Dr Stephen Daly

Guidance is an important part of the tax system – indeed, I would suggest that HMRC guidance is both legally appropriate and normatively desirable. At the VPG Annual Lecture this year in September[1] I advanced the claim that HMRC guidance is desirable as it advances the rule of law, thereby valuing human dignity, and produces efficiency.

Until recently however, HMRC guidance had escaped the attention of policymakers. Now however, the Financial Secretary to the Treasury, HMRC, and the representative bodies are particularly interested in the issue. Importantly to this end, the Office of Tax Simplification (‘OTS’) has just produced a strategic review of HMRC guidance which seeks to provide a New Model for the future (accessible here). It contains 12 recommendations relating to the substance of HMRC guidance, the framework for its production, its reliability and how it might be integrated with new technology (Disclosure – I met with the OTS to discuss the framework for HMRC guidance when a review was first mooted).

The review merits reading not only for the recommendations that it proposes, but also for its incisive observations about the utility of HMRC guidance in the tax system. Later this month, I shall have an article in the Tax Journal reviewing the OTS recommendations in light of concerns over when you can and can’t rely on HMRC guidance.

[1] Please contact me if you would like a copy of the lecture.

It is the start of the academic year and those taking tax law, whether at undergraduate or graduate level, will probably now be introduced to Adam Smith’s canons of taxation. The idea is that a good tax system will comply with several benchmarks. These are helpful for getting students to think critically about the design of tax systems. But they are not only useful for that – they can be used by tax authorities in order to determine how to go about the task of collecting taxes. In this way the benchmarks can be demonstrated to have practical utility in terms of understanding how tax authorities ought to act. In this blogpost I wish to first set out different benchmarks for designing tax systems and thereafter explore how one set of benchmarks, Adam Smith’s canons, can be used in understanding tax administration.

Designing tax systems

It is orthodox to begin tax modules by mentioning Adam Smith’s four canons of taxation. Taxes ought to be equitable (though there can be much debate about what this means, such as whether it requires progressive taxes or whether ability to pay refers to money available to pay taxes or the ability to work to pay taxes and so on), taxes ought to be certain and not arbitrary, taxes ought to be levied conveniently from the perspective of the taxpayer and taxes ought to be economical (leaving for the taxpayer all but that which is required to be given to the State)

The Meade Committee on the other hand, albeit in the context of direct taxes, produced different criteria for judging tax systems. The focus there is upon the effects on taxes:

• Incentives and economic efficiency – we should take into account for instance the income effect (the idea that one must work harder to increase income as tax rises) and the substitution effect – (the desirability of substituting leisure for work, which would be more pronounced as tax rates increase);
• Distributional effects – how the tax burden is and should be distributed across taxpayers;
• International aspects – there is a need to take into account the fact that taxpayers and the effects of taxes are not limited by borders;
• Simplicity and costs of administration and compliance
• Flexibility and stability – from both an economic and political perspective. The tax system must leave room in a mixed economy for the operation of effective incentives for private enterprise. The tax system must at the same time give scope for effective modification of the distribution of income and property, which would otherwise result from the unmodified operation of the “free markets”;
• Transitional problems – major upheavals should be avoided for myriad reasons, such as the significant costs which will be incurred as well as the distortion to taxpayers’ activities.

The Mirrlees review meanwhile made a unique contribution by adding three rules of thumb for designing tax systems: neutrality, stability and simplicity. As they are rules of thumb, they are not inflexible and so departure from them is permissible provided that there is a good justification for doing so.

These three sources are the ones I use in introductory classes, but there are others that can also be used. For advanced courses for instance, it would seem appropriate to introduce students to Murphy and Nagel who challenge us to look at tax systems in a different way – focusing upon after tax outcomes that we would expect to see in a just society. Viewing taxes in this way means that the utility of the aforementioned benchmarks is limited to the extent that they can be used to produce just outcomes.

Tax Collection

Taking the UK as an example and testing it against Adam Smith’s canons of taxation, it would not take long for us to realise that UK taxes are not always equitable, certain, convenient and economical. But looking at the way in which HMRC operates, we can see examples where the canons can be said to apply.

Equity: HMRC strives in its administrative practice to treat like people alike and unlike people differently (though it may be difficult in practice to determine who should fall into which category). Take for instance the case of Hely-Hutchinson where a taxpayer claimed that he was entitled to be treated in accordance with certain guidance. The problem for the taxpayer was that he was seeking to rely upon 2003 guidance, but his case was still “open” (i.e. subject to an open enquiry) in 2009 when HMRC replaced the guidance. He wished to be treated in the way as others had been treated (i.e. in accordance with the 2003 guidance). But HMRC distinguished between the taxpayer and those others on the basis that his case was “open” and theirs were “closed”. To this end, they treated him the same way as those whose cases were “open” and differently to those whose cases were “closed”.

