Three recent administrative law cases in tax. Part 3: R (Veolia) v HMRC

This is the third of a three part series of posts cataloguing recent administrative law cases concerning tax. In this, the recent Administrative Court case of R (Veolia and Viridor) v HMRC is explored. It is particularly fitting that this would be the final part to the series, as each post has had to deal with essentially the same issue, namely whether the taxpayer concerned could rely upon an HMRC statement. But in each, a different, and more complex angle has had to be assessed. In educational circles, we call this “ratcheting up the complexity”.

Thus whilst in Biffa Waste, the issue was whether the circumstances of the taxpayer fell within the clear terms of an HMRC ruling, in ELS Group, the issue was whether the circumstances of the taxpayer fell within the ambiguous terms of HMRC guidance. In Veolia and Viridor then, the issue is whether the taxpayers, whose circumstances fell within the favourable terms of an HMRC representation, could have the favourable treatment rescinded later when HMRC changed its stance. Regular readers will note the similarity between this case and that of R (Hely-Hutchinson) v HMRC (see my case-note here)

Veolia and Viridor concerned landfill tax. In brief, landfill tax is chargeable on waste which is disposed. In 2009, HMRC adopted a position such that waste which is put to use on the landfill site was not taxable. This was explained in general guidance. The taxpayers ‘Veolia’ and ‘Viridor’ claimed that ‘soft’ waste, known as ‘fluff’, which was in turn used on the outside layers of waste cells, was not taxable (just to be specific, the claims related to side fluff and bottom fluff). HMRC agreed to these claims in principle, and this was communicated directly to the taxpayers concerned. For Viridor, they remitted in part the tax that had been paid and would remit the rest subject to ironing out specific details (in relation to unjust enrichment). For Veolia, no tax had been remitted.

Then, HMRC changed its stance. It would not claim back the money already remitted to Viridor, but refused to honour the commitments to Veolia and in respect of the remaining monies to Viridor.

Was this kosher?

As with Biffa Waste, the court had to assess whether a legitimate expectation arose. In this respect, was there a clear, unambiguous representation devoid of relevant qualification? And did the taxpayers disclose all material facts? Unlike Biffa Waste, however, the Court also went on to consider whether the frustration of a resulting legitimate expectation was so unfair as to amount to an abuse of power.

For the taxpayers, the court held that the initial HMRC guidance lacked the requisite clarity to arouse a legitimate expectation. However, the assurances from the HMRC officers were sufficiently clear (as an aside, the officers were merely applying an internal policy document which stated that such claims should be honoured. This highlights both the importance of soft-law publications in the internal administration of the tax system, and how such unpublished policy documents may give rise to rights in the hands of taxpayers). Moreover, the taxpayers had disclosed all material facts (although counsel for HMRC had tried to argue that the taxpayers had sought to pull the wool over HMRC’s eyes).

Accordingly, the Court moved to considering whether in the circumstances it would have been so unfair as to amount to an abuse of power to frustrate the legitimate expectations. In previous cases, it has been noted that in such an instance the Court should seek to differentiate between conduct which is “‘a bit rich’ but nevertheless understandable – and on the other hand a decision so outrageously unfair that it should not be allowed to stand” (Unilever [1996] STC 681, p. 697c). Put another way, the Court must inquire as to whether the decision adopted was a “proportionate response… having regard to a legitimate aim pursued by the public body in the public interest” (Nadarajah [2005] ECWA Civ 1363, para 68).

In the case of Viridor, it was held that it was not. The Court had regard to several factors in arriving at this conclusion. First, there could only actually be significant unfairness if the true position as a matter of tax law is that the fluff was in fact taxable. Second, this is not a case of the paradigm type where a taxpayer arranges their affairs in light of an expectation. Third, Viridor had received substantial repayments, whilst fourthly, only the remainder in respect of “externals” was outstanding (this is the amount of profit Viridor claimed it had lost). Fifth, it was not a case where failure to repay Viridor was likely to leave it exposed to claims from its own customers. Sixth, there was little detrimental reliance on the part of Viridor, other than fees for trying to seek repayment and arranging for claims in turn to be made by customers.

These factors all largely collapse into one, namely that Viridor would not actually suffer any financial detriment from the legitimate expectation being frustrated. As landfill tax is an indirect tax, charges should be borne by customers and any repayments from HMRC should be likewise repatriated to them. Viridor was claiming for lost profits, but would be unjustly enriched if it were not to pass on the monies to its customers (although it claimed that it would). Accordingly, the company itself did not suffer in either event. Issue can be taken with this as it has long been established that detrimental reliance is only a factor in the assessment, but in this case it was de facto the only factor considered.

