adjudicator), the Court of Justice found that the policy of permitting black cabs to use London bus lanes could affect trade between Member States.

It is the second condition – the need for a “selective advantage” – where the contest for State Aid arises. There is essentially a two-stage test that is adopted in relation to this assessment (although this is sometimes broken down into three or even four stages). The first question is whether a “State measure is such as to favour ‘certain undertakings or the production of certain goods’… in comparison with other undertakings in a comparable legal and factual situation in the light of the objective pursued by the measure concerned”. The second is whether the measure “is justified by the nature or general scheme of the tax system of which it is part” (Case C-143/99 Adria-Wien Pipeline [2001] ECR I-8365, paragraphs 41 and 42).

Two cases in particular illustrate the susceptibility of the current tax change to infringing State Aid Law, namely GIL Insurance and British Aggregates. The former concerned Insurance Premium Tax (‘IPT’). This was introduced on insurance premiums generally in 1994. The Finance Act 1997 however introduced a new higher rate of 17.5% of IPT on insurance premiums relating to domestic appliances, motor-cars and travel. The UK sought to justify the differentiated rates by reason of the need to compensate for the fact that these activities were exempt from VAT.

The General Court refrained from discussing the first step in detail but reasoned with the assumption that the measure is specific. However, the Court nevertheless concluded that the measure is justified by the nature and overall structure of the system. The Court mentioned in particular the fact that the higher rates of IPT and VAT form part of an inseparable whole.

The British Aggregates scandal meanwhile took some 13 years to be resolved. The case concerned a UK levy on aggregates – inert granular materials such as sand, gravel or crushed stone. The levy only applies to virgin aggregates – aggregates that are newly mined. It does not apply to recycled aggregates (aggregates already used) or secondary aggregates (such as slate waste, china clay waste, colliery spoil, ash, blast furnace slag, waste glass and rubber). The General Court initially agreed with the Commission that there was no selectivity provided to the competitor of the applicant ‘British Aggregates’ (who benefited from using recycled aggregates). It held that Member States are empowered by reason of Article 11 of the Treaty on the Functioning of the EU to consider environmental protection in the interpretation of Treaty provisions.

The Court of Justice of the European Union overturned the General Court’s decision and remitted it for reconsideration. Environmental protection ought to have come within the second limb of the test and not the first, it was held.

The General Court on reconsideration found that there were factual and legal similarities between virgin, secondary and recycled aggregates, despite the fact that they were subject to different rates of tax. Virgin aggregates and secondary aggregates could be used for the same purposes for instance. Moreover, the environmentally harmful nature of extraction does not depend on the type of aggregates extracted. The extraction of a secondary product could be just as harmful as extraction of a virgin aggregate. Finally, the court noted the possibility that the exemption for clay, slate, china clay, ball clay and shale aggregate “creates greater demand for those aggregates in the construction industry, or even an economic incentive to extract more (‘primary’) aggregates from those exempt materials. Yet this steering of demand towards (‘primary’) aggregates obtained from exempt materials would reinforce the unequal economic effects produced by the tax differentiation itself as regards the commercial exploitation of alternative taxed aggregates”.

The Court then moved to the second question of whether the differentiation was justified by reference to the overall environmental objective. This was also rejected. The environmental objective was undermined by the fact that the scheme created a market for secondary aggregates, the extraction of which was just as harmful as the extraction of virgin aggregates.

Conclusion

Relating these cases and principles to the Clause 24 change, the following remarks can be made:

• Firstly, tax measures are not immune from State Aid Law even if enshrined in primary legislation.
• Secondly, they demonstrate that National Legislatures should be cautious not to accidentally differentiate between undertakings in legally and factually similar situations. Undertakings that are engaged in the market of renting properties could be held to be in similar legal and factual situations. They are subject to the same regulatory regimes and provide the same services. However, “Clause 24” differentiates between entities/individuals engaged in the renting of property whose assets are encumbered by mortgages and those that are not (admittedly any State Aid link here is tenuous). The change also, importantly, distinguishes between individual landlords and companies, with the latter continuing to obtain relief for mortgage interest. It is accepted that the idea that there is State Aid at play here by denying relief is far from the more orthodox case of a Member State granting relief or exemptions (h/t @hselftax), although the Commission decision of 26th January 2011 (OJ 2011, L-235/26) dealing with an exemption to an exemption to a relief comes close. Nevertheless, the question is whether there is an advantage provided to some and denied to other parties in similar legal and factual situations. Favouring companies over individuals would arguably do this. As such, the Government’s first flaw is its potential engagement of the State Aid provisions. (For reference, Conor Quigley QC in a video here from 18.15 explains why the “Bankers Bonus” could have engaged State Aid law)
• Thirdly, any differentiation must be done with careful scrutiny of the underlying objective of the general scheme. In the case of “Clause 24”, the general scheme could be argued to be the expenses regime, the underlying rationale of which might be argued to allow for the deduction of expenses wholly and necessarily incurred for the purposes of the business (an argument which seems to be suggested by the coverage in The Telegraph). That expenses should not be subject to taxation is accordingly undermined by the differentiation. Of course, it could well be countered that the general overarching tax system distinguishes, for myriad reasons, between Corporate and Income Taxes and that this asymmetry of treatment is a natural consequence (indeed, GIL Insurance would support this) (h/t @SatwakiChanda @AislingTax). Alternatively again, it might be argued that the policy underlying the change justifies the differentiation. The market for properties, particularly in the Southeast, has been overheated and a particular risk to the economy at the moment is mortgaged buy-to-let properties. Six out of 10 buy-to-let landlords could be vulnerable if interest rates rise by 3%, according to the Bank of England. However, that the property market is overheated cannot be solved by simply dissuading newcomers. Nor does the change necessarily bring this about given that newcomers can simply incorporate to obtain the relief. Similarly, that the mortgage-backed buy-to-let owners are a risk to the economy is not eliminated by the change. To this end, the Government’s second flaw could be said to be not having thought clearly about the justification for differentiating between undertakings in the market.

