On the 12th of December 2017, the Court of Appeal handed down judgment in the joined cases of Rowe v HMRC and Vital Nut v HMRC, in which dozens of taxpayers challenged the decision of HMRC to issue to them notices requiring the upfront payment of disputed tax – ‘upfront’ in the sense of being prior to a determination of the amount being due by a court or tribunal. These notices requiring the accelerated payment are aptly called ‘Accelerated Payment Notices’ (APNs), though in the specific instances where they are issued to partners in a partnership are referred to as ‘Partner Payment Notices’ (PPNs). The notices can be issued where the following conditions are satisfied (see Finance Act 2014, s. 219, as well as section 228 and Schedule 32):
- Either an enquiry or appeal are in progress;
- A tax advantage accrues from the particular arrangements; and
- A follower notice has been issued; the arrangements are DOTAS notifiable (FA 2004, s. 311); or a GAAR counteraction notice has been issued (FA 2013, Sch. 43, para 12).
Once issued, the disputed tax becomes payable within 90 days (though the taxpayer has a right to make representations to HMRC). These notices are being challenged through judicial review by 1,000s of taxpayers and it is easy to see why – taxpayers have no right of appeal against the notices themselves and, given the short time period in which the money must be repaid (which could well be into the 100s of £1,000s for tax schemes entered into a decade previously), will have little option but to fight the payment through judicial review. The High Court decision in Rowe was the first to be handed down in relation to accelerated payments (with several cases failing at the High Court on the basis of the judgment of Simler J – see here, and here for instance) and several cases, or parts thereof, are being stayed behind the appeal (see here, here and here for instance). This general background underlines the importance of the judgment in Rowe and Vital Nut v HMRC.
Before discussing the case itself, I should also note the following things that have become apparent from the litigation in this area over the past two years. The first is that whilst there are explicit statutory conditions which must be complied with before an accelerated notice can be granted (as set out already), there are also inevitably implied conditions which too must be satisfied. This is simply a reflection of the fact that these notices are a ‘game-changer’ and significantly impact the taxpayers concerned. (This was predicted here, and confirmed here and here where the judges introduced implied conditions). Secondly, in order for a taxpayer to succeed in a challenge to the issuance of an accelerated payment notice, the taxpayer should point to some choice made by HMRC in the execution of the relevant legislation, rather than trying to challenge the legislation itself. This argument was explicitly made by Jonathan Peacock in the British Tax Review. The third is the seeming failure of the courts to properly apply the test for taking into account relevant considerations. Broadly, public law requires in a tax setting that HMRC, or the relevant person in HMRC, takes into account all relevant considerations when making a decision and does not take into account any irrelevant consideration(s). If there is a failure for either reason, the question then is whether HMRC, or the relevant person, would inevitably have arrived at the same decision (see pages 101-106 here). In the case of Dickinson, when deciding whether to issue an APN, the fact that there was previously an agreement with the taxpayer to postpone the requirement to pay the disputed tax until after a tribunal determination was ignored. This seemed a relevant consideration, but the court did not deal with the point. At various points in the lengthy judgment of the Court of Appeal in Rowe and Vital Nut v HMRC, these three observations were confirmed.
In Rowe and Vital Nut v HMRC, the Court of Appeal summarised that the taxpayers sought to challenge the issuance of the notices on six broad grounds, finding against the taxpayers ultimately on all six. Judgment on the first four grounds was given by Lady Justice Arden, with Lord Justice McCombe giving judgment on the remaining two. Lady Justice Thirlwall concurred, save for considering whether the legislation was compliant with Article 6 of the ECHR, whilst Arden LJ added some thoughts of her own on the compliance of the notices with the Convention.
The first ground of appeal was that the notices were unreasonable (or disproportionate or otherwise unfair). The second was that the notices did not comply with the statutory conditions necessary for their issuance. These two grounds were taken together by Lady Justice Arden who dealt with the varied and complex arguments advanced by the taxpayers under these headings such as whether it was unfair to issue the notices long after the schemes had been entered into (unfair either because of the delay, or the fact that the legislation should only apply prospectively, as posited here) or whether it was unfair to issue notices in a period shortly before the hearing of the substantive appeals which underpinned the tax dispute. Arden LJ was minded that the power to issue notices, given its severity, called for “caution” (in line with my comment above):
“In a case such as Mr Rowe’s, if the provisions of the FA 2014 are applied without limitation, the result may be that Parliament imposes a disadvantage on citizen A in order to deter citizens B, C, D, E and F from acting in a similar way. That is on the face of it a remarkable result. In principle, it is possible for Parliament to impose such an obligation, but the court will expect the legislation to be expressed in clear language if it is to achieve that effect. I approach the issues of statutory interpretation arising on this appeal on that basis.” [paragraph 50]
Ultimately, however, the Court was satisfied that the notices were issued by HMRC within Finance Act 2014, consistently with its statutory purpose, following a fair procedure specifically prescribed by the legislation, pursuant to rational and proportionate exercise of HMRC’s discretion and the notices did not involve any unlawful interference with the appellants’ rights under the Convention.