Veolia’s claim differed slightly from Viridor’s. The former added that to have not received any repayment was comparatively unfair, given that its competitors had received repayments from HMRC. Again however, this claim failed effectively on the ground of detrimental reliance. The repayments to the competitors (with the exception of Viridor) related only to what the judgment characterised as “internal” claims, ie where the landfill operator bore the landfill tax. They did not relate to “external” claims ie for lost profits. Veolia however was claiming only in respect of “externals”, which had not been repaid to the cohort competitors (except in respect of Viridor). To this end, it was not comparatively unfair not to remit any amounts to Veolia.

Again, this case aligns with ELS Group and is distinguished from Biffa Waste in that the Court and HMRC placed greater emphasis upon whether the repayment itself was lawful. The Court at several points stressed that the claim for unfairness only had merit if the legitimate expectation was distinct from the true legal position. Counsel for HMRC also sought to argue that the repayment would be ultra vires HMRC, but this point was not dealt with as the Court ultimately found in favour of HMRC (although judge expressed doubts about the contention).

More broadly, the case highlights the difficulty in winning legitimate expectations cases in tax. In order to succeed, satisfying the judge that a legitimate expectation has arisen is just one of the hurdles. A second, even more difficult hurdle is then convincing the Court that failure to grant the taxpayer the favourable treatment expected (which is probably not in line with the underlying law) is somehow conspicuously unfair: that it is outrageously inequitable that the taxpayer is refused a benefit not strictly owed.

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Three recent administrative law cases in tax. Part 2: R (ELS Group) v HMRC

This is the second of a three part series of posts cataloguing recent administrative law cases concerning tax. Unlike Biffa Waste which concerned the issue of a standard legitimate expectations claim, the issues in the Court of Appeal case of R (ELS Group) v HMRC were i) whether HMRC guidance could apply retroactively and if not, ii) whether the taxpayer had in fact aligned its arrangements with the guidance at the relevant time. This second ground of the appeal was effectively a “factual issue” in which the court ultimately found against the taxpayer.

It is the first ground which is the concern of this post, as it is more of a legal inquiry. The relevant guidance Business Brief BB4/10 contained a concession which limited the quantum of VAT a business had to charge when seconding its own staff. The court then went about construing the guidance and whether its terms were capable of being applied retrospectively (i.e. whether the taxpayer was entitled to rely at a later time upon the guidance, having failed at the relevant time to elect for the treatment under the guidance).

Unlike Biffa Waste [blogged about here], counsel this time placed emphasis upon whether the purported treatment in the guidance was within HMRC’s power. HMRC contended (in Patten LJ’s words) that “concessions should be given a relatively narrow construction in recognition of the fact that they involve a derogation from statute”. This, he said, “seems to me that the most influential contextual element in the process of construction must be the statutory default position”. As the guidance itself did not in clear words state that it could be applied retrospectively, the taxpayer could not be said to be entitled to the concessionary treatment. The fact that the concession operated “in effect as a decision by HMRC not to collect tax that becomes statutorily due…militates strongly in my view against giving the concessions any greater scope than a fair and normal reading of the language of the concession dictates” [para 35]. Moreover, to extend the concession retrospectively to fit the current case would “create an obvious inconsistency” with the relevant legislation “and is a powerful reason why the concession should be assumed and interpreted not to have that effect” [para 36]. In brief then, the court placed significant reliance upon the proper legal position in order to dismiss the first ground of appeal, thereby contrasting with the case of Biffa Waste in which the actual legal position was regarded as irrelevant.

Aside from the distinction in litigating approaches, a secondary, broader point which can be made in relation to the two cases is that they both in effect deal with the same issue, namely, whether the taxpayer came within the terms of an HMRC statement. In Biffa Waste, the court found in favour of the taxpayer (the taxpayer fell within the terms of the ruling) and in ELS Group, the court found against the taxpayer (as the taxpayer neither fell within the terms of the concession either at the relevant time nor did the terms provide for retrospectivity). Thus whilst terms such as legitimate expectation, abuse of power, reliance, and vires are thrown about in such cases, these often serve to obfuscate relatively simple questions.