It should be stressed that my purpose in writing this post is to highlight the breadth of State Aid Law and to make the case that even relatively benign tax changes can come within the scope of the State Aid provisions. It is accepted further that the argument in relation to Clause 24 would even then fall at very outer limit. Intuitively it seems wrong that any such claim would succeed.

Ultimately, I hope that future State Aid cases clarify the scope of Member States’ competence over tax matters. The same reason that the Legislature should not be thwarted by the common law in its attempt to introduce social and economic policy to combat genuine problems particular to that State should be similarly why EU Law should not be allowed to do so. The ability of the State to remove benefits from certain undertakings, entities or individuals or to impose exceptional burdens to encourage change is an important policy instrument. State Aid should be concerned with interventions by the State which positively favour certain entities over others. Focusing instead upon relative favouritism blurs its boundaries and would be more aptly dealt with by the non-discrimination principle of EU Law.

*As a postscript to the British Aggregates saga, the Commission reopened the case in 2013 and in 2015 concluded that the exemptions for shale and spoil of shale represent State aid that is incompatible with the internal market, as shale is the only exempted material that is deliberately extracted to produce aggregates. Exempting shale and spoil for shale extraction from the aggregates levy therefore would not contribute to the environmental objective of the tax. The British Aggregates Association has appealed the case and it will be heard before the General Court sometime in 2016

Is it ridiculous that the CPS is still considering a ‘trial of the facts’ of the recently deceased Lord Janner? Well, in the context, not quite. If it is ridiculous to have a ‘trial of the facts’ now, it must also have been ridiculous to have a trial on the facts whilst he was still alive.

To explain, it is first worth recalling the circumstances behind the Lord Janner episode. Janner, a Labour peer, barrister and writer, was to be tried for 15 counts of indecent assault and seven counts of a separate sexual offence in relation to nine individuals, most of who were under the age of 16. However, it was not to be an ordinary trial, but rather a trial of the facts. In these proceedings, the jury is asked to decide whether or not the accused did the acts in question. They may be ordered by the Court where the defendant is unfit to plead.

This process of ordering a trial of the facts is actually a relatively recent introduction. Prior to the Criminal Procedure (Insanity) Act 1991, a finding of unfitness to plead led to automatic, indefinite admission to a psychiatric hospital in order to receive treatment. The accused was presumed to have done the facts in question (see, s. 5, Criminal Procedure (Insanity) Act 1964). The 1991 Act introduced a “supervision and treatment order” and an “absolute discharge” as alternatives for admission to hospital, and the Domestic Violence, Crime and Victims Act 2004 replaced the admission order with a “hospital order”, with or without a restriction order, and the “supervision and treatment order” with a “supervision order”.

As a result today, if the jury finds that the accused committed the relevant act, the outcome of a trial of the facts will be:

• A hospital order where the person is suffering from a mental disorder for which appropriate medical treatment is available; and/or a restriction order where it is necessary for the protection of the public from serious harm that the person be subject to special restrictions; or
• A supervision order where the defendant is to be under the supervision of a social worker or probation officer for the period not exceeding 2 years; or
• An absolute discharge.

The 87 year-old Janner was acknowledged to be suffering from degenerative dementia by four medical experts, two each for the prosecution and defence. Indeed, when he appeared in Westminster Magistrates’ in August of this year for a reading of the charges against him, he is said to have uttered “Oooh. Isn’t it wonderful?” before waving as he was led out of the Court. At the same time, the DPP, David Perry QC (who reviewed the case), in addition to Openshaw J at the hearing in the Old Bailey in December were each convinced that there was sufficient evidence to prove beyond a reasonable doubt that Janner committed the acts. Assuming that the acts would be proved accordingly, and as the disease is incurable and his condition decrepit, the only conclusion to the trial of the facts would have been an absolute discharge. Given his state, he would also have played virtually no part in the trial anyway.

