Dr Stephen Daly

The opening line of single Supreme Court judgment in UBS v HMRC [2016] UKSC 13 from Lord Reed reads as follows:

“In our society, a great deal of intellectual effort is devoted to tax avoidance. The most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax”

With an opening line like that, it is unsurprising to learn that the taxpayer went on to lose the case. This is certainly not the first time that the opening remarks from judges in tax avoidance cases signal how those judges will find in the end. In the recent Rangers case (in Rangers v Advocate General for Scotland [2017] UKSC 45), Lord Hodge’s opening line was far subtler:

“This appeal concerns a tax avoidance scheme by which employers paid remuneration to their employees through an employees’ remuneration trust in the hope that the scheme would avoid liability to income tax and Class 1 national insurance”

By conceptualising the appeal in this way however, David Goldberg QC and Nigel Doran have pointed out that this effectively determined the result, in this case, a taxpayer loss.

More subtle again, and perhaps I am reading too much into this, is the opening line from the single judgment in Pendragon from Lord Sumption (HMRC v Pendragon [2015] UKSC 37):

“This appeal is about an elaborate scheme designed and marketed by KPMG relating to demonstrator cars used by retail distributors for test drives and other internal purposes. In the ordinary course, a car distributor will buy new cars for use as demonstrators, paying VAT on the full amount of the sale price. This will in due course be recoverable as input tax by being set off against the output tax for which the distributor was accountable on its taxable supplies. The object of the KPMG scheme was to ensure that companies in the distributor’s group were able to recover input tax paid on the price of new cars acquired as demonstrators from manufacturers, while avoiding the payment of output tax on the price at which the car was ultimately sold second-hand to a consumer.”

Note can be taken of the use of language such as “elaborate scheme”, the fact that it is “marketed” and the use of the word “avoiding”.

The single judgment from Lord Walker in Futter and Pitt (Futter and Pitt v HMRC [2013] UKSC 26) (although note that there was a part taxpayer victory in this case) and his lead judgment in Tower M’Cashback (HMRC v Tower M’Cashback [2011] UKSC 19) more clearly evince the judge’s disdain for avoidance schemes. However, Lord Walker’s style was not to open with such lines, but rather to plant them towards or in the conclusion. In Futter and Pitt, he wrote as follows:

“[S]ome cases of artificial tax avoidance the court might think it right to refuse relief, either on the ground that such claimants, acting on supposedly expert advice, must be taken to have accepted the risk that the scheme would prove ineffective, or on the ground that discretionary relief should be refused on grounds of public policy. Since the seminal decision of the House of Lords in WT Ramsay Ltd v IRC [1982] AC 300 there has been an increasingly strong and general recognition that artificial tax avoidance is a social evil which puts an unfair burden on the shoulders of those who do not adopt such measures.”

The final paragraph of Tower M’Cashback reads as follows:

“If a majority of the Court agrees with my conclusion, it is to be expected that commentators will complain that this Court has abandoned the clarity of BMBF and returned to the uncertainty of Ensign. I would disagree. Both are decisions of the House of Lords and both are good law. The composite transactions in this case, like that in Ensign (and unlike that in BMBF) did not, on a realistic appraisal of the facts, meet the test laid down by the CAA, which requires real expenditure for the real purpose of acquiring plant for use in a trade. Any uncertainty that there may be will arise from the unremitting ingenuity of tax consultants and investment bankers determined to test the limits of the capital allowances legislation.”

There might well be a thesis behind the extracts, but it should not be overstated. These are just four examples of statements from Supreme Court judges in tax avoidance cases. When the words “tax avoidance” are searched in the BAILII database of Supreme Court judgments (i.e. judgments arising from the UK’s highest court since 2009), seventeen cases are found. Thus, whilst some might argue that the current Supreme Court wind blows in favour of the Revenue in avoidance cases, the idea that this is evidenced by language used in those cases is not sustainable on the evidence produced here.