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Three recent administrative law cases in tax. Part 1: Biffa Waste

This blogpost is one of a three part series of ‘case notes’ on recent HMRC cases concerning matters of administrative law. The first, Biffa Waste [2016] EWHC 1444, is a fairly straightforward case from an administrative law perspective. The relevant company had obtained a ruling in 2009 from HMRC in respect of the application of the relevant law to a particular set of circumstances. In this case it was the provisions in respect of landfill tax and whether the “regulating layer” [the layer above the final layer of soft waste placed below the “cap” used to seal the containment system] in a landfill site was subject to this tax. The 2009 ruling provided that this regulating layer was not subject to landfill tax. Three years later, in 2012, HMRC issued a second ruling which purported to override the initial ruling, and applied the new 2012 ruling retrospectively. The new 2012 ruling provided that the regulating layer was to be subject to landfill tax.

The issue for the court was effectively: was this kosher?

The law on when taxpayers can rely upon rulings issued by HMRC is relatively set. Following the foundational judgments of MFK Underwriting [1990] 1 WLR 1545 and Matrix Securities [1994] STC 272, there are two initial questions which must be asked:

  • First, was the ruling clear, unambiguous and devoid of relevant qualification?
  • Second, did the taxpayer disclose all material facts to the Revenue when requesting the ruling?

If both are answered in the affirmative, then a ‘legitimate expectation’ is said to arise in the taxpayer’s favour to be treated in accordance with the ruling. HMRC then cannot frustrate this legitimate expectation if to do so would be ‘so unfair as to amount to an abuse of power’.

HMRC conceded that if the two above questions were answered in the affirmative, then there was no answer to the claim. Accordingly, the battle in the court revolved around whether the 2009 ruling provided what the taxpayer contended that it provided [which the court found it did] and whether the taxpayer failed to disclose any material facts [which the court found it did not]. As such, the taxpayer won the case.

What is particularly interesting about this case is that HMRC did not challenge the ‘abuse of power’ point. [Although the law on this particular matter is in a bit of a state of flux] HMRC was not actually bound to its ruling because both the previous two questions had been answered in the affirmative.

As a matter of law, yes, a legitimate expectation arises. But HMRC is not bound to give effect to every legitimate expectation come what may. It may argue still that resiling from the legitimate expectation would not be an abuse of power, for instance, because the ruling was manifestly wrong in law, or would result in discriminatory treatment between similarly placed taxpayers. For instance, if HMRC agreed that a taxpayer could pay a set amount of tax every year regardless of how much money was actually earned, it would be entitled to resile from that commitment [see: Al-Fayed [2004] STC 1703]. Indeed, HMRC has elsewhere argued that it is not bound by guidance which is incorrect in law [see for instance Hely-Hutchinson [2015] EWHC 3261 where HMRC argued that it should not be bound by incorrect guidance].

Whatever the merits of the particular litigation strategy, the case is nevertheless a useful reminder of the utility of administrative law principles for taxpayers.

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The Fiscal Coin of Tax and Spending

A few days ago, Rasmus C. Christensen (aka FairSkat) tweeted that ‘‘Tax is only one side of the fiscal coin. Expenditure is the other’’. This should be no great surprise, but it is nevertheless something worth reminding ourselves about. When we talk about the objectives that our tax system, few would disagree that one goal is that it ought to be redistributive: that is should facilitate the redistribution of wealth from those better off to those less well off. This can be made for instance as an economic case (leveling out the disparities caused by the economic structure), as a moral case (improving the life chances of those less fortunate), or as a political case (it is unfair that power should reside only in the hands of so few).

But there are two elements to this. The first is that the overall burden of taxation should fall more heavily upon those that are more able to bear it. Progressive taxes, strictly meaning that the marginal rate is higher than the average rate, but in layman’s terms meaning that the rate of tax increases as income or wealth increases, are a means to this end. The second element however is that expenditure then should more heavily benefit those that are less well off. Health and education are two prime examples of public spending which have a significant impact upon leveling the life chances of individuals from poorer backgrounds.

The two elements are inseparable for the purpose of redistribution. For instance, if taxes are regressive overall, public spending even on equality drivers like education will not render the system progressive overall. Rather it would merely mean that people are paying exactly for the services they use. The tax system then becomes more of a ‘pay for use’ system. This would also be the effect at the other end: where taxes are progressive themselves, but public spending served merely the interests of those that have been most taxed, for example, by subsidizing polo lessons for children in Chelsea.

Whilst this might be an extreme example, such a state of affairs can occur less obviously when there is a regional element involved. Think for instance of an area in the UK in which there are a minute number of very wealthy taxpayers who bear more or less the entirety of the burden of taxation in that area. However the rest of the inhabitants are poorly off. A redistributive system would mean that the region should receive significant amounts of public spending. Through ignorance however, the government of the day may neglect to do so.