Against this background, it does not seem entirely “ridiculous” that a trial of the facts would proceed even though Janner is dead. The trial would merely establish whether the acts were indeed committed. The fact that there will be no order by the court is essentially no different from the absolute discharge which would have happened if Janner were still alive.

That the CPS may proceed with a trial of the facts of a dead man is no more ridiculous than proceeding with a trial of the facts of a man with degenerative dementia. So if the argument is that the proceedings should no longer take place, it must also be that they should not have been pursued in the first place. This becomes especially clear when it is recalled that the “trial of the facts” construct was introduced in order to prevent automatic, indefinite admission to a psychiatric hospital, without actually establishing whether the accused in fact did the acts in question, and thereafter to provide redress instead which more adequately addresses the accused’s state.

Last week, I blogged about the Flour Tax: an episode from the 1930s in Australia which I came across whilst researching the history of the Australian Tax Office (‘ATO’). Another gem from this research is not a story, but a person, namely Robert Ewing. A lifelong civil servant, he was the second person to head the ATO and reigned for some 22 years. His professionalism and conduct were said to be of the highest standard of administration and he possessed singleness of purpose and untiring devotion to duty, which belied a frail appearance (L. Edmonds, “Working for all Australians 1910-2010”, p. 119). He was renowned for his determination to uphold the integrity of the office. For him, the “principal rule of the department” was to “assist taxpayers in every possible way”.

In addition to these admirable characteristics, he was also quite the philosopher. In 1926, approximately 10 years into his tenure, he produced a small book (32 pages in length) entitled “Taxes and Their Incidence”. In it, he recalled the relationship between taxes and society in such eloquent terms that it warrants lengthy citation:

“We have seen that taxation means the drawing upon the revenue of the individuals of the community for the purpose of providing the wherewithal for effectively carrying on the activities of the community as a whole. A community is a living organism. It uses energy which is supplied by its component parts. It does not drain energy away from the individual; it merely diverts it into channels which are different from those into which the individual would have directed it. It is impossible for the individual member of a community to have any communal life, as we understand it, without contributing some part of his “energy” or earnings towards the creation and maintenance of the communal life. The existence of the community places limitations upon the individual members of it. At the same time, it makes the individual freer than he could possibly be if he had no communal life, but merely lived unto himself. Each member of the community, therefore, is bound to contribute some part of his “energy” or earnings for use in promoting the common welfare of himself and his fellows. The necessity to make this contribution is scarcely realised by very many Australian citizens, and many of the remainder use all sorts of means to try to avoid making it.

Speaking idealistically, the effect upon a community of taxation should be beneficial. It enables the community as a whole to maintain itself with some degree of respectability; it helps the community to pay its debts; it assists the community to take its place alongside the other communities of the world, and to speak with more or less influence and conviction. A community which taxes itself properly in order to meet its engagements always has a good reputation” (R. Ewing, Taxes and Their Incidence (Melbourne University Press 1926) pp. 11-12)

What shoots out from a reading of this abstract, for me, is two overarching, interrelated, ideas. First, when elaborating upon the duty to pay tax, Ewing focuses not upon the specific public services for which the taxpayer has or will have use but rather the general contribution which society has made to the bettering of that person’s position. The taxpayer accordingly should pay taxes not because she has used specific services funded by the general pot, but rather because she finds herself in this comparably better position as a result of the existence of society. A second striking concept here is that the diversion of funds towards the upkeep of a community does not undermine an individual’s liberty by stripping her of her property. Rather, the converse is true. The individual is rendered freer by contributing to communal life, the absence of which would leave her with fewer choices as to how she would like to conduct her life.

Of course, these propositions assume that the tax is being levied by consent in a democratic society. Ewing’s reflections were based upon his own experiences in Australia in the early to mid 1900s. The extract nevertheless encompasses a valuable expression of the relationship between tax and morality, and yet another reminder that the debates we have today are far from novel.

The final stage of my PhD focuses upon the Australian Tax System, owing to which I have come in contact with some fascinating literature exploring the history of taxation in Australia. One book for instance, +400 pages long entitled: “Working for all Australians 1910-2010: a brief history of the Australian Taxation Office” by Leigh Edmonds (available here), contains a host of gems unearthed during archival research.

