The Ricoh Arena, State aid and the parallel with public Law

As a Munsterman, my eyes will firmly be fixed on the Ricoh Arena in Coventry this Saturday where Munster take on Saracens in the European Champions Cup semi-final. Presumably unknown to rugby fans, this stadium has been the subject of litigation over the past few years which has just now come to an end. As highlighted by a press release from 39 Essex Chambers, the Supreme Court has today refused permission to appeal in R (Sky Blues) v Coventry City Council & Ors. By way of background, Coventry City Council owns the stadium. In 2003, a Company (“ACL”) was set up which acquired a long lease to use the stadium. Shares in ACL were initially owned 50/50 by the Council and Coventry City Football Club, before the Football Club sold its interest to a local charity.

Coventry Football, which played its games at the Stadium, stopped paying rent to ACL, meaning that ACL entered financial difficulties. Given these difficulties faced by ACL, the Council (with remember a 50/50 interest in ACL) provided a loan to ACL. The Claimants – the now owners of the Football Club – contended that the loan was at an undervalue and hence amounted to State aid (Claim 1).

Later, the Council entered into negotiations with Wasps Rugby club. The result was that Wasps would acquire 100% of the shares in ACL: 50% from the Council, 50% from the local charity. Part of the deal was that the Council would renegotiate the lease with ACL, extending the lease from under 40 years to 250 years. The Claimants argued that this deal amounted to State aid because the Council’s interest in ACL was sold at an undervalue and the lease extension also took place at an undervalue (Claim 2).

The Supreme Court’s decision to refuse permission confirms that neither claim successfully made out that State aid had been provided.

The case itself highlights the interesting relationship between public law and State aid. Hickinbottom J in the High Court (Claim 1) noted that an important principle in determining whether State aid had arisen in such a context was that the public authority enjoyed a wide margin of discretion. Whether the transactions occurred at an undervalue is not a binary question. Rather there can be a range of appropriate figures and the court’s job is not to isolate the best outcome:

“Although the test is an objective one, the law recognises that there is a wide spectrum of reasonable reaction to commercial circumstances in the private market. Consequently, a public authority has a wide margin of judgment (see, e.g. the 1993 Communication at [27] and [29] (“… a wide margin of judgment must come into entrepreneurial investment decisions…”)); or, to put that another way, the transaction will not fall within the scope of State aid unless the recipient “would manifestly have been unable to obtain comparable facilities from a private creditor in the same situation…” (Déménagements-Manutention Transport at [30]: see also Westdeutsche Landesbank Girozentrale v Commission [2003] ECR II-435 at [260]-[261]). Therefore, in practice, State aid will only be found where it is clear that the relevant transaction would not have been entered into, on such terms as the State in fact entered into it, by any rational private market operator in the circumstances of the case.”

The point was affirmed by two differently constituted Courts of Appeal in subsequent proceedings in the case (para 26 of the Appeal and para 40 of the parallel appeal of refusal to give permission in relation to Claim 2).

Applying it to the case at hand, Hickinbottom J found that the loan agreement fell within the wide ambit of decision-making discretion extended to public authorities and that the loan was not, therefore, unlawful state aid. A rational private market operator in the Council’s position at the time might well have considered that refinancing ACL on the terms agreed. ACL might otherwise have gone insolvent, in turn meaning further loss for the Council.

There is a clear parallel here in State aid law with the standards of judicial review, where similarly the focus of the court is on the process of decision-making. Though the Court may intrude on the merits of a decision, it will do so only in circumstances where the decision arrived at has not been reasonable (or not proportionate depending on the case, but we’ll leave that to the side for now). The parallel between the circumstances where State aid will arise as a result of a public authority engaging in transactions at an undervalue and the standard of reasonableness in judicial review is expressly affirmed by Hickinbottom J later in the judgment. The judge found that the argument of the Claimants that the public authority had acted unlawfully as a matter of public law because of irrationality could be dismissed on the basis of the same reasoning as in respect of the State aid claim:

“I can deal with that ground very shortly: it clearly cannot survive my findings in relation to the other grounds, particularly those in respect of State aid”

It seems appropriate to use the existing and well-known frameworks that exist in public law to determine the level of discretion afforded to public authorities when it comes to determining whether or not State aid arises. Public authorities, tasked with carrying out functions by Parliament, will be already familiar with such frameworks and additionally there are sound conceptual reasons for entrusting those better placed to make administrative decisions with some leeway in relation to those resulting decisions. One wonders however whether this logic might be extended also to the rulings’ cases currently ongoing between the European Commission and several Member States. At issue is whether the tax authorities of Ireland, the Netherlands and Luxembourg granted State aid by affirming tax positions which were in fact incorrect as a matter of domestic law. Whether tax authorities grant rulings will generally be a matter of discretion (though in some States, there may be a mandatory obligation on the tax authority to provide a private ruling). As a matter of domestic law, the tax authority will be held to have acted lawfully provided that it followed appropriate decision-making processes and did not reach a decision which was unreasonable. It follows that a tax authority will not have acted unlawfully simply because it provided a ruling which as a matter of substantive law later turned out to be incorrect. In this discrete sense, tax authorities have a power to get it wrong.

If the parallel between public law and State aid could be maintained in relation to the rulings’ cases, then it would appear that State aid will only be said to have arisen if the tax authorities in Ireland, the Netherlands and Luxembourg acted unlawfully, rather than simply if they granted rulings which turned out to be incorrect as a matter of domestic law.

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Hely-Hutchinson and the end to the Mansworth v Jelley affair

Though it is not evident from the Supreme Court’s permission to appeal page, the Supreme Court refused permission to appeal in the case of Hely-Hutchinson v HMRC. This has been discussed in many blogposts on this site (here, here, here, and here) and also in case notes in the British Tax Review (for the High Court decision) and the Cambridge Law Journal (for the Court of Appeal decision). This brings to an end the saga around the Mansworth v Jelley losses. In effect HMRC (Inland Revenue at the time) produced some poor guidance in 2003 in which it had erroneously misrepresented the law, allowing taxpayers to claim capital losses where no losses were actually made. The mistake was only realised in 2009, thus creating a saga – what should HMRC could do in relation to those persons who relied upon the 2003 guidance? HMRC decided that it would not touch “closed” cases, but would apply the 2009 guidance to those taxpayers who had ongoing enquiries. Ralph Hely-Hutchinson was a taxpayer who amended his tax returns on the basis of the 2003 guidance, but his returns were still “open” in 2009 so HMRC applied the 2009 guidance. In the High Court, Hely-Hutchinson successfully argued that he had a legitimate expectation to be treated in accordance with the 2003 guidance. The Court of Appeal found otherwise and the Supreme Court, by refusing to grant permission, has rendered that decision final.

Ultimately, I would argue that the Court of Appeal decision is defensible as an orthodox application of the law as it stands. HMRC can resile from a previously promised position where it has a good reason for doing so and overturning a mistaken view is a good reason. However, a different result could have been arrived at if the case had gone to the Supreme Court. What is unfortunate about the decision is that it undermines the value of HMRC guidance, which performs an important rule of law function. By virtue of HMRC guidance, taxpayers are better informed of the legal consequences of their actions which is desirable as it respects the autonomy or human dignity of taxpayers (even where the taxpayer is a legal entity, it is ultimately humans that make decisions on its behalf). On this basis, HMRC would also be justified in not reneging on its previous position.

Of course HMRC should strive to ensure that it collects the correct amount of tax. But mistakes happen. Provided that HMRC follows good processes and does not act in an outrageously misguided way, it is not unlawful for HMRC to fail to collect tax which might ultimately be due. In the case of Hely-Hutchinson, it would have been lawful for HMRC to accept that some tax due would not ultimately be collected (see the recent case of R (Vacation Rentals) v HMRC [2018] UKUT 383 (TCC) for example). In fact, HMRC bore its own costs in the litigation, which certainly would have added up and likely been greater than the tax ultimately payable (the taxpayer claimed capital losses of £428,000, meaning the tax due would be far less than this figure). HMRC has the power to get it wrong and there is virtue at times then in allowing mistakes to perpetuate.