One wonders however whether the taxpayers might have been more successful if their argument had been based on a constitutional principle, such as access to justice, which had been infringed by deliberately sending the notices so soon before the substantive appeal was due to be heard. Courts are more likely to entertain an access to justice point after the success of the argument in the Supreme Court this year in Unison. In the case of the taxpayers in Rowe, HMRC offered a settlement opportunity to the taxpayers prior to the issuance of the notices [see paragraph 42], with the settlement expressly providing that those taxpayers who did not accept the offer would later receive an APN. The combination, it could be argued, was an aggressive means of forcing tax settlement and severely restricting the taxpayers’ access to the court. To recall, an APN requires upfront payment, but a settlement would not and could be staggered. Objectionable here is the fact that HMRC are requiring payment of the maximum amount due (by issuing the APN) despite knowing that less is in all likelihood receivable (by issuing the settlement opportunity). In order for a judicial review of HMRC to be successful, it is necessary for the taxpayer to show that she has been “shafted” in some way (my words), or as Arden LJ put it – “[t]here must be some material factor which makes [the exercise of a discretionary power] unfair.” Could it be argued that this is a material factor – asking for more up front, when knowing it is not due, in a bid to restrict the taxpayers’ access to the courtroom when an appeal is pending?
The third ground of appeal was that the issuance of the notices breached the principles of natural justice because taxpayers were not provided with a proper opportunity to rebut the claims of the asserted tax liability before the notices were served. Arden LJ held that the right to make representations to HMRC after the initial issuance of the notices must include the right to make representations as to the effectiveness of the underlying tax scheme. This again deviates from the strict wording of the statute and reads in a further requirement for HMRC. In the circumstances however, the taxpayers were well aware of the basis of the dispute and that HMRC questioned the effectiveness of the underlying scheme.
The fourth ground of appeal was a technical procedural point – that the notice did not relate to an “understated partner tax” as required by section 228 and Schedule 32 of the Finance Act 2014. In the case of PPNs, the notice must state the “understated partner tax” which is the amount which becomes “due and payable” following determination by the designated HMRC officer of the amount of tax advantage to be denied. The argument here was that no amount was “due and payable” because HMRC never opened an enquiry into the relevant tax return for the right year of the lead taxpayer in Rowe. The taxpayer filed his return for the year and then later, in a separate claim, filed for the relevant relief. HMRC challenged the relief, it was argued, but not the return and thus there was no tax due and payable. This ground of appeal is a direct fallout from the Supreme Court judgment in Cotter (though the taxpayer also had to try to distinguish the Court of Appeal judgment in De Silva, the appeal of which was unanimously refused by the Supreme Court). Arden LJ rejected this argument. HMRC had made an enquiry into the return of the partnership for the loss year, this operated as a deemed enquiry into Mr Rowe’s tax return, including the statement of his share of the relevant loss for the same period. Therefore HMRC did not need to open any other enquiry into the standalone claim for relief.
The fifth ground was that there was a breach of the taxpayers’ human rights (in respect of Article 1 of the First Protocol as well as Articles 6 and 7 of the Convention). The Article 7 ground was not argued before the Court. Whilst McCombe LJ had doubts about the conclusion of the High Court judges that Article 1 Protocol 1 was not engaged, he was happy nevertheless that any interference was in accordance with law and proportionate. As for Article 6, McCombe LJ was satisfied that the availability of the procedure for the making of representations against the issue of notices, backed by judicial review of any decision made, was sufficient.
The sixth ground was also a technical procedural point that HMRC must be satisfied that the disputed amount is in fact owed. The legislation requires that the notice specify the amount of disputed tax (section 221(2)(b) of Finance Act 2014), which should be determined by a designated officer (section 221(3) of Finance Act 2014). Charles J in the High Court found that this required that the officer is not satisfied that the underlying tax scheme is effective. The Court of Appeal however reversed this onus of proof, finding that it in fact required that the designated officer was positively satisfied that the scheme was ineffective. This is an important change as HMRC had argued that it could send out notices for instance whenever a scheme was DOTAS notifiable, unless it was as clear as a “slam dunk case” that the taxpayers would succeed in challenging HMRC as to the effectiveness of the underlying scheme.
Notwithstanding the fact that the incorrect test was applied, the Court of Appeal found that it was “highly likely that the same decision would have been reached by the designated officers in these cases, even if the correct test had been applied by him/her in specifying the sum to be paid.” This, it could be argued, was the incorrect test to be applied if the language of relevant considerations is used. The designated officer should have taken into account whether the scheme was in fact ineffective (which is an importantly distinct consideration from whether the officer was not satisfied that it was effective). That consideration ignored, the test then is not whether the same decision was highly likely, but rather whether it was inevitable. This then is where the court erred – by using the incorrect test of likelihood rather than inevitability to determine whether the officer’s decision was vitiated. But the court did not do so, and it does not appear to have been argued in such a way. But as noted already, it is becoming a common trend to overlook the proper application of the relevant considerations test. Whilst the taxpayers did come close to making an argument on the basis of failing to take account of relevant considerations, this was done so on the basis that HMRC had formulated an overly strict policy for the exercise of its discretion which in turn did not allow for exceptional cases in which the schemes might be effective. (The Court found that HMRC’s policy did in fact allow for exceptional cases).
Some time ago, I predicted that one of the ’notices’ cases would make it to the Supreme Court and this looks likely to happen with Rowe and Vital Nut. Over the past few years, HMRC have acquired important powers which ‘nudge’ the actions of taxpayers – the DPT, APNs, the GAAR, POTAS and so on. These powers are distinct from the traditional powers that HMRC exercised when investigating taxpayers. The public interest in having the Supreme Court consider a case like Rowe and Vital Nut accordingly lies in the fact that it would be the first opportunity to pronounce upon the proper interpretation and scope of these new ‘nudging powers’. This case for instance highlights the role that the courts can play in restricting the wording of statutes and the litigation has highlighted some misconceptions that HMRC had about its power to issue the notices.