An episode of note in the book relates to the introduction of a tax on flour (see pages 95 and 96):

“The flour tax was introduced in 1934 to help the wheat industry because the cost of production had become more than the sale price. Millers and others in the flour industry paid a levy intended to raise about half of the £3 million needed to support the wheat industry, which was passed on to state governments to be allocated to distressed wheat farmers. This tax was modelled on the sales tax and the Australian Tax Office administered it using sales tax staff, so the cost of collection was minimal. The tax first operated between December 1933 and May 1934, then from January 1935 to February 1936 and it was revived again in December 1938 as part of a wheat price stabilisation scheme”

What follows are the three classic consequences which flow from the introduction of a new tax (obligation or relief: when reading the below extract, think about the lifespan of Film Tax Relief for instance). First, taxpayers attempt to shift behaviour to avoid the new charge. Secondly, increased resources are required to tackle non-compliance. Finally, prudence on the part of the enforcers or lawmakers is necessary to outwit the avoiders.

The Commissioner of the Australian Tax Office (then Robert Ewing) described the fallout as follows:

“It was known that many persons had purchased large quantities of flour when the flour tax was first mooted, hoping thereby to avoid the incidence of the tax. Special action was taken to ensure that these persons accounted for the full amount of tax due by them, both to protect the revenue and to prevent competitive disabilities to other traders. The services of postmasters, country valuers, and officers of the Taxation Department were utilised in the inspection of stocks of flour held on 4th December, 1933, by persons in the metropolitan areas and larger country centres. The prompt action taken in this regard obviated in a large measure under-statements by taxpayers of stocks held by them.”

What lessons can be derived from this episode? The first is obviously that policymakers should be aware of the reaction of the target taxpayers group (as was clearly not the case in the ill-fated “Wallpaper tax”) when introducing change to the system, either by reason of a new tax, relief or obligation. The fact that HMRC is still unwinding Employment Benefit Trusts entered into to avoid the Bank Payroll Tax (an exceptional 50% levy on “bankers bonuses” above £25,000 in 2010) suggests that this has not yet been fully learnt. The second is to ensure that the revenue collecting body is adequately resourced to tackle any ensuing compliance issues. In this respect, one wonders whether the current government has properly reconciled the continuing cuts to HMRC (a further 18% announced at the Autumn Statement) with the increase in duties it is undertaking (is it realistic to expect HMRC to be able to cope with, for instance, Quarterly Tax Returns by 2020?).

Ultimately, the case of the Flour Tax, from the 1930s in Australia, demonstrates just how unnervingly timeless and homogenous tax issues are.

As with last year, there is likely to be much written on the blogosphere and in newspapers over the next few days dissecting George Osborne’s Autumn Statement. Rather than attempting to extensively cover it, I just seek here to tease out a few of my own notes on the tax issues which arose in the Chancellor’s speech.

The first is the decision to cut HMRC funding by 18%, or as expressed in the speech, HMRC’s agreement to make efficiency savings of 18%. That is a very significant cut-imagine the consequences for the body if one decided to eat 18% less? That would be a day and a quarter without food! Needless to say, much like binge dieting of this sort, the cut is also counterproductive. The end result will likely be a reduction in tax receipts. This is due to the fact that discretion in the hands of HMRC is contingent upon resource constraints. As discretion is increased, the number of arrangements that the Revenue may permissibly reach which do not collect the full amount of tax that might otherwise be due, also increases. The dicta of Lord Diplock in the Fleet Street Casuals case is authority for this suggestion:

“In the exercise of these functions the board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection” (R v IRC, ex parte National Federation of Self-Employed and Small Businesses [1982] AC 617 (HL), at p. 637)

The second is the hypothecated tampon tax charge. By way of brief background, tampons are categorized as “luxury” products for VAT purposes and incur a VAT charge of 5%. The reason for this is that VAT (introduced in 1973) is harmonised within the EU and as a result, classes of products which are subject to different rates of charge were agreed with the EU in 1972 (h/t Aisling Donohue, “zero rates” were not frozen until 1991). At that point, it was agreed that tampons would be classed as a “luxury” item, although it might be worth noting that Johnson & Johnson started producing tampons in 1974. Osborne today announced that the UK government would seek to negotiate with the EU to reduce the tax on the product so that it is zero-rated for VAT purposes. Until that point, the tax collected from the charge will be put to women’s charities. My first thought is that this is a fantastic idea. My second thought is – why bother even negotiating to remove the charge and not just continue to hypothecate the charge? This will provide a vital stream of revenue to these charities. Whilst it might be argued that there is no reason that this charge should come directly from women’s products, and I would agree that it ought not to be a burden imposed solely upon women, it is worth considering, in practice, just how difficult it is to convince government to hypothecate taxes at all. Or how almost politically impossible it is to raise any new kinds of taxes, the revenues of which could be put directly to such charities. (Note (added Wednesday 25 November 19h21) having just read why these charities are having funding difficulties in the first place, I no longer support these assertions. They were first thoughts after all-and first thoughts are rarely correct!)