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The Belgian Excess Profits case, de facto and legal discretion

The General Court today handed down its decision in the Belgian Excess Profits case, finding that the Belgian Excess Profits regime did not amount to State aid (on the basis of the arguments put forward by the European Commission). The reason essentially was that the Commission did not persuade the Court that the regime amounted to an ‘aid scheme’. An aid scheme is a general scheme, for instance some generally applicable legislation, whereby individual aid is granted. The full definition is:

“any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time and/or for an indefinite amount” (Article 1(d) of Reg 2015/1589)

What is critically important to note is that the Court only had to decide whether the regime itself amounted to an aid scheme. It was not deciding whether the way in which the law was administered by the tax authority was selective. In this way the case has always differed from the ‘individual rulings’ cases of Apple, Fiat, Amazon, Starbucks, IKEA and Engie.

Why the case focused on the entirety of the scheme, rather than the individual rulings provided to undertakings is very usefully explained in this incredibly helpful twitter thread from Professor Ruth Mason (hint: money), whilst that thread and this blogpost from George Peretz QC also assist in understanding the implications for the other ongoing State aid rulings cases.

What I wish to focus on here is the use of the word discretion in the judgment itself. One of the critical reasons for the General Court finding against the Commission in this case was that the Belgian Tax Authority enjoyed a margin of discretion in the application of the Excess Profits regime. This was important because to say that there was a margin of discretion in the application of the regime would mean that in fact ‘further implementing measures’ were required and hence the regime could not amount to an ‘aid scheme’ (see paras 99 to 113). The relevant Belgian law allowed a downward adjustment to be made by the Belgian tax authority and to determine how this should be. As put by the General Court, the Belgian law thus allowed “a correlative adjustment should be made only if the tax administration or the Ruling Commission considers both the principle and the amount of the primary adjustment to be justified”. This should be taken to mean that the discretion that was being exercised here was a legal discretion as distinct from what could be termed a de facto discretion.

What do I mean by the distinction between legal and de facto discretion? By ‘legal discretion’, I mean the power to choose where that choice is determinative legally. So in the case of ordinary legislation, such as a tax on income, the tax authority does not have legal discretion to determine how much money is due in income tax. Rather they make an assessment, but that assessment can be challenged and the tax authority is not the ultimate arbiter of how much is owed – that will be the judiciary. This is not to say that tax authorities do not have power when they make assessments (and indeed that assessment may be influential for the ultimate arbiter) – this might helpfully be distinguished as ‘de facto discretion’. But critically it is not legal discretion. Thus in the case for instance of Apple, it would be incorrect to say that the Irish Revenue Commissioners had legal discretion to decide how much money was due from Apple. They could make an assessment, but if that was challenged then the arbiter would be a judge. When it comes to advance rulings provided by tax authorities then, the tax authorities will have legal discretion as to whether to provide the ruling or not (unless there is law in place that provides that the tax authority is under an obligation to provide the ruling, as in the case of the Belgian Profits Regime case for those who were entitled to apply). It will not have legal discretion to decide how the substantive tax provisions apply in the case at hand (unless the relevant legislation mentions that the tax authority legally determines some component of the tax liability, again as was the case in the Belgian Profits Regime case).