Accelerated Payment Notices (‘APNs‘) have been frequently visited as a topic on this blog (see here, here, here, and here). To recap, APNs require taxpayers to pay disputed tax upfront before proceeding with an appeal (provided that certain conditions are satisfied). APNs may be issued, pursuant to section 219 of Finance Act 2014 where the following conditions are satisfied:

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

Several cases where the claimants sought to challenge the issuance of the APNs have already failed before the Administrative Court (see here, here and here for instance), with the Court of Appeal due to begin hearing one of those cases (Rowe v HMRC) on the 18^th of July.

In the most recent case Dickinson, an element which differentiated it from the other APN challenges was that HMRC had previously agreed (by virtue of a postponement agreement) not to seek the tax purported to be due until after the outcome of the appeal. This agreement took place before the APN legislation was introduced. The problem however for the claimants in Dickinson was that section 214 of Finance Act 2014 specifically envisages a situation where a postponement agreement is already in place and allows nevertheless HMRC to issue an APN. The court’s task accordingly was to resolve whether “it was an abuse of power for the Revenue to resile from its express promise not to enforce the payment of the tax it had assessed and which had become due pending the resolution of the disputes relating to the validity of its assessments?”

In a strange concession, the Revenue accepted that it gave “no consideration” to the original postponement agreement when deciding to exercise the power to issue APNs in this case –  a concession which the judge found “surprising”.

The claimants’ argument in the case was that HMRC had abused its power by issuing the APN, taking into account all the circumstances of the case (such as the fact that it was not a complicated DOTAS arrangement, initial positive reception by the Revenue about the schemes effectiveness, and long delays in the processes and investigations of the Revenue). The Revenue’s response effectively revolved around “macro-political” issues of policy, in other words that the claimants were ultimately seeking to challenge a political choice made by Parliament when it expressly provided the body with the power to issue APNs in such circumstances.

When assessing whether there has been an abuse of power, the court set out the factors that should be taken into account:

• categories of case or situations are not hermetically sealed but are of assistance as a matter of analysis of the competing factors and so in reaching the result,
• all the competing factors have to be assessed and weighed in the round to assess and identify the proportionate balance between the rival contentions,
• the competing factors engage private and public interests,
• the clarity of the promise and the circumstances in which it is made are relevant. They can be weighty, and require the public authority to provide compelling reasons to depart from it,
• “macro-political” issues of policy are relevant. They can be weighty and present a steep climb for a person to whom the relevant promise has been made,
• once the promise is proved the onus shifts to the authority to justify the departure from the legitimate expectation it creates (and see Paponette v A-G of Trinidad and Tobago [2010] UKPC 32 at paragraph 37,
• if a claimant wishes to reinforce his position by relying on detriment he must prove it. The existence of detriment is not a necessary ingredient, but is often present when a claimant succeeds (and see R (Bancoult) v Foreign Secretary (No 2) [2009] 1 AC 453 at paragraphs 73 and 179),
• where a public authority is considering whether to act inconsistently with a promise that has given rise to a legitimate expectation good administration and elementary fairness demands that it takes its promise into account (see Lord Mustill in Doody and Paponette at paragraph 46),
• in assessing the scales of fairness and so whether the breach of a promise is so unfair as to amount to an abuse of power the court asks itself whether the breach of the promise is conspicuously unfair to the persons to whom it was made, and
• that focus on the relevant individuals is an important aspect of the necessary balance between private expectations and policy objectives.

The court rejected in part HMRC’s argument. The fact that there is a macro political issue at stake does not trump all other considerations. Thus, that there might be express provision for the Revenue to issue APNs when the statutory conditions are satisfied does not mean that there are no further restrictions upon the use of the power (such as for instance public law or the need to align with the underlying purpose of the legislation, or indeed the fact itself that there had been a postponement agreement). However, the court accepted that Parliament had expressly and deliberately “changed the goal posts” with respect to where the disputed tax should lie pending an appeal. On that basis, ultimately, the court found that the Revenue was using the power to issue an APN for the purposes provided by Parliament and thus the power was not abused.

The case highlights that although Parliament has endowed HMRC with a power to issue APNs provided that certain conditions set out in legislation have been satisfied, there are also other implied considerations which must be taken into account when exercising the power. This too was found in the case of Vital Nut, wherein Charles J in the High Court found that a necessary implied condition was that the relevant HMRC officer regarded the underlying tax scheme as ineffective.