My final thought goes to Northern Ireland, the 6 counties located above my country of birth. After years of lobbying, the country is finally to get autonomy to set Corporation Tax rates and, unsurprisingly, has endeavoured to reduce the rate to 12.5% to match the Republic of Ireland’s rate. The idea is that Northern Ireland has been neglected in terms of Foreign Direct Investment, to the benefit of its southern relation, by reason of the differential in Corporation Tax rates. When the Republic benefitted hugely from the Celtic Tiger boom in the 90s, generated by a massive influx of foreign capital and companies, an equivalent economic surge was not felt north of the border. But it is misconceived to believe that this Celtic Tiger was solely brought about by the 12.5% rate, as I suggested here, not least because the Republic of Ireland’s Corporate Tax rate has been this low since the inception of the State, but did not achieve prosperity until the 90s. So too it is misconceived to believe that a lowering of the rate to 12.5% will bring about some magical influx of foreign capital and resurgence of Northern Ireland’s staggering economy.

On Friday 20 November, the Tax Law and Policy Discussion Group at Oxford had the privilege of hosting Conor Quigley QC for a talk entitled ‘Tax and State Aid Law: Recent Experiences’. Conor is the foremost expert on State Aid Law and just two months ago released the 3rd edition of his textbook ‘European State Aid Law and Policy’. Discussion inevitably turned to recent European Commission investigations into the alleged selective tax treatment provided by the tax authorities in Ireland, Netherlands and Luxembourg to Apple (IRE), Starbucks (NE), Fiat (Lux) and Amazon (Lux). The revenue authorities in these cases blessed Advanced Pricing Arrangements for intra company transactions which the Commission suspects to be overly generous.

The talk confirmed what many of us had suspected, namely, that applying State Aid law to APAs with revenue authorities could create more problems than it solves. Will it be possible for third parties in separate Member States to those in which the Aid was allegedly granted to initiate proceedings against the revenue authorities in those countries, Quigley pondered? For instance, say that the Irish Revenue Commissioners blessed in advance an advantageous transfer pricing arrangement for Facebook in Dublin. Would it be possible for a third party in Germany to challenge the arrangement by raising the issue of State Aid in the National Court?

More pertinently and practically, Conor Quigley QC having stressed this in the latest edition of his book, how exactly does this matter square with a necessary delegation of competences between the Commission and the Member State? Is it for the Commission to act as a supervisory body to all revenue authority actions which involve some exercise of judgment or discretion (which all transfer pricing arrangements necessarily will as the calculation pivots on hypothetical assessments)? Ought it be correct that the Commission’s jurisdiction should be engaged to correct any and all historic mistakes of the revenue authorities? This would appear to be the Commission’s understanding: “Every decision of the administration that departs from the general tax rules to the benefit of individual undertakings in principle leads to a presumption of State aid and must be analysed in detail”. On the basis of the apparently extremely broad jurisdiction, I previously rhetorically asked whether there was any scope for avoiding the gaze of the Commission?

At least one of these investigations will be contested before the Court of Justice of the European Union. A win for the Commission may well prove to be a poisoned chalice. This is to be regretted. A summary glance at the details of the APAs which are under investigation will bring up the sense that there is something a bit “iffy” about the arrangements which were agreed. The Commission went so far as to say that the Apple deal seemed to have been “reverse-engineered” to produce a result amenable to the multinational (para 62).

So there certainly is a case for “something to be done”, but it is equally important that any action undertaken be done in a suitable manner.

To my mind, a more conceptually coherent route could have forged through the deployment of Article 102 TFEU, which proscribes an undertaking from abusing its dominant position. The Commission is the guardian of the internal market and is authorised to cleanse distortions caused by such abuse. This is a two-stage test-the first is the establishment of dominance and the second is proving that there is an abuse. What will be categorised as abuse is related to the concentration of dominance. Put another way, in order to stay on the right side of competition laws, what an SME with little market share in a fiercely competitive market may be entitled to do will be different from that of a quasi-monopolist. Discounts and rebates to distributors are a classic example of behaviour which is not facially problematic for competition law, but may become abusive depending upon the level of dominance and whether any “iffy” elements (like preventing distributors from seeking other suppliers) are present. Within this framework accordingly could hypothetically fit “iffy” deals struck with tax authorities in Member States.