This distinction between legal discretion and de facto discretion comes through in the judgment of the General Court, in particular at paras 99 and 100. It is written that “the fact that a prior request for approval must be submitted to the competent tax authorities in order to benefit from an aid does not imply that those authorities have a margin of discretion, when they merely verify whether the applicant meets the requisite criteria in order to benefit from the aid in question”. What was distinct about the regime in question however was that the legal determination was to be made by the tax authority, as evidenced 1) by the scope of the responsibility granted to the tax authority to determine whether a downward adjustment should be granted; 2) that not all rulings granted aid (thus, the fact that not all exercises of the same power produced the same result, then the tax authority must have been exercising a choice and therefore a discretion); 3) and related to the second point, the assessment of individual rulings demonstrates that the rulings differed in their outcomes (and the factors leading to those outcomes) depending on the circumstances. They were determined on a case-by-case basis; 4) the fact that many applications for rulings are rejected.

Going forward, to be clear, the General Court’s decision does not mean that the Belgian State is off the hook. The fact that legislation provided a legal discretion to the tax authority does still mean that State aid may have arisen in any (or even many) individual instances. Given that the facts present a legal administrative discretion, the question that would need to be answered is whether the administrative discretion was consistently exercised according to objective, non-discriminatory and ascertainable criteria (see for instance paras 123-125 of Commission Notice on the notion of State aid).

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Too many powers, too little oversight? The answer is ‘no’

In an earlier blog (‘Too many powers, too little oversight?’) I attempted to summarise the findings and recommendations of the House of Lords Economic Affairs Committee in its report into HMRC powers. Ultimately, the Committee issued concerns about the increased powers of HMRC and the lack of safeguards for affected taxpayers. On the 22nd of January, the Government responded to the report, which has helpfully been summarised in a (non-paywalled) article in Tax Journal. In this blogpost, I just wish to focus on one part of the Government’s response.

Interestingly, the Government accepted the recommendation to increase awareness of the statutory review process, but rejected the rest of the recommendations from the Committee relating to ‘Taxpayer Safeguards and Access to Justice’. These were that there should be a right of appeal against all HMRC determinations and notices; there should be a right of appeal with any new power HMRC is granted; that penalties associated with GAAR and Follower Notices be abolished; that the First-tier Tribunal should have the power to consider judicial review cases; that naming and shaming should only be used where there has been non-compliance with the law. Many of the responses in relation to the particular recommendations essentially revolved around repeating the underlying purpose of the relevant regime or rule. For instance, in response to the recommendation of abolishing penalties for GAAR or Follower Notices, the Government wrote that those ‘regimes are designed to address protracted delays in finalising avoidance cases and give the taxpayer opportunities to settle their disputes without the application of penalties’.

In relation to the recommendation that judicial review of HMRC decisions should be permitted in the First-tier Tribunal meanwhile, the Government responded that:

 ‘Any change to the Judicial Review process would need to be led by the Ministry of Justice in consultation with the judiciary. This would fundamentally alter the nature and purpose of the First-tier Tribunal which is to make findings of fact in a relatively quick and inexpensive way.’

The question which follows from this is whether it would in fact ‘fundamentally alter the nature and purpose of the First-tier Tribunal. Undoubtedly the First-tier Tribunal is an decision-making body which is invested with the expertise to make determinations of fact. However, it is myopic to think that the Tribunal does not also engage itself in issues of public law. Indeed, as I stressed in an article in the British Tax Review last year, ‘Public law in the First-tier tribunal and the case for reform’, the First-tier Tribunal already deals, and is in fact tasked by statute, with deciding public law issues for instance of reasonableness, illegality, procedural impropriety, legitimate expectation and proportionality. Further, there would be serious practical advantages to formally extending jurisdiction to the First-tier Tribunal (for instance in terms of efficiency and costs)! To this end, it is misconceived to argue that extending jurisdiction would in any way alter the nature and purpose of the Tribunal – its nature and purpose has since its inception been to determine facts and public law issues.

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Too many powers, too little oversight?