Certainty: in order so that taxpayers acquire certainty as to tax outcomes, HMRC engages in a wide array of initiatives such as providing informal rulings and general guidance. This is in spite of the fact that HMRC is under no general legal obligation to provide advice to taxpayers (though in specific circumstances, some taxpayers have a right to apply for binding rulings as in TCGA 1992, s. 138).

Convenience: there are many examples of instances where HMRC will work with the taxpayer, such as through payment plans, to ensure that tax is collected in a reasonably convenient manner. HMRC will generally not exercise its powers where to do so would cause hardship for taxpayers[1] (see for instance here in the context of tax credits).

Economy: It is one of HMRC’s key priorities to provide efficient tax administration, whilst at the same time striving (even if not succeeding in doing so) to collect from taxpayers no more than that which is due until the law (which is at times unhelpfully put as “maximising revenues due”). This can be seen for instance in the notorious Litigation and Settlement Strategy. This is a policy which should reduce the costs of collecting tax, by providing a streamlined system for dealing with disputes. The policy document and the commentary regularly refer to “efficiency” in administration. At the same time, it is made clear that HMRC should only seek to collect the taxes properly due.

This exercise could be undertaken in respect of different benchmarks, such as those set by the Meade Committee, Mirrlees, and Murphy and Nagel. Of course, the different benchmarks can also be used to further effect to critique whether in fact tax authorities are acting in a normatively desirable way by testing whether tax administration complies with the benchmarks. But in order to do this, it would first be necessary to recognise that each set of benchmarks in fact comprises values, each of which would have to be justified on their own terms. For instance, before we can say that tax authorities ought to act equitably, we would first have to define equity and justify why it is a “good thing”. Only then could we properly test whether tax authorities do act equitably.

[1] I must admit, I am yet to fully investigate the legality of this power. It is longstanding – there are references to the hardship ‘discretion’ in some 19^th century Inland Revenue documents. If I were to hazard a guess, I would say that today it would be justified on the basis of statutory interpretation – Parliament would surely not legislate so as to impose hardship.

At the International Fiscal Association’s annual congress, Advocate General Kokott weighed in on the European Commission’s State aid cases concerning tax rulings. AG Kokott’s comments suggest that tax authorities, in effect, ought to have a degree of authority about how their national laws ought to apply (the remarks are reported in law360). This echoes an argument of mine in a working paper which I presented at the Oxford Sydney Tax Research Conference in June 2018. The link to the conference website is now broken (a cached version is here) but I am also happy to send a Pdf of the most recent version – just send me an email (stephen.daly@kcl.ac.uk).

In this article I argued that the European Commission’s investigations into tax rulings are predicated on the assumption that misapplications of the law should give rise to State aid concerns. The article argues that this is wrong. Tax authorities, within limits, have the authority to “get it wrong” and this is desirable. EU law should only intervene then where national tax authorities have breach these limits and used their discretion derived from the responsibility to manage compliance improperly, not simply where they have misapplied the law. But therein lies a role for the Commission in checking to ensure that the powers have been used lawfully. The Commission could still succeed in its cases against Ireland, Luxembourg and the Netherlands if it can be demonstrated that the national tax authorities departed from standards governing the exercise of the authority to grant rulings. Moreover, the investigations ultimately demonstrate that there is a lack of confidence that certain tax authorities dispassionately and objectively carry out their functions. The Commission here too should have a role in seeking institutional reform to rectify this problem of trust

Any and all comments are welcome on the paper!

The issues surrounding the Mansworth v Jelley losses plow on. In the case of HMRC v Hely-Hutchinson, the taxpayer claims that he is entitled to the benefit of HMRC guidance which provided that losses could be claimed as a result of the 2003 Mansworth v Jelley case. HMRC’s response is that the guidance was wrong; that it is lawful for the body to correct that mistake and that the taxpayer should not accordingly be entitled to the benefit of the erroneous guidance. The taxpayer succeeded before the High Court, as I explained in a lengthy case note for the British Tax Review. The result was reversed however in the Court of Appeal. A short case note that I wrote on the Court of Appeal judgment has now been published by the Cambridge Law Journal and is available to read here (a pre-publication version is available here). The taxpayer has sought to appeal that judgment and the decision on permission to appeal is still outstanding (the latest permission to appeal results from May to June 2018 do not contain the case).