At the very least, investigating the APAs within Article 102 would make more sense from a jurisdictional perspective, as the Commission seeks to tackle distortions of the market (“the elimination of unfair tax competition” being somewhat stretched as justification, as this inexorably leads to the suggestion that harmonisation of all taxes in the EU is what must be done to eliminate distortions). This could allay concerns about third party instigation of aid issues and duplicity also, with a framework for allocating competence in relation to Article 102 having already been relatively set between Member States and the Commission. Moreover, the Article 102 framework would eschew the moral complication that those Member States who granted Aid reap the fruits not only of the multinationals presence, but also recovering any Aid previously granted to incentivize such presence. Art 16(1) of Council Regulation 2015/1589 provides that the Commission shall decide to order recovery by the Member State concerned when it finds that there has been unlawful aid. The amount recovered will go into the pockets of that Member State. If it is opined that the offending parties in relation to the Aid investigations are the Member State authorities themselves rather than the undertakings, then it is quite perverse that it is the Member States who should doubly benefit by acquiring the recovered aid (as has been recognised recently by the Commission, see: para 95). Article 102 TFEU fines for abuse of dominance on the other hand go directly to the EU budget, thereby avoiding this intrinsic moral obfuscation.

In June 2013, I considered, but decided against, writing my masters’ thesis on this potential framework as a means to deal with tax practices harmful to competition. When the Commission opened its State Aid investigations the following June, I realised I’d missed an important opportunity. Whilst regrets in life might be ubiquitous, I could not have predicted that my choice of dissertation topic would come back to haunt me.

Yesterday evening, I sat down in the ‘Missing Bean’ café on Turl Street in Oxford to drink my customary flat white (despicable right?!) and read about the Fiat and Starbucks Commission decisions. The ‘house roast’ coffee beans at the ‘Bean’ are imported from Bolivia, Honduras & Brazil, roasted in Cowley (East Oxford) with the know-how of Ori and Vicky (two Oxford residents) and then ground for use at the café in central Oxford. On Saturdays, between 10am and 2pm, customers are invited to the East Oxford roastery to see the process of coffee roasting and chat to the roaster. Meanwhile, around the corner from the flagship store on the High Street used to lie Starbucks, whose beans are imported from around the world to Switzerland, sold to Starbucks Manufacturing EMEA BV in the Netherlands where they are roasted with know-how acquired at a ‘very substantial royalty’ from Alki (a Starbucks LP in the UK), and then sold back to the stores in the UK.

As a competition law tutor and someone who enjoys a decent blend, the exit of Starbucks from the local market filled me with glee. For years, it had been selling a product of what I considered to be of low quality at an excessive price (grande cappuccino for £2.60?!). For my part, I can’t help but suspect that the low quality might have something to do with the fact that Starbucks beans are forced to travel around the world from purchase, to storage, to roast, to shipment before landing in their ‘tall’, ‘grande’ and ‘venti’ cups. Local entrepreneurs, at any rate, recognised the market potential and so exploited the incumbent’s failings. In an economic microcosm, the theory that competition brings about the best product at the best price proved to hold, with inefficient companies forced to exit the market.

This is where the argument that Starbucks enjoys a competitive advantage and so distorts the market as a result of its tax arrangements comes into difficulties. This is precisely the opposite of what was experienced in Oxford. Further, one might note that Starbucks’ arrangements are in fact quite similar to those of the Missing Bean in terms of the fact that purchase, roasting (with company know-how) and the grinding of beans all occur in different places, the only difference in the case of Starbucks is that these enterprises take place in different countries (an unfortunate bye-product of the perverse incentives provided by the international tax framework). Indeed, the CJEU in RBS Deutschland commented that:

“taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens” (para 53 h/t Dr Tom O’Shea).

Nevertheless, it was the Commission’s contention yesterday that Starbucks does indeed enjoy an unfair competitive advantage by reason of a ruling obtained in the Netherlands. The Commission has accused the Netherlands revenue authority of providing unlawful state aid, in breach of EU Law (Article 107 TFEU). To recall from a previous blog, unlawful state aid arises where there is i) intervention by the state (or through state resources), ii) giving the recipient a selective advantage, iii) which distorts competition and iv) affects trade between member states. It is the third criterion on which I wish to focus for the remainder of this blog. SMEs, the Commission suggests, struggle against Starbucks’ power as they are taxed on their actual profits because they pay market prices for the goods and services they use. Thus, it is not Starbucks’ tax structure per se which is at issue, but rather the benevolent treatment granted by the Dutch revenue authorities. This apparently has had a distortionary effect on the market. The initial, detailed letter from the Commission to the Netherlands in June 2014 merely took the issue of distortion as read:

“Starbucks Manufacturing BV is a globally active firm, operating in various Member States, so that any aid in its favour distorts or threatens to distort competition and has the potential to affects intra-Union trade.” (para 72)

I anxiously await the full decision which might bring some clarity to this issue, for the Oxford case study would suggest that distortion is not axiomatic and cannot be assumed,

Nevertheless, the case for the Commission should not be hard to make out. First, it should be stressed that the caselaw of the CJEU has set a very low threshold for what is required in terms of distortion (see e.g: France v Commission [1990] ECR I-307). Second, whilst the market in Oxford might be competitive enough to squeeze out Starbucks, notwithstanding its tax savings (being the benevolent treatment obtained abroad benefitting the Starbucks group as a whole), this is unlikely to be true of the rest of the UK and, more importantly, Europe. Local enterprises are completely handicapped by the cost of rent, for instance. Starbucks’ unfair tax “advantages” allow it to take the big hits on extortionate rent, undoubtedly beyond the ability of an SME, allowing it to cement its power and position in the UK market. It is unsurprising therefore that there is no ‘Missing Bean’ on Oxford Street, and yet there are 11 or so Starbucks dotted around Europe’s busiest shopping street. Following from this, strengthening its position in the UK market will by its nature result in a strengthening of Starbucks’ position in the European market.