Although it won’t quite catch the headlines like the Advocate-General’s decision that Article 50 is unilaterally revocable, the report of the House of Lords Economic Affairs Committee released also on the 4th of December should not go unnoticed. The Committee conducted an investigation into HMRC powers, entitled ‘The Powers of HMRC: Treating Taxpayers Fairly’, looking in particular at the increased powers of HMRC in recent years and the impact of some items of legislation on taxpayers (such as the 2019 Loan Charge). Ultimately, the Economic Affairs Committee issued concerns about the increased powers of HMRC and the lack of safeguards for affected taxpayers.

But in particular, its recommendations relate to the past, present and future. The recommendations in relation to the past could be perceived as odd as these relate to legislation already enacted. Legitimate issues were raised about the scope of existing legislation and its impact on affected taxpayers, such as the retrospective nature of the 2019 Loan Charge and that affected taxpayers, sometimes urged into aggressive schemes by their employers, may no longer be in a position financially to pay the taxes due. The Committee thus made several recommendations about how HMRC ought to operate the legislation going forward, putting the taxpayers clearly on notice where HMRC considers schemes to be ineffective. The Committee highlighted that the issuance of Notices by HMRC which accelerate the payment of disputed tax (APNs and FNs) should be appealable to the tax tribunal given the centrality of the protection of taxpayers. Meanwhile, per the Lords, the naming and shaming provisions went too far and should only apply to those who have broken the law.

But where bad legislation is produced, it is the result of failings on the part of government (in proposing it), the Commons (in passing it) and the Lords (in scrutinising it). Scrutiny after the fact is a poor substitute for scrutiny before. One does query then why the very Parliamentarians that are expected to scrutinise legislation did not flag these issues up when the relevant legislation was being proposed?

In relation to the present, the Lords recommends that proposed extensions to HMRC powers (in relation to offshore time limits and civil information powers) be withdrawn by the government as these are disproportionate or fail to incorporate sufficient safeguards.

In relation to the future, proposed legislation should be more narrowly targeted and should involve more substantive consultation. In terms of safeguards for the future, the report recommends an increased role for the Adjudicator, the taxpayer “Charter” and the Powers Review principles. The report also envisages a greater role for the tax tribunal, both in terms of the increased oversight of the exercise of HMRC powers or the extension of the jurisdiction to judicially review HMRC decisions. This is something that I argued also in a 2018 article in the British Tax Review. But this only skims the surface in what should be a much more comprehensive assessment of the supervision of HMRC. It is important not to overstate the capacity of the courts and tribunals and to understate the other forms of oversight available. In my own submission to the Committee, I highlighted the existing formal routes for scrutinising HMRC powers and urged any proposal to introduce a new form of oversight to consider whether existing forms of scrutiny are adequate (and if not, why not). Indeed, these points are acknowledged too by the Committee:

“There is considerable support for new oversight of HMRC and a compelling need to address the view that HMRC is not sufficiently accountable. It has not been practical to explore this fully and effectively in the course of our inquiry, and we are mindful of the House of Commons’ pre-eminence in financial matters. Further work is needed to determine what new oversight might be established and how it would fit with existing arrangements.”

To this end, the Committee calls for an independent review, commissioned by the Treasury, to consider the establishment of an independent body to scrutinise the operations of HMRC. It goes on to recommend a collaborative body, modelled on the Joint Consultative Committee on VAT, to perform such a function. There are other options, such as the creation of a post of Inspector-General as in Australia, or Taxpayer Advocated as in the US, or perhaps even a change to the role played by the Auditor and Comptroller General.

The report ultimately is to be welcomed and engagement with the recommendations by both HMRC and the Treasury is desirable. Tax legislation has very sharp edges and it is incredibly disheartening to see cases where statutes cut unintended victims.

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Scott v HMRC: Principles, policies and interpretation

A poet cannot dictate how their poem should be read. Once the words are published to the world, they lack the authority to determine the poem’s meaning. That is not to say that the poet’s subjective intention should be disregarded, indeed it may provide context for how the poem should be read. Critically though, the words become alienated from the author’s control. This too is the general case with regard to words in statutes subject to the narrow exception established in Pepper (Inspector of Taxes) v Hart. What the sponsoring minister states about a Bill generally provides no more than context. The meaning and hence the underlying purpose of the statute, in other words the content of the rules, should be derived from a close reading of the text.