Something slightly confusing about the case is however that the court seemed to suggest that HMRC had failed to take into account a relevant consideration when exercising the discretionary power, namely the postponement agreement. This of course is a ground for judicial review and should amount to a success for the claimant (provided that, had the consideration been considered mandatory and been taken into account, the same decision would not have inevitably been arrived at). But it does not appear that this point was argued in the case. Nor does it seem that this point was argued in the recent Vrang case, concerning a taxpayer who suffered at the hands of the 2011 Swiss/UK Tax Cooperation Agreement. A possible argument there could have been made that a relevant consideration when deciding to exercise discretion to repay monies was whether there was any tax initially due. In the case itself it seems that the taxpayer in fact owed little if any tax. It is canonical nevertheless that a public authority must not fail to take into account mandatory relevant considerations (and should not take into account irrelevant considerations) when exercising a discretionary power.

Legal philosophers (and philosophers more generally) have a beautiful way of cutting through the noise and expressing in the simplest language that which takes us mere mortals thousands of words to explain. This clarity presents itself of course whenever these people stumble upon tax. Take for instance this one paragraph from Tony Honoré in which he explains that whilst a moral obligation to pay taxes might arise, it is law which provides its substance:

“The need for determinants of morality is particularly clear as regards obligations owed by members of a community to their community. Taxation affords a good example. According to most people’s moral outlook members of a community should make a contribution to the expense of meeting collective needs. A morality which denied this would hardly count as co-operative. In a monetary economy the contribution has to be mainly in money, and takes the form of paying taxes. So members of a community have in principle a moral obligation to pay taxes. But this obligation is incomplete or, if one prefers, inchoate, apart from law. It has no real content until the amount or rate of tax is fixed by an institutional decision, by law. What amounts to a reasonable contribution is not otherwise determinable, since what is required is a co-ordinated scheme which can be defended as fair not merely in the aggregate amount it raises but in its distribution. Taxpayers cannot settle it for themselves, as people can within limits settle for themselves, say, the proper way of showing respect for the feelings of others. Apart from law no one has a moral obligation to pay any particular amount of tax. An obligation to pay an indeterminate sum is not an effective obligation; it requires only a disposition, not an action. So, apart from law no one has an effective obligation to pay tax. If there were a society in which morality was taken as a sufficient guide to conduct apart from law it would therefore not be viable. It would grind to a halt and disintegrate for lack of resources. For this crucial moral and political obligation, vital to the life of a complex community, morality depends on law in the sense that to create an effective obligation it must have recourse to law” (Tony Honoré, ‘The Dependence of Morality On Law’ (1993) 13 OJLS 1)

Tony Honoré would be little surprised then that when provided with a voluntary opportunity to pay more taxes, people might choose not to do so. The obligation to pay tax has been discharged. There is no further moral duty owed. This seems to be precisely what has occurred in Norway. In an interesting experiment, the government introduced a scheme whereby taxpayers could voluntarily pay more taxes than due under the law. From June 2016 to July 2017 however, the scheme raised just $1,325 (which is perhaps less than the cost of administering the scheme).

However, the Honoré thesis relates only to the idea of an effective obligation – it does not remove the possibility that people might still feel inclined to contribute more to the common pot than is specified in the law. For this reason, different results may be witnessed elsewhere. The US for instance has had a voluntary scheme in place since 1961 and has raised over $100mil to date. Even accounting for population size, there is still a significant difference in outcomes between the US and Norway.

Raz might use the “normal justification thesis” to help us understand the divergent results. Raz wrote as follows:

“the normal way to establish that a person has authority over another person involves showing that the alleged subject is likely better to comply with reasons which apply to him (other than the alleged authoritative directives) if he accepts the directives of the alleged authority as authoritatively binding and tries to follow them, rather than by trying to follow the reasons which apply to him directly” (Raz, The Morality of Freedom (OUP 1986) 53)

Thus, a prerequisite for authority normally is the presence of independent reasons which apply to the subject. When it comes to tax, people will normally accept as authoritative law which prescribes the need to pay a specific amount as there already is reason to give a fair share of resources for the common good.