This blog has sometimes noted the contribution that legal philosophy can make to understanding matters of tax law and policy: for instance, using Hart’s “Core and Penumbra” analogy to understand how the limits of language can result in tax avoidance, or how Tony Honore and Joseph Raz can help us to understand why people pay taxes. To this end, the collection Philosophical Foundations of Tax Law edited by Monica Bhandari of UCL is a must read for those interested in the insights in to tax that can be gleaned from legal philosophy. In that collection, Professor David Duff has written about Dworkin’s conception of equality and redistributive taxation – using Dworkin’s work to argue for progressive income and wealth transfer taxes as essential elements of a just tax system. It could also be said that Dworkin’s conception of equality could be used to explain the approach of UK tax law to the deductibility of expenses and the “wholly and exclusively” rule and also point out a flaw.

Duff writes as follows about Dworkin (footnotes omitted):

“For this purpose, Dworkin relies on two principles of what he calls “ethical individualism”: (1) a principle of “equal importance” that requires any political community that exercises dominion over and demands allegiance from its citizens to treat them with equal concern; and (2) a principle of “special responsibility” that regards individuals as having a particular responsibility for the choices that shape their lives. While the first principle “requires government to adopt laws and policies that insure that its citizen’s fates are, so far as government can achieve this, insensitive to who they otherwise are – their economic backgrounds, gender, race, or particular sets of skills and handicaps,” the second principle “demands that government work, again so far as it can achieve this, to make their fates sensitive to the choices that they have made.” Together, these principles define a conception of distributive justice that distinguishes between a person’s circumstances and their choices, making the justice of distributive outcomes as insensitive as possible to people’s circumstances and as sensitive as possible to their choices.”

It is this idea of insensitivity to circumstance as against sensitivity to choice that can help us to understand the “wholly and exclusively” rule. By way of brief background, in the case of a trade that is carried on, expenses will be deductible if they are of a revenue and not capital nature and “wholly and exclusively” incurred for the purposes of the trade. There have been many battles over the years about the meaning of “wholly and exclusively”, with the cases themselves being highly fact sensitive and at times difficult to reconcile. However, one can see a trend of ignoring circumstance and respecting choice in deciding whether expenses are deductible: if the expense is incurred ordinarily in a trade, the courts will respect this, applying this equally to all in those circumstances, but where the expense instead a matter of personal choice, then the courts will reject its deductibility.

For instance in the case of a barrister purchasing a “wig and gown” will be an inevitable expense incurred wholly and exclusively for practising at the bar. The purchase of dark clothes however is not a cost that only relates to the trade, as the clothes can be worn more generally. The decision not to do so might be a personal choice, but that should not be a concern of the tax rules (see Mallelieu v Drummond). If a personal is ill and decides to go to a private hospital where she or he may conduct business, again this is a personal choice given that healthcare is free generally in this country (see Murgatroyd v Evans-Jackson). So too is the personal choice to live in a different town to where one permanently works necessitating the incurrence of travelling costs – these should not be deductible (Newsom v Robertson).

But therein lies the problem: the two principles of Dworkin’s ethical individualism, equal importance and special responsibility, are intimately linked and at times inseparable– the choices that we make may be dictated by our circumstances. Some choices are only open to certain people, and some people will never be required to make certain choices. In the context of deductibility of expenses we can see this playing out perversely in that some trades provide significant freedom as to how expenses should be incurred and yet still remain whole and exclusive. Though all engaged in trades may deduct expenses wholly and exclusively incurred (“equal importance”), some trade expenses de facto allow for personal choice, even though such choice should otherwise be respected (“special responsibility”). A plumber cannot deduct lunch expenses generally, but what about a barrister having a client meeting over lunch at work? A painter cannot deduct the cost of a holiday to Spain, but an academic conference could well take place there.

Thus fundamental rules of the tax system, such as those concerning the deductibility of expenses, might seem facially neutral while in reality providing advantages to certain taxpayers.

The Supreme Court on Wednesday 16 May gave judgment in the case of R (Gallaher) v Competition and Markets Authority. This case concerned an agreement to settle a dispute and the Court of Appeal judgment was given some attention in a previous blogpost. The Supreme Court judgment will be of particular relevance to those following the ongoing Hely-Hutchinson dispute (see the ICAEW website for a timeline of the dispute) and to those generally interested in tax administration.

The Office for Fair Trading (now subsumed within the Competition and Markets Authority) investigated several companies in relation to tobacco pricing and decided in 2008 that the companies had engaged in anticompetitive behaviour (namely price fixing). The public authority gave the companies the opportunity to settle the dispute on the same express terms. One provision provided that the parties could pursue an appeal (though if that option was taken, the public authority would increase the fine and pursue costs). All the companies agreed to the settlement agreement, but one party (TMR) was given an assurance additionally. This assurance provided that TMR would be entitled to a refund effectively of the fine paid (and a contribution to costs and interest) if any one of the other companies successfully appealed against the decision (in the proceedings this has been referred to as the “2008 decision”).