This separation of the context from the content of words in a statute is one principle of statutory construction which underpinned the judgment of the Upper Tribunal (UT) in Scott v HMRC. The other principle is that, when searching for the purpose of words in a statute, the tribunals and courts will seek to interpret legislation in a manner which brings coherence to the law. When these two principles are combined, as demonstrated by HMRC’s success before both the First-tier Tribunal (FTT) and the UT in Scott v HMRC, a taxpayer will struggle to convince a tribunal or court that a broad policy goal mentioned in a ministerial statement should be used in order to produce what approaches incoherence across statutory provisions. Further, the case illustrates the inefficiency of the limitation on public law issues being heard by the FTT.

My case note on Scott v HMRC has now been published in the British Tax Review and can be downloaded here from SSRN.

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Queen’s honours, tax avoidance and the duty of confidentiality

Queen’s honours are awarded “to deserving people from all walks of life, in public recognition of their merit, service or bravery.” As an Irish citizen, the system has always seemed a bit strange, but nevertheless such awards undoubtedly provide value for recipients. Honours are awarded on the advice of the Cabinet Office, and it has recently hit the headlines that tax behaviour of proposed candidates will have an impact on the likelihood of an award being granted. For instance, it has been reported that “poor” tax behaviour has led to honours not being awarded to about 150 sports stars and other public figures, such as David Beckham and Robbie Williams. Information regarding tax behaviour is obtained from HMRC and it is likely that the disclosure of the information is a breach of HMRC’s duty of confidentiality.


The government submits that the integrity of the honours system is protected by the carrying out of “probity checks” and as part of this process, the Honours and Appointments Secretariat in the Cabinet Office may ask HMRC to advise about any potential “risk” to the honours system posed by candidates in respect of their tax affairs. Not all candidates have their tax affairs appraised as part of the process – checks are apparently requested on a proportionate basis, taking account of the level of the honour and the profile of the individual.

HMRC will respond to the request from the Secretariat by giving an assessment of the risk of the taxpayer – by reference to a low, medium or high rating (see memo at page 8). Low means that the individual has “no markers on HMRC’s records to indicate an enquiry or only minor issues found during a check or enquiry”. Medium means that the individual “may still be or have been involved in behaviours which cause concern”. High relates to an individual with “serious areas of non-compliance; either current or in the recent past… or who is currently involved in other serious non-compliant arrangements”.

Permissible disclosure of information?

The disclosure of information in such circumstances will naturally engage HMRC’s duty of confidentiality, which is set out in section 18(1) of the Commissioners for Revenue and Customs Act 2005:

“Revenue and Customs officials may not disclose information which is held by the Revenue and Customs in connection with a function of the Revenue and Customs”

This duty however is subject to a number of exceptions, of which for present purposes that found in section 18(2)(a) is relevant

“[The duty] does not apply to a disclosure (a)which (i)is made for the purposes of a function of the Revenue and Customs, and (ii)does not contravene any restriction imposed by the Commissioners”.

HMRC claims that the disclosure of risk profiles to the Cabinet Office is justified on the basis of section 18(2)(a). The reasoning is set out in the Memorandum of Understanding between HMRC and the Cabinet Office at paragraph 2.3:

“The Commissioners believe that disclosure of HMRC information to Cabinet Office (Honours and Appointments Secretariat) to inform the honours committees’ recommendations on whether an honour is to be awarded is necessary to fulfil HMRC’s functions of collecting and managing revenue by:

i) Increasing the likelihood that the individual subject to the HMRC check will ensure that their tax affairs are in order and up to date;

ii) Increasing the likelihood that other individuals in a similar position will be influenced to rectify their tax affairs if they become aware that poor tax behaviour is not consistent with the award of an honour;

iii) Increasing the likelihood that taxpayers at large will maintain their trust in the integrity of tax administration by HMRC and comply with their tax obligations voluntarily if tax behaviour is seen as a factor when considering public reward and recognition via the honours system; and

iv) Reducing the likelihood that taxpayers at large will lose their trust in the integrity of tax administration by HMRC and so fail to comply with their tax obligations voluntarily. Trust would likely be lost if an honour was awarded to someone with negative tax behaviours and those behaviours became linked to the positive recognition that accompanies the award of an honour.”