This conception of authority based on reasons might give us an insight into the divergent result in Norway and the US. The reason to pay tax – to give a fair share of resources for the common good – might be felt no longer to apply in Norway generally after satisfaction of statutory obligations, whilst in the US there might still remain some residual reason for some people. And indeed, that makes sense when the tax systems are compared (for instance with respect to income taxes: lower in the US than in Norway).

Perhaps these twin theories about obligations and authority should be applied more broadly to debates around tax law and policy. Do they help illuminate issues around tax avoidance and evasion? About the relationship between states and supranational bodies when it comes to tax reform? The setting of tax rates? Or perhaps legal philosophy itself is merited a place more generally in the debates (in a previous blog for instance, I wrote about Hart’s “core” and “penumbra” idea in the context of tax avoidance). The texts cut through the noise, and that is something which is pretty desirable right now…

In July 2016, I was tasked with responding to a presentation on “Trends in Tax Exceptionalism and Tax Litigation” by Professor Kristin Hickman of the University of Minnesota and Donald Korb of Sullivan and Cromwell. The event was organised jointly by the Journal of Tax Administration and the Centre for Tax Law, University of Cambridge. For those not aware of her work, Professor Hickman has established herself as the foremost academic commentator on matters of administrative law in US taxation, whilst Donald Korb was formerly Chief Counsel for the US Internal Revenue Service.

The forthcoming volume of the Journal of Tax Administration bears fruit from that workshop. Professor Hickman has produced a piece entitled “The growing influence of administrative law and judicial review on US tax administration” which explores recent litigation relating to idea of “tax exceptionalism”, namely the idea that tax deserves special treatment from administrative law. In response to themes from her paper, I make my own contribution with a piece entitled: “Tax exceptionalism: a UK perspective”. The introduction to my piece reads as follows:

“In her article in this issue, Professor Kristin Hickman explores the relationship between the US Treasury and Internal Revenue Service (‘IRS’), and exceptionalism to general administrative law principles, dubbed “tax exceptionalism”. It builds upon work that Hickman has produced in response to the 2011 case of Mayo Foundation for Medical Education and Research v. United States in which the Supreme Court is generally considered to have rejected the idea of tax exceptionalism. Indeed, Hickman’s article deals a decisive blow to the idea of tax exceptionalism by noting that the functions of the IRS are not dissimilar to those of other administrative agencies. Why then “should the IRS avoid general administrative law requirements when other agencies administering substantially similar programs must follow them?” But that does not mean that questions do not remain. Whilst it can be accepted easily that there should be no general exceptionalism, that tells us little about “which administrative practices are susceptible to legal challenge under general administrative law principles?” or whether provisions of the tax code might in fact “justify certain tax-specific departures from general administrative law requirements, doctrines, and norms.”

A similar dichotomy can be said to arise in the UK between on the one hand the idea that there are no special principles of public law which apply to tax law and on the other hand the fact that the application of general principles of law in respect of the tax administration, Her Majesty’s Revenue and Customs (‘HMRC’), will differ from treatment given to other administrative agencies. This article will explore this dichotomy by first exploring briefly the history of the prospect of tax exceptionalism in the UK, and thereafter looking in depth at instances where HMRC may be said in practice to benefit from distinct treatment. The article will further assess situations where greater tolerance was given to HMRC actions than ought to have been afforded.”

Both articles will be available to read on the JOTA website and an early draft of my article can be accessed on SSRN.

The Centre for Tax Law at the University of Cambridge hosts a biannual Tax History conference. Papers selected for the conference are reviewed, edited and later published in the collection “Studies in the History of Tax Law” (published by Bloomsbury) which is now on to its 8th Volume. I had the pleasure of presenting my paper “The Life and Times of ESCs: a defence?” at the conference in July 2016 and that will soon be published in the latest collection. The abstract for my chapter reads as follows:

“In 1897, the UK Public Accounts Committee became simultaneously both aware and alarmed at the practice of the then Inland Revenue providing extra-statutory dispensations to taxpayers. Despite criticisms in the interim, it was not until the judgment of Lord Hoffmann in Wilkinson that HMRC began to put the brakes on this practice. Almost 120 years since the Public Accounts Committee’s awakening to the Revenue’s habit and over a decade since Lord Hoffmann’s judgment, it is timely to reflect upon the life and times of ESCs.”