Some of these companies did in fact successfully appeal against the decision. TMR then got the benefit of the assurance and was refunded (the fact of this refund was published online and this has been referred to in the proceedings as the “2012 decision”). What about the other companies who did not pursue an appeal and did not receive an assurance like TMR (which in fact was the only company which received such an assurance)? That is precisely the issue that arose in the Gallaher case. Gallaher (and another company Co-op, which was “Somerfield” at the relevant time) lobbied the public authority to get the same treatment as TMR, but this was refused. Gallaher and Somerfield then took a judicial review case against the public body which was unsuccessful in the Administrative Court, succeeded in the Court of Appeal (unanimously) and was ultimately unsuccessful in the Supreme Court.

Cases such as this concern the principle of consistency and can broadly be broken down into the consideration of two questions. First, are there two persons or entities in comparable positions which have been subjected to different treatment? Second, is there a good reason for distinguishing between the two? The Administrative Court found that the parties were in comparable positions, but that there was good reason for distinguishing between them. The Court of Appeal found that there was no good reason for distinguishing between them and the Supreme Court on Wednesday ultimately found that there was good reason for the distinction in treatment. Several “good reasons” were provided by the court: 1) it was a mistake in the first place to give the assurance to TMR who, 2) had the assurance been rescinded, would have likely succeeded in convincing a court to hear an appeal out of time (given the reason for not appealing earlier was the assurance) and would have succeeded on the substantive argument given the precedence set by the other appeal; 3) Gallaher and Somerfield had not lobbied for the same assurance as TMR had in 2008.

In the judgment, Lord Canwarth spent some time “tidying up” administrative law. The principle of consistent treatment is not a free-standing principle of administrative law which can be relied on by litigants, but rather is parasitic on established grounds for review, such as rationality. In other words, lack of consistency is only relevant in so far as it demonstrates that a decision was irrational because no good reason for distinguishing between similar parties existed. Use of language such as “abuse of power”, “conspicuous” and “unfairness” in earlier cases (Unilever, Preston and Fleet Street Casuals) only obfuscated this point. It is not that the previous case law is bad, it is simply that the case law should now be interpreted either in terms of rationality or legitimate expectations. So when the previous case law mentions that some action might be so unfair as to amount to an abuse of power, the court is simply saying that the decision was irrational.

The judgment itself is important from a tax perspective. Cases should no longer be argued solely in the language of abuse of power or conspicuous unfairness but rather must be anchored around an established ground for review – such rationality or legitimate expectation. Moreover, at the time of writing, it has still not been decided whether the case of Hely-Hutchinson will be granted permission to appeal to the Supreme Court. The judgment in favour of the public authority in this case deals a blow to the prospects of either permission being successfully granted or the taxpayer ultimately succeeding in any appeal. The problem is that when viewed in light of the two questions mentioned above – has there been a lack of comparable treatment, and is the distinction in treatment justified – a strong argument from HMRC would be that it had good reason to renege of its published position. It was seeking to minimise the impact of a mistake, as the OFT successfully argued in Gallaher. Introducing more explicitly the standard of rationality too will be unhelpful for the taxpayer – as it makes it more difficult for the taxpayer to establish that no “good reason” was present. It raises the threshold in favour of the public authority.

On the other hand, the cases are distinguishable on the basis that in Hely-Hutchinson, the commitment to particular treatment was published in general guidance and in practice promised to the taxpaying community at large. To renege on such a commitment deals a blow to the utility of such HMRC communications which are integral to the smooth operation of the tax system. Thus, it might be said that there is a strong argument based around “good administration” that HMRC should not renege on a published practice save in exceptional circumstances.

In any event the judgment in Gallaher is certainly helpful from HMRC’s perspective (for a case note on the Court of Appeal judgment, see here).