This is precisely what occurred in the case of the 1853 Income Tax in Ireland. Professor Peter Clarke in his recent presentation at the biannual Cambridge Tax History Conference set out how in 1853 a tax was levied in Ireland as a means of paying for the famine relief provided to the country. The tax however continued well beyond the point at which the debt was recovered, with the Report of the Financial Relations Commission in 1896 concluding that it was not a good settlement for Ireland (on which, see: here). Of course, the tax was only levied on the wealthy, with only 21,000persons paying the tax, 17,000 of whom were Schedule D taxpayers (presumably wealthy farmers or professionals). Viewed from the tax side of the fiscal coin accordingly, Gladstone was justified in asserting that “the fact of a country being poor was no argument prima facie against the application of income tax”. It was the redistribution in terms of public spending which was lacking in respect of the tax. The money was directed towards causes like the Crimean War, rather than into the feeble Irish state. As Professor Clarke surmised, this “added” to Irish perceptions of British misrule, and to a Gaelic revival.

Politics in the UK is currently in a state of flux. But the business of government will continue regardless. It will soon be time for another Finance Bill. Politicians on both sides of the House of Commons would do well to remember the two sides of the fiscal coin when the debates inevitably next turn to the tax system.

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Some brief thoughts on Brexit and tax

It is a fallacy to believe that the UK can completely extricate itself from the EU. The reason is simple. So long as the EU exists, the UK will have to engage with it if it is to actually trade with the bloc. But with the UK no longer at the table adding input in respect of the rules which govern that trade, the EU is granted a significant increase in relative power. And that is the crux of the issue in respect of tax post-Brexit. The UK will still be subject to the vast bulk of EU hard and soft-laws. However, it will no longer have influence on the scope and substance of the hard rules, and the soft rules will no longer have such a soft edge. Inspired by a fantastic seminar organised by 39 Essex Chambers this morning, the purpose of this post is to outline some brief thoughts on the impact of Brexit on tax.

It is first worth setting out what hard tax rules the UK is subject to by reason of its membership of the EU (on which, see this excellent, comprehensive paper from the UK Government in 2013). As set out in Articles 110-113 TFEU, the EU has competence in respect of indirect taxes, which most importantly includes VAT. Direct taxes meanwhile are within the competence of the Member States, provided that they do not fall foul of Union Law, most prominently, in respect of the principle of non-discrimination (non-nationals and non-resident EU companies have to be treated in the host Member State in the same manner as nationals and companies of that state) or state aid. Unanimity between the Member States is required to bring to life a Direct Tax measure of which there are a few, most notably, the Parent Subsidiary Directive, the Interest & Royalties Directive and the Merger Directive.

That these are all rules that the UK subscribes to as a result of EU Membership does not flow as its converse that the UK would no longer be subject to them if it were not a member of the EU. The level of access that the UK wishes to acquire to the single market will have as its consequence that it must subscribe to a proportionate quantity of the rules. Would that include provisions, for instance, on state aid? Timothy Lyons QC this morning pointed out that “Trade Deals” with the EU are a misleading title for what are in reality “Political Deals”. When Switzerland arranged a trade deal with the EU, it was obliged to also subscribe to rules on “Public Aid” which in reality were equivalent to the EU rules on state aid. Elsewhere, few would seriously contend that the UK would even attempt to scrap VAT given that it accounts for a significant proportion of the UK’s total tax take.

The crucial point in respect of hard EU laws is that the UK would have to subscribe to them to a varying degree depending on the level of access that to the single market it wishes to acquire.

That takes us to soft-laws. It is well recognised that the EU seeks to exercise soft power additionally in respect of tax matters (see here for a nice synopsis of EU tax policy over the last 5 years by FairSkat). Soft-laws however become much more rigid when the Commission can additionally put some weight behind them by restricting access to the single market. Of course, that sanction cannot arise for Member States of the EU, but importantly it is an issue for third countries. In this respect, the “sovereignty” of the UK to determine its own tax policy is in fact more restricted by being outside the EU. To give an example, were the UK to lower its corporate tax rate to say 10%, the EU could retaliate by limiting access to the single market.

In summary, Brexit has the threefold effect i) of still subjecting the UK to EU hard laws, ii) but without any say on the scope or substance of these rules, and iii) to soft-laws which have now become more solid.