The book should soon be available in all good libraries and can be pre-ordered here. For those who cannot wait for their local library to obtain a copy, an early draft of the paper can be found on SSRN and also on the Tax History Conference 2016 webpage.

I have recently published a short article in the Bulletin for International Taxation entitled “The Relationship between Tax Authorities, Large Multinationals and the Public”, the abstract for which reads as follows:

In this article, the author explores accusations levelled at the revenue authorities of Ireland and the United Kingdom in response to their treatment of multinationals, analyses the statutory scheme underpinning the powers of those revenue authorities and provides a preliminary proposition as to why subsequent developments have been so distinct.

It was something I worked on tangentially to my doctoral work and explored the different reactions to accusations that revenue authorities in Ireland and the UK had gave preferential treatment to multinationals. Whilst in the UK, this caused much opprobrium, the reaction in Ireland has been much more muted. The paper was presented originally at the 2015 IBFD Doctoral Meeting of Researchers in International Taxation. The article can be accessed here, (although it is subscription only), whilst a very early version of the paper can be accessed here. If you’d like a copy of the Bulletin for International Taxation version, please Direct Message me on Twitter.

I have written previously about the 2011 Swiss/UK Tax Cooperation Agreement (‘the Agreement’), which provided for UK resident taxpayers with bank accounts in Switzerland:

• to be subject to a one-off payment on 31 May 2013 to clear past unpaid tax liabilities and/or to be subject to a withholding tax on income and gains for the future from 1 January 2013 (between 27% and 48% annually); or
• to authorise the Swiss bank or paying agent of the taxpayer to provide details of the Swiss assets to HMRC. This option does not provide relief from past or future tax liabilities.

The Swiss Account holders could remain anonymous if the first of the above two routes was chosen.

The claimant in a recent case before the Ouseley J in the Administrative Court (Vrang v HMRC [2017] EWHC 1055 (Admin)) was subjected to the full force of this Agreement. The Swedish claimant worked for Credit Suisse in Switzerland between 1988 and 2005, before moving to London. She amassed an amount of money in several bank accounts in Switzerland during that period which she intended for use when she would return to Sweden. In 2012, the bank warned her about the need to make a voluntary disclosure to HMRC pursuant to the Agreement and the possibility of a one-off lump sum being extracted. True to their word, a lump sum of £58,000 (ca.) was extracted in 2013.

The claimant sought the return of the bulk of the money from HMRC, claiming that something between £1,000 and £7,000 was in fact owed. HMRC refused the request on the basis that she did not qualify for a refund under the express terms of the Agreement (which provides for repayment where the amount was ‘wrongly levied’, Article 15(3) of the Agreement) or under HMRC’s managerial discretion which according to HMRC:

afforded to the Commissioners for HMRC enabled them, in exceptional cases, to offer repayment in cases of “hardship at the margins”, that is in “circumstances where keeping the charge in place would cause significant hardship and result in a situation which a court would view as grossly unfair to the individual paying the charge, as a result of actions entirely beyond that person’s control.

The sum, it was said by HMRC, was not wrongly levied as the extraction from the claimant’s accounts followed the letter of the Agreement, and hardship was not established (the personal hardship that the claimant had suffered at the time was insufficient to reach the threshold).

The judicial review sought to challenge HMRC’s refusal on the following grounds primarily (although other arguments relating to EU law and human rights were raised):

1. that there is no Parliamentary authority for the levying of the sum, and so it cannot be levied, where there is no tax due in that amount;
2. if there is legislative authority to that effect, it has been misconstrued in a number of respects by HMRC and
3. that HMRC has not exercised its powers, notably its discretionary powers, lawfully.

Dealing with the first ground, it is a well-known aphorism that there must be Parliamentary authority for the levying of tax. However, the court held that it the payment was not a tax levied by HMRC, but rather a payment from a cooperating authority under an international agreement.