Listed for hearing before Mrs Justice Philippa Whipple (appointed on the 1st of October) in the High Court today is the case of R (Hely Hutchinson) v HMRC. The case revolves around the controversial Mansworth v Jelley claims.

Background

The Mansworth v Jelley (2003) case concerned an assessment to CGT. The taxpayer in this case was granted options to purchase shares in JP Morgan at the market price of those shares. He duly exercised the options and thereafter, promptly sold the shares. The issue in dispute, between the taxpayer and HMRC, was whether the chargeable gain or loss ought to be calculated by reference to the proceeds from the sale of the shares, (a) minus the market value of the options when originally granted (which was nil) or (b) minus the market value of the options when exercised. The Court of Appeal ultimately held in favour of the latter construction, in other words, in favour of the taxpayer.

Following the case, the Inland Revenue issued guidance on the matter in 2003 to the effect that the chargeable gain or loss in such circumstances should be calculated on the disposal of shares acquired by such options by deducting both: the market value of the shares at the time the option was exercised; [and (controversially)] any amount chargeable to income tax on the exercise of that option

In 2009, Dave Hartnett and HMRC acknowledged this to be incorrect. The guidance was revised to provide that all that would be deductible would be the market price of the shares and not, additionally, the income tax that would be paid. As regards closed cases in which the earlier guidance was relied upon, HMRC’s position was that the revised 2009 guidance could not be applied and thus that the position created by the 2003 guidance would not be revisited.

The question thereafter turns to open cases.

A freedom of information request from August 2014 revealed that there are 650 taxpayers who have been affected by Mansworth v Jelley. 525 cases have closed in favour of HMRC, 42 cases have been closed in favour of the taxpayer and 83 cases remained unresolved as at June 2014. Of the 42 cases closed in favour of the taxpayer, 38 were closed for reasons such as no valid enquiries and 3 were accepted as falling within the doctrine of legitimate expectations.

Hely-Hutchinson

Mike Truman helpfully sets out the details of the Hely-Hutchinson case in an article for Taxation magazine. The applicant relied upon the 2003 guidance, but the case was not closed by 2009 (owing to a dispute between HMRC and the applicant about the tax treatment of the scheme used to distribute the shares to him). Accordingly, the taxpayer was refused the 2003 guidance treatment, and subjected to the harsher (albeit correct) 2009 guidance. Patterson J gave the applicant leave to apply for Judicial Review on the basis of arguments put forward by Rory Mullan and Harriet Brown (acting pro bono), which (from a reading of the Taxation article, seem to) revolve around abuse of power, unfairness, delay and failure to apply guidance consistently between taxpayers. The judge was “just persuaded” that there was an arguable case. Now the full hearing is taking place before Mrs Justice Philippa Whipple.

Importance

The importance of the case stems from the fact that many issues of HMRC practice will be subjected to judicial light. For instance, can HMRC retroactively apply changed guidance? How far is HMRC constrained by the doctrine of legitimate expectations as regards changing its policy in light of a change of understanding of the law? It should not be taken lightly the fact that HMRC got it plain wrong in 2003 and so taxpayers, and as such, should taxpayers have known better? Can HMRC apply inconsistent treatment to taxpayers simply because some taxpayers have had their cases closed?

However, the applicant will probably be discouraged by the fact that there have only ever been 4 successful legitimate expectations cases against HMRC (Unilever, Cameron, Greenwich University and GSTS). In this area of law, given constraints upon the public purse, and the need to close cases for the sake of a consistent stream of revenue to the exchequer, there is a significant hurdle to be overcome to force HMRC to be bound by a practice which is inconsistent with the primary law.

One thing going in Hely-Hutchinson’s favour however is the judge. Mrs Justice Whipple has written about the apparent exceptionalism to human rights applied to tax avoiders. Human rights, like privacy, should apply to all, she opines. Equality of treatment might likewise come within this bracket. Moreover, Whipple J represented the taxpayer in one of the 4 successful legitimate expectations case, namely GSTS.

A judge with an acute understanding of the vagaries of HMRC practice is undoubtedly reason for the applicant to be hopeful.