One final point should be made about the judgment. There were three concurring judgments and one almost throwaway remark from Lord Sumption will be of interest to those interested in tax administration. In relation to the Competition and Markets Authority, he mentioned that a “competition authority is not an ordinary litigant, but a public authority charged with enforcing the law. It therefore has wider responsibilities than the extraction of the maximum of penalties for the minimum of effort” [para 46, emphasis added]. And yet in several significant tax cases where at issue was the use of HMRC’s managerial discretion, the highest courts in the law affirmed that HMRC may use its discretion to collect the maximum amount of tax due having regard to resources (see Gaines-Cooper, Wilkinson and Fleet Street Press). That has been taken, not unreasonably it should be said, by HMRC to be a statement of the legal limits of its overarching managerial discretion (see for instance, HMRC’s manual on collection and management powers). But the statement by Lord Sumption adds an important nuance not explicitly mentioned heretofore in the tax cases. Public authorities such as the Competition and Markets Authority and HMRC have overall responsibility for managing compliance with the relevant law. It therefore has an overarching discretion as to how that task is achieved. It may make decisions which seek to maximise compliance, having regard to resources. But that is not a statement of a rule, and hence a demarcation of the limits of its overarching discretion. Rather, it is an example of a rational use of discretion in particular circumstances (such as the production of guidance in Gaines-Cooper to reduce the cost of compliance, or settling a dispute as in Fleet Street Casuals). Thus, a public authority should not always use its powers to maximise compliance, having regard to resources. It has “wider responsibilities”. In the case of tax, such wider responsibilities will be treating taxpayers fairly (in the sense of abiding by various public law standards), maintaining and increasing trust in the administration of the law, fulfilling its constitutional role of enforcing legislation and so on.

Thus, that subtle nuance from Lord Sumption should not be overlooked.

In its 1955 Report, the Royal Commission on the Taxation of Profits and Income wrote that “Avoidance of tax is a problem that faces every tax system…but until some certainty is reached upon the question of definition, the question as to what sort of steps should be taken to prevent or correct it remains an aimless one”. So a two-stage approach should be adopted when discussing tax avoidance: define the problem and then propose solutions.

A 2012 Oxford University Centre for Business Taxation paper on tax avoidance similarly advocates the two-stage approach. In doing so, the paper makes a very important distinction between effective and ineffective domestic avoidance – effective being where the law is used successfully (in the sense of succeeding in a court or tribunal) to reduce tax liability in a way unintended by the legislature. Ineffective being where the avoidance is successfully challenged by HMRC. And that is important because it raises the issue of avoidance which would be ineffective but goes unchallenged (something which David Quentin highlights also in his paper on risk-mining the exchequer).

Meanwhile I view domestic avoidance[1] – the use of legislation in a way unintended by the Legislature (using HMRC’s definition) – as being an inevitable result of the limitations of language. HLA Hart explained this through the “core and penumbra” idea. Laws, like language, have a core meaning which is readily understandable. But there will also be a penumbra where the result of the application of the particular law in different situations is unclear. Where a rule states “no vehicles in the park” – it is obvious that this prohibits cars, but it is less clear if it prohibits bicycles, skateboards, electronic wheelchairs and so on.

The problem in tax is that there is an incentive to exploit the penumbra. Moreover, the core/penumbra idea highlights the fact that at the moment the relevant action is undertaken it may be unclear whether avoidance will be effective or ineffective. To put this in the context of domestic tax avoidance take the example of a speedometer which is very accurate up to 60mph, but after that point becomes gradually less and less reliable. Now imagine that you are driving in a car with this speedometer in an area where the speed limit is 80mph (‘the rule’). You have an incentive to try to go as close to the speed limit as possible, as this will get you to your location quicker. But the closer you try to get to the speed limit, the greater the risk that you will breach the rule. It becomes less clear whether you have in fact complied with the rule. Sometimes you will go over the limit but nobody will catch you – you have avoided the intended effect of the rule in a manner which would be ineffective if you had been caught. Other times you will be stopped by the police who will have their own calculation of your speed. Sometimes the police will be correct in their assessment of your speed, as adjudicated by an impartial third party. Sometimes the police will not be correct in their assessment of your speed, in which case you will be found determinatively to have complied with the rule.

When the problem is defined in this way, what does that tell us about the potential solutions? First, it highlights the fact that counteractive legislation such as TAARs and GAARs, in addition to the use of purposive interpretation can only go so far. They too are confronted with the limits of language. Secondly, it demonstrates that retrospective legislation does not necessarily undermine the rule of law. It seeks to catch and charge to tax those people who have tried to exploit the penumbra of legislation (a situation in which they have knowingly placed themselves) which they cannot be certain will succeed. Finally, it illuminates the wisdom at least from HM Treasury and HMRC’s perspective of legislative and administrative initiatives (such as The Code of Practice on Taxation for Banks and the Diverted Profits Tax) which seek to nudge persons away from placing themselves in the penumbra. Though these too are beset by the limits as language, as Prof Judith Freedman pointed out to me on Twitter, it might be said that the limits work in HMRC’s favour.