Dealing with the second ground, the judge noted that the phrase ‘wrongly levied’ in s. 15(3) of the Agreement was ‘clearly confined to an error in the interpretation or application of the Agreement by the paying agent or the Swiss Tax Authority’ and no such error arose in the case.

In relation to the final ground, the judge expressed ‘considerable sympathy’ for the claimant, but that aside, HMRC had formulated lawfully and rationally a policy on refunds whereby it would exercise its discretion in certain, limited circumstances. The claimant simply did not fall within a class of persons in favour of whom HMRC would exercise its discretion.

When previously writing about the Agreement, I had been sceptical about its merits. Here however is a cautionary tale about a person who negligently fell on the wrong side of the Agreement, failing to follow the steps that would have meant she had little tax to pay and in the end being subjected to a considerable extraction from her savings. It was a case of mala prohibita not mala in se. People researching, writing and working in the tax sphere understand only too well the sharp edges of taxing provisions and agreements. Ordinary citizens will not be so well informed and this is a case showing the severe consequences.

The author of this blog has written previously about the fabled ‘Mansworth v Jelley’ losses. It has been the feature of an extended published case note and two blogposts (here and here). The Court of Appeal heard the appeal in the Hely-Hutchinson case, which concerns these Mansworth v Jelley losses, two weeks ago (at which the author was present). It is not clear when judgment will be handed down, but it will likely be another few weeks (given that we are now in the Easter recess). This blogpost seeks to set out some thoughts on the oral hearing of the case.

The case essentially boils down to whether HMRC is permitted to “go back” on its published position. HMRC produced guidance in 2003 which provided that taxpayers who engaged in particular share loss schemes would be able to generate an artificial loss (by deducting both the market price of the shares and chargeable income tax from the proceeds from the sale of the shares). In 2009, the body changed its position such that the income tax element was no longer deductible. The taxpayer, Hely-Hutchinson, fell within the terms of the 2003 guidance when published, and sought to obtain the benefit of that treatment. Unfortunately, his case (for reasons not relevant for the purposes of this post) was still open in 2009 and HMRC sought to apply the new, less benevolent 2009 treatment.

The case has in essence turned on whether the taxpayer had a legitimate expectation to be treated in accordance with the 2003 guidance. The High Court found in favour of the taxpayer. HMRC fought this point quite hard in the Court of Appeal, noting that the taxpayer had been on notice effectively since he first sought to benefit of the 2003 treatment that the Commissioners were challenging his claims (albeit not in relation to the 2003 guidance treatment specifically, but the possibility was still open that they would challenge that too). A further, important point which HMRC stressed in the appeal was that the taxpayer did not rely upon the 2003 guidance when he exercised his share options. The 2003 guidance postdated the taxpayer’s actions. In fact the taxpayer had to retrospectively amend his tax claims in order to benefit from the 2003 guidance. In this sense, the case is peculiar in that he did not ‘expect’ any benevolent treatment when he undertook the action. It was only several years later when HMRC published its guidance that he had any expectation as to the particular benevolent treatment. HMRC’s guidance did not change the way that he organised his affairs.

For this reason, it does seem a perversion of the English language to say that the taxpayer did ‘expect’ anything at the relevant time.

And indeed, this reveals a tension in the doctrine of legitimate expectations. This case is a far cry from the most famous tax cases concerning legitimate expectations whereby taxpayers received advanced assurances from HMRC and sought to arrange their affairs in accordance with those assurances, as arose in the case of Gaines-Cooper, MFK Underwriting, Matrix Securities, GSTS Pathology, Cameron, Unilver (although that was a practice rather than assurance) even the recent Veolia case. The idea underpinning these types of cases is that it would be unfair for a public authority to resile from its previous position given that the relevant party has changed their position in reliance upon the assurance, particularly where the taxpayer has incurred expenses in reliance. These are ‘reliance’ cases, in which the relevant public authority will be bound to its assurance if it would be ‘conspicuously unfair’ not to be so bound.