Now these reasons could certainly be used to argue for an amendment in the law to make explicitly clear that there may be disclosure of risk to the Cabinet Office when honours are being considered. But the question to be answered here is not whether the disclosure of tax risk would be a desirable power for HMRC to have. The question is whether HMRC does in fact have this power and it would appear that it does not in light of the Supreme Court’s decision in R (Ingenious Media) v HMRC.

The case concerned an “off the record” disclosure by David Hartnett, then Permanent Secretary for tax at HMRC, to journalists from The Times. The subject of the conversation was tax avoidance schemes that were taking advantage of the “Film Partnership” legislative provisions. Over the course of the meeting, Hartnett referred specifically to Ingenious Media and Patrick McKenna, as marketers of such avoidance schemes, noted that they had contributed to depriving the public purse of circa £5 billion, that McKenna had personally benefited from the tax relief, that McKenna was a big risk, and denounced film schemes as “scams for scumbags”. Some of these comments were later quoted, albeit with anonymity attached, in two articles published by the journalists in The Times on 21 June 2012. Perhaps unsurprisingly, Ingenious Media and McKenna (the claimants) sought judicial review of the decision of Hartnett to disclose such information to The Times journalists (this information is all lifted from my Case Note published in the British Tax Review, which can be downloaded here). The Supreme Court unanimously found that the duty of confidentiality was breached. In doing so, the Court rejected the justifications put forward by HMRC for disclosing the information, which were predicated also on section 18(2)(a):

“[Para 34] … [A] general desire to foster good relations with the media or to publicise HMRCs views about elaborate tax avoidance schemes cannot possibly justify a senior or any other official of HMRC discussing the affairs of individual taxpayers with journalists. The further suggestion that the conversation might have led to the journalists telling Mr Hartnett about other tax avoidance schemes, of which HMRC knew nothing, appears to have been no more than speculation, and is far too tenuous to justify giving confidential information to them”

The cadence of the Court’s judgment is that for disclosure to be justified under section 18(2)(a) there must be a direct link between disclosing taxpayer information and the collection of tax (see in particular paras 33 and 35) – that the disclose directly assists HMRC in carrying its primary function of collecting and managing taxes and credits (section 5 of Commissioners for Revenue and Customs Act 2005). The problem for HMRC is that none of the reasons set out in para 2.3 of the Memo appear to provide a direct link. The reasons are speculative, rather than grounded in evidence, and relate mostly to future compliance rather than current investigations. The very language of “increasing the likelihood” or “reducing the likelihood” suggests that the link between disclosure and collection is shaky.

A defence of HMRC might be that the information disclosed is not confidential –  thus not having the “necessary quality of confidence about it” (Saltman Engineering) – as the tax affairs of individuals are not actually disclosed to the Cabinet Office, but rather only HMRC’s opinions of particular individual’s tax affairs. That does not sound particularly convincing. It would be comparable to saying that a doctor is under a duty not to disclose information I present to her during a private consultation but may freely disclose the medical view she has formed of my ailments.[1]

In sum then, on the basis of the Supreme Court’s judgment, it is likely that the disclosure of information regarding “risk” to the Cabinet Office breaches HMRC’s duty of confidentiality.

[1] Though if I was brought to the doctors by somebody who has responsibility for my care, the disclosure to that person might be different.

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The OTS strategic review on HMRC guidance

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.

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The canons of taxation and tax collection

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 19th 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.


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The authority to get it wrong and AG Kokott’s comments

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 (

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!

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