[1] (as opposed to avoidance using loopholes in the international tax system (p. 6))

Consider the following example. A taxpayer has an assessment issued against her by HMRC. Her argument is that the tax is not due under the relevant taxing provision, or in the alternative that she is entitled to rely upon Extra-Statutory Concession (ESC) A19 which provides that HMRC will “give up” tax due where the body has failed to make timely use of information supplied by the taxpayer.In such a case, the taxpayer will have to institute two separate proceedings. In one, she will appeal against the assessment to the First-tier Tribunal. In the second, she will institute judicial review proceedings in the Administrative Court claiming a legitimate expectation that she was entitled to rely upon ESC A19 (or that HMRC’s decision not to apply the concession was irrational). This situation is entirely unsatisfactory. The result in either of the proceedings may render the other redundant, with the effect being a waste of the time and money of all concerned. In such a case, why should the expertly constituted First-tier Tax Tribunal not have the capacity to resolve both disputes?

In an article just published in the British Tax Review, which is available on westlaw and which can be downloaded from SSRN (available here), I seek to demonstrate that the underlying restriction is unjustified. Further, there are considerable practical benefits to extending the ambit of the First-tier Tribunal’s jurisdiction. The article will propose that taxpayers should be allowed to bring public law issues before the First-tier Tribunal where there is additionally a substantive dispute. The Tribunal is the best placed forum for resolving such cases.

The Court of Appeal has just handed down judgment in the case of City Shoes v HMRC, in which the taxpayers claimed to have a legitimate expectation as to certain treatment from HMRC. That treatment related to the ‘Liechtenstein Disclosure Facility’ (LDF). The LDF allows taxpayers to settle outstanding tax liabilities relating to assets in Liechtenstein (or assets held offshore more generally, by following particular steps). It offers terms more favourable to taxpayers than other forms of tax investigation – a carrot for being proactive, but still a stick in the form of a reduced fine. There are three stages to be undertaken: application to register for the LDF (Stage 1); registration with the LDF, HMRC having considered the taxpayer to be eligible and at which point HMRC and the taxpayer seek to settle the matter (Stage 2); finalisation of the settlement (Stage 3).

The taxpayers in this case had engaged in tax schemes using employment benefit trusts (EBTs) and sought to get the benefit of the LDF. Accountants on behalf of the taxpayers were in discussions with HMRC as to the possibility of using the LDF, and had received assurances from HMRC that the taxpayers could apply to use the LDF. So, the taxpayers registered to apply for the LDF (Stage 1). HMRC then changed its policy on eligibility for using the LDF – that those engaged in EBTs should not benefit from the LDF. A reason for the change in policy was that allowing those with offshore EBTs to use the LDF would be unfair given that a different settlement offer had been proposed to the general body of taxpayers engaged in EBTs. The only difference here was that the taxpayers so happened to have the assets offshore. Another reason was that the purpose of the LDF was to bring to light information that HMRC did not already have, whilst on the other hand HMRC was aware of the goings on in respect of EBTs.

Whipple J in the High Court found that the taxpayers’ only expectation was being able to apply to register for the LDF – but there was no legitimate expectation as to the substantive benefit of the LDF itself. Here the taxpayers had received no assurance from HMRC that they would benefit. They had not actually been registered for the LDF and in the process of settling their affairs. Rather they had simply applied to register for the LDF (Stage 1).

The taxpayers then fell back on an argument based on conspicuous unfairness – that the taxpayers were nevertheless treated conspicuously unfairly. Whipple J noted that failure on the legitimate expectation argument did not augur well for success on the conspicuous unfairness argument, given that the latter can be a factor leading to the former, but accepted in principle that the arguments differed. At best however, the taxpayers were “led up the garden path” by HMRC, but never treated conspicuously unfairly. There was never a guarantee as to particular treatment. Further, the taxpayers were not treated dissimilarly to similarly placed taxpayers and the process of HMRC changing its policy came after considering all the relevant factors.

The Court of Appeal (Henderson LJ, Holroyde LJ and Longmore LJ) unanimously agreed with Mrs Justice Whipple’s judgment. Lord Justice Henderson gave the only speech of the Court and there were in reality only two things that the judgment did. First, it affirmed that Whipple J was correct in rejecting the taxpayers’ claims. Second, it rejected the taxpayers’ arguments, which the Court found had little or no weight, that Whipple J was for some reason incorrect. All that was new in the judgment effectively was that the taxpayers in the case were discriminated against vis a vis other non EBT taxpayers were admitted to the LDF after the time that the claimants were refused admission to the LDF. But the Court held on balance that the evidence did not support this.

There are four points that are worth making about this judgment. The first is about the language used. In another blogpost, which was published later in the Tax Journal, I noted that sometimes in cases concerning tax avoidance cases the language used by judges can be an early indicator of the later result in the case. Paragraph 9 of the judgment indicated in this case that the prospect for success on the part of the taxpayers might be limited. Lord Justice Henderson there noted as follows:

“It is well known, however, that EBT arrangements of various kinds have been widely used as vehicles for tax avoidance schemes, typically designed to enable companies to remunerate their employees through arrangements involving the use of third parties and offshore trusts in a way that it was hoped would avoid liability to income tax and national insurance contributions (“NICs”), while enabling the company to obtain an immediate deduction in computing its profits for the money so expended.”