But that does not mean that the present case does not come within the doctrine of legitimate expectations, as the doctrine also encompasses cases where a public body seeks to depart from its guidance. The idea is that it would be unfair for a public body to fail to act consistently towards citizens. For this reason, it does not matter in the class of ‘consistency’ cases that the particular citizen was aware that a public body had adopted a particular practice towards persons in their position (see: Scheimann LJ in Bibi at para 55). The question in such cases is whether the public body could rationally apply different treatment. This can be for two reasons. The first is that different treatment is being applied to different classes of persons. The second is that different treatment is being applied to the persons within the same class, but that there are rational reasons for doing so. In the oral hearing of the case, the justices kept coming back to this point about whether it was permissible for HMRC to apply the 2009 guidance to the taxpayer when it applied more benevolent treatment to other taxpayers. What was different about this taxpayer to those persons whose cases had closed before the 2009 guidance was published (and hence benefited from the 2003 treatment).

And this is where things get particularly interesting. HMRC claimed that the taxpayers whose cases were still open after the 2009 guidance had been published could still be entitled to the 2003 treatment if they could demonstrate ‘detrimental reliance’. Several taxpayers could demonstrate such detrimental reliance. Thus, the taxpayer in the case was given the same option as these taxpayers but simply could not demonstrate detrimental reliance. In this sense, HMRC argued that they acted consistently across this group of taxpayers by applying the same standard to all that fell within the group by reason of having their cases still open in 2009.

This is the issue that it is posited the appeal will turn on. What is the relevant comparator group – is it all those who fell within the terms of the 2003 guidance, or is it only those whose cases were still open in 2009? If it is the 2003 group, was it fair to distinguish between those persons either because of the effluxion of time or by use of the ‘detrimental reliance’ criterion.

I await the judgment with interest.

Listed for hearing before the Court of Appeal today is the case of R (Hely Hutchinson) v HMRC. The case revolves around the controversial Mansworth v Jelley claims. The taxpayer Ralph Hely-Hutchinson was successful before the High Court in this judicial review (which I reviewed in a lengthy case note for the British Tax Review which can be downloaded here), which HMRC are today appealing.

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.

What about open cases (in order words, instances where there is an open enquiry)? Would those persons get the same treatment?

That is precisely the issue which arose for Ralph Hely-Hutchinson. The taxpayer 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. Whipple J in the High Court found that this breached the taxpayer’s legitimate expectation that he would obtain the treatment specified in the 2003 guidance. For Whipple J, it was ultimately a question of whether HMRC could frustrate a legitimate expectation in circumstances which would lead to significant unfairness to the taxpayer. The court balanced the duty of fairness against the duty to collect taxes and held in favour of the taxpayer. One significant component of Whipple J’s reasoning was that it was intrinsically unfair to provide differing treatment to persons who had their cases closed as against those whose cases were open. A problem with this approach however is that in situations where different treatment is provided to persons in similar legal and factual positions, the proper approach for the court is to ask if there are rational reasons for the distinction in treatment. The imposition of sections 9A and 29 TMA 1970 could arguably constitute a rational reason for distinguishing between the taxpayers, although this specific argument was not put to the judge.

The appeal will be heard by a strong bench: Sales LJ, Arden LJ and McCombe LJ and is scheduled to last for 10 hours, thus spanning two days. It is a finely balanced and important case which will illuminate further upon the relationship between the duty to act fairly towards taxpayers and HMRC’s primary duty to collect and manage taxes, as well as the effect of this interrelationship with regard to HMRC guidance. In particular, the assessment will concern how this interrelationship constrains HMRC from retroactively withdrawing treatment prescribed in a publication which is based upon an incorrect interpretation of the relevant law.

Accelerated Payment Notices (‘APNs’) and Partner Payment Notices (‘PPNs’) have since 2014 been clogging up the Administrative Court. A rough estimate suggests that up to 87 cases have been petitioned for review.[1] In fact, there are currently 4,116 applicants or potential applicants seeking interim relief from APNs/PPNs which HMRC’s records show amount to a total sum in excess of £756m.

