The past couple of years has seen a noticeable increase in the number of Judicial Review (JR) applications being made against HMRC. The majority of these have been in relation to HMRC using its new powers to issue the various types of notices to enforce payment ahead of a taxpayer’s case being heard by the Tribunal. This article looks at some of the leading applications and how the Courts are cutting HMRC a lot of slack when it comes to their actions.

It has to be said that HMRC has managed to get itself into a bit of a mess dealing with the large number of users of ‘marketed avoidance’ schemes. Practitioners and HMRC staff who have been working these cases will remember the original way these schemes were usually tackled. One case was selected as a lead, not test, case with all other cases then ‘parked’ once they had been identified as being part of the same planning.

Often a case was parked as soon as an enquiry was opened and, although an opening letter was sent out, often with an informal information request, no action was taken to progress the case as the scheme was being worked by specialist staff and there was plenty of other work to be getting on with. The case effectively sat in the local officer’s cupboard waiting for news or instructions from the Specialist Unit dealing with the lead case.

This system worked, (well, it worked for HMRC), when there were not too many schemes and not too many users, but the world turns. The number of schemes grew, as did the number of users, while the number of HMRC staff fell. Plus, whether deliberately or not, tactics changed. Cases were conceded ‘on the steps of the court’ which left HMRC with a single win, but not a precedent that could be applied to other users. HMRC then had to work another case up, sometimes from scratch and although a lot of the thinking and decision making had already been done, bringing a new case up to a litigation standard, plus getting it listed and heard took a number of years. I’m aware of this happening three times for one scheme. I should say that the cases were all conceded for separate reasons by separate taxpayers and there was no question of it being a tactic to delay settlement for the other users, but it had that effect and added around 6 years to the ages of the cases in question.

Alternatively, if a case was heard and a decision received that HMRC could use as a precedent, sometimes inventive reasons were advanced as to why that precedent or decision did not apply. I know that in at least one instance the reason advanced as to why the lead case did not apply was because different agents had been used in this particular case and that, apparently, made all the difference.

All of this slowed cases down, as admittedly did the time it took HMRC to investigate, consider, settle their view and litigate a case. During this time, either no tax was due or, if it was, a postponement application had been made and accepted, giving the taxpayer the ‘cash flow benefit’ as the Treasury has it, of the money. This was important for many of the schemes, that could be described as ‘income schemes’, where a user routed their salary or contract fees through the structure, bumping up their take home pay which was then spent.

To help bring in more money to the Exchequer (reversing the cash flow benefit) and to deter future use of schemes, legislation was introduced in Part 4 Finance Act 2014. This allows HMRC to issue various notices, such as accelerated payment notices (APNs), to users of schemes to reverse the cash flow benefit, with the Exchequer holding the cash while cases work their way through the courts. The legislation also stops the benefit of tactical concessions or tweaks to schemes or arguments by allowing the issuing of follower notices (FNs) where, if one is issued, the taxpayer risks incurring a penalty if they take their appeal to the tribunal and lose.

These notices will not have had much effect for ‘capital’ schemes where, in my experience, a taxpayer was not allowed to take part unless they confirmed they had put aside the tax (or purchased a certificate of tax deposit). However, for the income schemes, or those that rely upon timing differences, the effect could be described as catastrophic as the taxpayer will probably not have the cash available to pay the notice.

The notices themselves have no rights of appeal, leaving the only avenue to challenge them being via JR. It perhaps comes as no surprise that since 2014 there has been an uptick in the number of JR cases involving HMRC. It will also come as no surprise that the early cases were on the larger schemes where more money was at stake and the users, or the promoters, had deeper pockets to challenge the legislation. Personally, I believe this was ‘a good thing’ as it allowed the position of the taxpayer to be put forward and argued as best it could be, which benefits both the taxpayer and HMRC.

Continuing the theme of ‘no surprises’ are the decisions of the Courts in these JRs. The cases that have got the furthest are the joint Court of Appeal decisions in Rowe & Vital Nut Co Ltd [2017] EWCA Civ 2105 handed down on 12 December 2017. Here we have an aspect that runs throughout the decisions; that the Courts may not like what HMRC has done, indeed in a case I will come on to, they may be very unhappy about what HMRC has done, but they will find against the taxpayer.

The particular aspect of this in Rowe is to be found in the discussion relating to the actions of the ‘designated officer’ who decides how much tax is needed to be brought into charge in order to counteract the scheme. HMRC’s case was that all the designated officer had to do was decide there was a dispute. Arden LJ, however, held that the officer needs to consider if the scheme works or not and it is only if they arrive at a view that the scheme does not work, having considered the information at that time, that an APN can be issued. Arden LJ goes on to say that if a decision on effectiveness was not needed why did Parliament require a senior HMRC officer to be the designated officer? This equates seniority with technical knowledge, which is true – sometimes.