Secondly, the gist of a successful judicial review is that a citizen has been shafted by the State in some way. It must be more than just a bit hard done by. To this end, in respect of arguments based on “conspicuous unfairness”, Lady Justice Arden in Hely-Hutchinson noted that there “must be some material factor which makes its exercise unfair.” Simon Brown LJ in MFK Underwriting distinguished between situations where the action was a bit rich and those instances where the action was outrageously unfair. The problem for the taxpayers in this case is that they were a bit hard done by – HMRC had taken them up the garden path. HMRC had discussions with the taxpayers and led them to believe that the LDF would be open to them. They did not keep them informed about their thinking on the matter and that they were in the process of internally consulting on changing the policy. They were hard done by. But they were not shafted.

Third, this case again underlines an important distinction between cases in which the taxpayer either has some assurance on which they have relied to their detriment and those cases in which there is no reliance or detriment in that sense, but rather dissimilar treatment applied between similarly placed taxpayers. These are different claims and the requirements on the taxpayers in either will be different. In the former, detrimental reliance will generally need to be shown. In the latter, this is not necessary. Nor should it even be necessary for the taxpayer to be aware of the policy in advance of entering in to a particular transaction or arranging their affairs in a particular way. The point is that the public authority has published a policy and it is right that the public authority apply that policy consistently. The claimants in this case attempted to argue both, at least initially, but in respect of the first type of claim could not demonstrate that a legitimate expectation as to treatment arose at all. As for the second, there was no lack of consistency as the only persons who came close to being in the same material position as the claimants were those taxpayers who had already had their applications for registration for the LDF accepted. But these two classes of persons are clearly different. They are separated not merely by the effluxion of time, but also by the fact that the applications of those successfully registered were actually considered and decided to be eligible for registration.

Finally, in terms of what I might loosely label “judicial politics” it is interesting to note just how much weight Lord Justice Henderson put upon the judgment in the High Court of Mrs Justice Whipple – there were 50 or so paragraphs dedicated to restating what was said or found in that judgment (including a paragraph effectively supporting Whipple J’s implied criticism of HMRC processes in respect of the decision to change its policy in another case, namely Hely-Hutchinson – see para 26). Further, around 10 paragraphs were dedicated to defending Mrs Justice Whipple from the accusation that she had failed to deal with a particular argument apparently put to her in the High Court. Indeed, the judgment really only starts at paragraph 65 and ends effectively at paragraph 80.

A recurring issue that this blog has sought to explore is the problem of public authorities making mistakes. This blog for instance has spent some time considering the case of Hely-Hutchinson, wherein the Court of Appeal placed reliance upon the fact that public authorities like HMRC are entitled to renege on earlier commitments where this is necessary to correct a mistake. A different result however, albeit on different facts and in different circumstances, arose in the case of R (Gallaher) v Competition and Markets Authority. This case concerned an agreement to settle a dispute. The Office for Fair Trading (now subsumed within the Competition and Markets Authority) investigated several companies in relation to tobacco pricing and decided in 2008 that the companies had engaged in anticompetitive behaviour (namely price fixing). The public authority gave the companies the opportunity to settle the dispute on the same express terms. One provision provided that the parties could pursue an appeal (though if that option was taken, the public authority would increase the fine and pursue costs). All the companies agreed to the settlement agreement, but one party (TMR) was given an assurance additionally. This assurance provided that TMR would be entitled to a refund effectively of the fine paid (and a contribution to costs and interest) if any one of the other companies successfully appealed against the decision (in the proceedings this has been referred to as the “2008 decision”).

Some of these companies did in fact successfully appeal against the decision. TMR then got the benefit of the assurance and was refunded (the fact of this refund was published online and this has been referred to in the proceedings as the “2012 decision”). What about the other companies who did not pursue an appeal and did not receive an assurance like TMR (which in fact was the only company which received such an assurance)? That is precisely the issue that is being litigated at the moment in the Gallaher case. Gallaher (and another company Co-op, but this post for the purposes of simplicity will refer only to Gallaher) lobbied the public authority to get the same treatment as TMR, but this was refused. Gallaher then took a judicial review case against the public body which was unsuccessful in the Administrative Court, succeeded in the Court of Appeal (unanimously) and is to be heard by the Supreme Court in March (though the case name used there erroneously is “Gallagher”).