In order to understand why, one need simply to understand what an APN (or a PPN) does. It accelerates the payment of ‘disputed’ tax. The APN/PPN regime broadly requires that taxpayers pay disputed tax upfront, before being able to challenge HMRC’s assessment through the normal channels. APNs may be issued where the following conditions are present:

1. Either an enquiry or appeal are in progress;
2. A tax advantage accrues from the particular arrangements; and
3. A follower notice has been issued; the arrangements are DOTAS notifiable (section 311 of the Finance Act 2004); or a GAAR counteraction notice has been issued (paragraph 12 of Schedule 43 of the Finance Act 2013).

Once an APN has been issued to the taxpayer, the money becomes payable within 90 days. There is no right of appeal against the APN, but merely the right to make representations to HMRC, as a means only of objecting to either the satisfaction of the conditions or to the amount submitted to be due. After taking into account the representations, HMRC may refuse to withdraw the APN. If an APN has been issued to a taxpayer who entered into the once seemingly popular film schemes, the amount due could well be into the hundreds of thousands. Taxpayers are left with little option but to fight the APN, but without any right of appeal against the APN available, the only route which can be taken is through the Administrative Court. PPNs are almost identical to APNs but apply to parties who have invested through partnerships.

This blog has covered the emergence of the APN/PPN regime and the cases concerned in several posts (see: here and here). To date, no taxpayer has been successful in the JR applications to have the APN/PPN set aside (the closest has been minor successes in acquiring interim relief).

It should come as little surprise then that the latest judgment to be produced from the Administrative Court concerning the APN/PPN regime also found against the taxpayers. In R (VVB Engineering Services) v HMRC, three cases were heard together in which the claimant taxpayers sought an interim injunction against HMRC enforcing APNs and PPNs. As the law currently stands, the claimants would be entitled to relief if they could establish “hardship” (ie that they would be unable to trade/run their businesses in the manner in which they ordinarily operate). The claimants however argued that they were entitled to relief without having to establish hardship on the basis of deleteriousness of HMRC’s part and the administrative burden which arises where conditions are attached. This argument was rejected by the Court on the basis that the balance of convenience lay in not granting the injunction having particular regard to the fact that Parliament purposefully enacted the APN/PPN regime and that the taxpayers themselves entered into tax schemes accepting the risk that tax could become payable in the future. The Court also rejected the argument that the hardship test created too high a burden, again having particular regard to Parliament’s intention in enacting the regime.

This case then will offer little comfort to the thousands seeking relief from APNs/PPNs. There are two cases that will be heard this year, Rowe and Walapu, by the Court of Appeal which are the ones to watch closely. The High Court judgments in those cases, from Simler J and Green J respectively, were so comprehensive and robust that they effectively closed off the possibility for a successful challenge at the High Court level (or at least created a significant hurdle for High Court judges to overcome if they choose to depart from these cases. None so far have chosen to do so).

However, with so many cases coming before the Administrative Court concerning APNs/PPNs where the taxpayers are seeking a judicial review in an instance where the substantive case will be heard by the Tribunals (recall that one condition of the APN being granted is that an enquiry and appeal are ongoing), one might query why there needs to be ongoing two parallel proceedings. Yes, there will need to be separate proceedings where taxpayers have sought interim relief (injunction applications can for the most part generally only be granted by the High Court), but the point is that each case for interim relief could go on to be a full judicial review. At the same time, the substantive dispute will be heard before the tribunals. With two parallel proceedings ongoing, I again ask the question why should the expertly constituted First tier Tax Tribunal not have the capacity to resolve both disputes?

[1] See the JR stats at this page, download the zip file (Civil Justice and Judicial Review data) and look for the “Tax Avoidance” JRs in the JR spreadsheet. All have been since 2014-the same time that the legislation for APNs/PPNs and Follower Notices was introduced. It is hypothesized that all those cases are concerned with APNs/PPNs rather than Follower Notices for the reason that Follower Notices themselves do not require taxpayers to pay the tax, but rather the later issuance of an APN/PPN. Of course, some could be JRs of Follower Notices pre-empting the later issuance of an APN/PPN, but there has yet to be an administrative court judgment concerning Follower Notices, but there are myriad concerning APNs/PPNs).