This is not a particularly high bar, but as McCombe LJ said at 223 onwards, HMRC did not even met this as they were ‘oblivious’ to the need to do so. To me it is the use of the word oblivious here that shows the Court of Appeals unhappiness with HMRC as ‘unaware’ would have been a kinder description. However, despite this the Court of Appeal found that had HMRC been aware of the need for some consideration of the effectiveness of the scheme, they would undoubtedly have come to the same conclusion as regards issuing the APN. The taxpayer’s appeal failed.

The next JR I believe worth considering is that of Dickinson & Others [2017] EWHC 1705 (Admin) given by Charles J on 7 July 2017. Interestingly, Charles J had been the High Court judge in Vital Nut too. Here Charles J found that the approach HMRC took when deciding to issue APNs “effectively ignores the principles of good administration and so is unlawful as being conspicuously unfair as a matter of procedure and substance.” He also castigates HMRC for the delays in dealing with the enquiries and describes the explanation offered by HMRC for the delay as “obfuscation”. He was so exercised by HMRC’s behaviour that he refused to award HMRC full costs and made them bear their own as much as he could.

However, despite this, Charles J found for HMRC as Parliament had enacted the APN legislation with a particular purpose in mind and the taxpayers were within this purpose, HMRC had an arguable point as to whether the tax was due and, despite what the Judge felt about how HMRC had handled the cases, the “conspicuous unfairness” at the heart of the complaint was based on what Parliament had done to them by the legislation, not how HMRC had applied it.

As an aside, in weighing up in favour of HMRC, Charles J found that the taxpayers should have known that delays by HMRC are “not uncommon” and could have taken steps to move the case forward themselves. This has been mentioned in other JRs too, so perhaps it is a question for advisers. Do you try and force cases along so you can point to HMRC’s delays or does that just risk your clients coming to the top of the list? Now that APNs will have been issued, perhaps forcing the pace and obtaining certainty sooner rather than later will be welcomed.

The final case I want to look at both continues the point that the Courts have been willing to give HMRC the benefit of the doubt, but also show the benefits of the JR system for taxpayers. The case is Broomfield & Others [2018] EWHC 1966 (Admin). This decision was about FNs, more so than APNs. This was because, due to the age of the cases, they predated DOTAS, and I understand APNs could only be issued if an FN had also been issued. Therefore, knock out the FN and you knock out the APN meaning that the cash flow benefit for these cases would go back to the taxpayer.

The case at the heart of the matter will be one well known to most agents by now, that of Huitson. Following his own unsuccessful JR and appeal to the European Court of Human Rights, Mr Huitson, tried again. This time based upon the technicalities of the matter. He lost, again, and didn’t appeal in time.

Under the FN legislation, once Mr Huitson’s appeal became final, HMRC had a decision they could use to issue FNs to other users, and proceeded to do just that. However, some of the users of the scheme had come up with an alternative argument to Mr Huitson and were advancing that as part of their appeal as well as the defence used by him. HMRC, were though, insisting that the users drop all their arguments or face the penalty that could be imposed by issuing a FN.

Here is where the benefits of the JR system show through. Before the case was heard, HMRC accepted that the FNs can only cover arguments decided by the tribunal or the courts and not ones that have yet to be heard. This is an effect of Tower MCashback, where HMRC was allowed to advance alternative arguments to those set out in the closure notice in order to also allow taxpayers to advance alternative arguments that occur to them later in the day. A FN can only cover past arguments, it cannot cover/disallow arguments that a taxpayer develops later, either due to a new precedent or a cracking idea they have just thought of.

Therefore, in Broomfield, if the taxpayers agreed to drop the Huitson argument and only advance their new one (plus, in effect, anything else they could come up with later and the tribunal allowed) then the FN would be withdrawn. This also neatly does away with any APNs linked to the FNs. However, I don’t think this will assist in many, if any, other cases because, I understand FNs were the only way an APN could be issued as there was no DOTAS number. Most other users who have received an APN will also have a DOTAS number and therefore receiving FN will not change the need to pay the APN.

As well as the defence that they had two technical arguments and not just Mr Huitson’s, the taxpayers also advanced a number of other arguments around the technicalities of the FNs, including that the FNs had the wrong dates on them. Here, Lewis J found that the notices did have the wrong dates on them and had other errors, but held that the notices were still valid because Parliament would not have intended such errors to invalidate the notices.

In summary then, when it comes to APNs and FNs, the courts appear to be finding for HMRC no matter what they do procedurally, and no matter how badly they do it. However, where the taxpayer can advance what might be called a “tax technical” argument, HMRC and the courts will give it greater thought and the taxpayer may even win.

Read Andrew’s article in Taxation

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November 5, 2018

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