Cases such as this concern the principle of consistency and can broadly be broken down into the consideration of two questions. First, are there two persons or entities in comparable positions which have been subjected to different treatment? Second, is there a good reason for distinguishing between the two?

The Administrative Court found that Gallaher had been treated unfairly and unequally as compared with TMR in 2008 and that the refusal to make payment to Gallaher in 2012 required objective justification. But the distinction in treatment was indeed justified – not because of principles of finality and legal certainty, but because the initial assurance was itself a mistake. Thus, it was not wrong for the public authority to seek to remedy or contain this mistake: “a mistake should not be replicated where public funds are concerned” (this quotation was taken from the case of Customs and Excise v Natwest [2003] EWHC 1822 which the Court placed some reliance upon).

The Court of Appeal too found that the parties were in materially similar circumstances but was not convinced that there was an objective justification which was sufficient. The Master of the Rolls gave the only speech and reaffirmed the notion that this issue was grounded in fairness and that a mistake alone would not be sufficient to justify differing treatment. The matter must be considered against all of the circumstances of the case and thus offering differing treatment because a mistake had arisen would not be sufficient if in the circumstances the result would be so unfair as to amount to an abuse of power (see para 54 in particular). In the circumstances, the only real reason for the distinction in treatment was that TMR just so happened to ask for an assurance whilst Gallaher did not and there should not, according to the Court, be a distinction in treatment following from that fact alone.

The Court of Appeal also rejected the reasoning of the Administrative Court that public authorities should be entitled to offer differing treatment where a mistake has arisen in so far as the Administrative Court’s reasoning was based upon an earlier case of Customs and Excise v Natwest Bank. There Customs and Excise had made an error in repaying overpaid tax to some taxpayers but failing to take into account any reduction in the amount due on the basis of unjust enrichment – the idea being that some of the overpaid taxes, in this case VAT, were actually passed on to customers (by way of higher prices) and so the financial burden of the overpaid tax did not squarely fall upon the taxpayer. In this sense, the taxpayer should not be repaid the full amount of overpaid tax, as the taxpayer would then be unjustly enriched. One taxpayer received a reduced amount of overpaid tax on this basis and was disgruntled about not receiving the more benevolent treatment that others had received. The taxpayer was unsuccessful because Customs and Excise were entitled to apply dissimilar treatment in order to rectify the initial mistake(s).

The Master of the Rolls for three reasons distinguished the present case from Natwest. First, the taxpayer in that case had no strong right to expect equal treatment – in Gallaher the public authority expressly committed itself to affording equal treatment to a defined category of parties and this was set out too in a more general internal policy; second, there was no large administrative system in Gallaher as was at issue in the case of Natwest and so the effects would be limited and finally, there was no complex legal issue comparable to that in Natwest facing the public authority in Gallaher.

A better reason can be given however for distinguishing the cases. The mistake in Natwest that the public authority sought to rectify was of a different order to the mistake in Gallaher that the Office for Fair Trading sought to rectify. Whilst the underlying reason for the disparity of treatment in Natwest was administrative inconsistency – there was no coherent, consistent process or policy for dealing with these claims across the different offices of Customs and Excise – the actual “mistake” which Customs and Excise sought to rectify was substantive in that as a matter of law some taxpayers were receiving money to which they were not entitled: “Just because a tax gatherer makes a blunder which favours some taxpayers by way of a windfall does not mean that he should perpetuate the blunder in favour of others”. (Tangentially, in Hely-Hutchinson it was a mistake of this order too that HMRC claimed needed to be rectified).

In Gallaher on the other hand, the public authority’s “mistake” was not substantive, but simply administrative. As a matter of substantive law, Gallaher in this case had settled amounts that were not due. By effluxion of time, Gallaher’s claim to overturn the incorrect settlement was barred (the time within which an appeal against the initial decision could have been brought had passed). The public authority’s “mistake” related to allowing another party (TMR) the benefit of the substantive law. It was in this sense administrative in that the authority did not need to give the assurance in the first place. As the mistakes in these cases are of a different order, then the policy reasons justifying their rescission will likewise be different. Recourse to the reason of “public funds” means different things across the different mistakes – in the case of overpaid tax, it would be wrong to pay out monies from the public purse which are not owed as a matter of substantive law. In the case of an internal administrative mistake, the policy justification is less strong in that public authorities regularly have to pay out for maladministration – that for instance is why we have the Ombudsman!

The Supreme Court hearing in March will hopefully set out some guiding principles as to when it is appropriate for public authorities to renege on earlier commitments, or refuse to roll out commitments to other affected parties, where a mistake has been made. The resulting decision of the Supreme Court will be relevant too to the case of Hely-Hutchinson, where the taxpayer has sought permission to appeal to the Supreme Court, and more generally to HMRC.