The proposal to abolish the Human Rights Act 1998 (‘HRA’) and replace it with a British Bill of Rights has been simmering on the back burner for some time now. It was proposed during Chris Grayling’s tenancy as Justice Secretary (particular proposals which Dinah Rose QC referred to as “just so rubbish” and “so stupid”) and re-emerged in the aftermath of the 2015 General Election. David Cameron’s promise to have a draft Bill of Rights within 100 days of his new government ultimately went unfulfilled however.

Nichola Sturgeon has been using abolition of the HRA as a political tool to apply pressure on David Cameron’s government:

“Repealing the Human Rights Act meets no pressing need, and addresses no obvious problem. There is instead a clear risk that it will create legal confusion, harm people in the UK who need support and protection, and give comfort to illiberal governments around the world”

The SNP’s Alex Neil, social justice secretary, previously expressed the SNP’s position that it would not consent to the “implementation of the Conservative government’s proposals”.

The complication brought about by devolution, and the Sewel convention which prescribes that the UK government will not legislate with regard to devolved matters without consent of Scottish Parliament, has not gone unnoticed by commentators (Joshua Rosenberg, Prof Mark Elliott, Matthew Scott).

No doubt a wrong move from Cameron on this issue would play right into the hands of the SNP and open up the prospect of a second referendum on Scottish independence. When considering the effect of imposing legislation upon a non-consenting nation within the Union, one should be mindful of the aftermath of imposing conscription in Ireland in 1918 (attached to a Home Rule Bill which was voted through Parliament). Nationalist parties can use the perceived coercion as a means of demonstrating the apathy of Westminster towards the country concerned and impress upon the populace that the only route to true political accountability is through secession.

So perhaps those wishing for a British Bill of Rights should countenance the prospect of a Britain divided by it.

On the 22nd of July, the Ministry of Justice announced that it would be consulting on introducing fees for those remaining tribunals which do not currently charge. Importantly, this includes the first tier and upper tier tax tribunals. The government hopes that by doing so, it might be able to recoup some of the costs of running the courts and tribunals service.

Commentators have been outraged by the proposal. Jolyon Maugham QC remarked that it was “flat wrong for the state to charge you for disputing what it charges you”. Law Society president Jonathan Smithers commented that the proposed reform led to a “feeling there’s a fairly heavy-handed state”. Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, remarked that the introduction of fees put up “a cost barrier for those who could have only made an arbitrary mistake”.

Indeed, high-minded constitutionalists might at this juncture recall Article 39 of the Magna Carta which provides that:

No freeman shall be arrested or imprisoned or deprived of his freehold or outlawed or banished or in any way ruined, nor will we take or order action against him, except by the lawful judgment of his equals and according to the law of the land.

As such, limiting the ability of individuals to access the courts can be seen as an unjust infringement on this constitutional text. This is even more compelling, as identified by AccountingWeb, when it is added that two-thirds of those going before the tax tribunals are not represented by an agent (this suggests at least that there is a sizeable portion of litigants who would struggle to afford the charge). Or that the fee would render effectively pointless the pursuit of litigation over smaller amounts, such as automatic £100 fines.

One might counter that charging fees merely deters spurious claims, which results in the backlogging of the courts. This does not hold on the facts. The effect of the introduction of fees in employment tribunals in 2013 for instance has resulted in an 83% drop in sex-discrimination claims “with no surge in the success rate, so far—suggesting that people with strong cases have been priced out”.

The most persuasive argument for not introducing fees for the tax tribunal, however, is simply pragmatic. The success rate of HMRC through the tribunals is far from convincing. In 2013-14 and in 2012-13, three quarters of decisions made by First-tier tribunal were in HMRC’s favour. However, just 61% in 2011-12 were decided in HMRC’s favour. The number of HMRC assessments which are successfully internally reviewed is particularly uninspiring. In 2013-2014, there were a total of 38,621 reviews; 18,109 (47%) were upheld; 6,362 (16%) were varied, and 14,158 (37%) were cancelled. In 2012-2013, there were a total of 39,156 reviews; 20,046 (51%) were upheld; 5,932 (15%) were varied; and 13,178 (34%) were cancelled. In 2011-2012, there were a total of 56,228 reviews; 54% were upheld; 12% were varied; and 34% were cancelled. In 2010-2011, there were a total of 46,043 reviews; 17,355 (38%) were upheld; 4,502 (10%) were varied; and 20,424 (44%) were cancelled. In 2009-2010, there were a total of 25,348 reviews; 12,576 (50%) were upheld; 1,319 (5%) were varied; and 11,375 (45%) were cancelled.

If nothing else, these figures demonstrate that in a complex tax system where application of laws to an infinite number of fact scenarios will provoke innumerable disputes. The cost of running the tax tribunal might simply be one which the government ought to bear for having introduced legislation the implementation of which is far from straightforward.