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Ingenious Part 3: A trip to the Supreme Court

I’m at a loss for a metaphor or phrase which aptly captures the tumultuous times we currently live in. For my own part, I’ve spent the last 8 days glued to twitter, finding it almost impossible to get any work done. But the world keeps turning, and the (tortuously clichéd) inevitability of tax remains true. This Monday at 11am, the Supreme Court will host the judicial review hearing of R (Ingenious Media and Patrick McKenna) v HMRC (on which I’ve previously blogged about here and here). For loyal observers, this is exciting-a quick search of reveals that in the last 5 years, the Supreme Court has laid down just two judgments on tax cases which concerned matters for judicial review (Gaines-Cooper and Eastenders).

The facts of the case have been very helpfully summarised by the Supreme Court as follows: On 14 June 2012, two journalists from The Times had a background briefing on tax avoidance schemes with Mr David Hartnett, Permanent Secretary for Tax at HMRC. It was explicitly agreed that this meeting was “off the record”, which Mr Hartnett understood to mean that nothing would be published. During this meeting, Mr Hartnett expressed views about film schemes. On 21 June 2012, some of what was said at the briefing was published in a Times article as coming from a “senior Revenue official”. The article included statements that Mr McKenna had “never left my radar”, that “he’s a big risk for us” that “we would like to recover lots of tax relief he’s generated for himself and for other people” and that “we’ll clean up on film schemes over the next few years”. The appellants brought proceedings seeking declarations of illegality as well as damages for HMRC’s breach of its statutory confidentiality obligations, its own policy as well as the appellants’ rights under the ECHR. The High Court (Philip Sales J) and the Court of Appeal (Moore-Bick LJ, Tomlinson LJ and Sir Robin Jacob) held that the disclosures did not breach HMRC’s duty of confidentiality (owed to taxpayers under the Commissioners for Revenue and Customs Act 2005, s. 18) nor did they infringe upon the taxpayers rights under the ECHR.

At a recent conference organised by the Centre for Tax Law at Cambridge University, I expressed my discomfort not at the ultimate conclusion in these hearings on the issue of the duty of confidentiality, but rather at the reasoning underpinning them. To explain my stance, it is first worth recalling that the courts regard themselves as jealous protectors of individual liberties. As Lord Hoffmann has said, “the courts approach the Parliamentary language with a built-in incredulity” where it is purported to “give powers to an official which would enable him to override traditional individual rights” (see from 14.56 here). The courts accordingly strictly review the permissibility of an action by an official or public authority where the action purports to infringe upon an individual’s rights. The courts will seek to assure themselves that the action is strictly and purposefully permitted by the legislation. In brief, my issue with the judgments of the High Court and Court of Appeal in the Ingenious hearings is that the courts did not sufficiently interrogate whether the particular disclosures to the media were permitted by the legislation. What the courts need necessarily do is elaborate upon whether the particular information itself is protected as confidential and why the disclosure of that particular information does not infringe upon HMRC’s duty of confidentiality or the taxpayer’s rights.

Sales J in his decision in the High Court that the duty of confidentiality was not breached stressed two key points. The first was that the engagement with the journalists was in the nature of an evaluative judgment (see paras 40-48) and in doing so very eloquently elucidated the general case for HMRC’s engagement with the media. The second was the limited nature of the disclosure. In para 50, Sales J rightly, in light of the above, recognised that the duty of confidentiality narrowed the scope of the discretion to be allowed to HMRC when disclosing taxpayers’ information. It is para 51 that I struggle with. It was claimed that “Mr Hartnett did not pass to the journalists any information which Ingenious Media and Mr McKenna had provided to HMRC about their affairs”. But that’s not quite correct, particularly when it is recalled that Hartnett disclosed that Patrick McKenna had generated “lots of tax relief… for himself”. Sales J responded that this was information “which was obvious in the context of Mr McKenna’s involvement in film investment schemes about which the journalists were themselves well aware”. Does that make it okay? That journalists already know the confidential information means that HMRC can confirm it for them and thereby not infringe Commissioners for Revenue and Customs Act 2005, s. 18? It certainly seems difficult to square this with the reasoning of the Supreme Court, albeit in a different context, in the recent PJS case. It does not appear that HMRC itself thinks that this is kosher. HMRC’s internal guidance appears to provide that in such circumstances, it should neither “confirm nor deny”. And this is precisely what HMRC does generally (see e.g. the case of Ryanair).

By the way, the answer could well be “yes”. My point is merely that the connection between the release of confidential information and the duty not to release confidential information needs to be fully explained-without that, it is not the jealous protection that the courts are expected to provide.

The Court of Appeal judgment, on the other hand, is far more problematic, as to my mind it misconceived the judgment of Sales J. It held that the disclosure of information was in the nature of an evaluative judgment and that accordingly, the standard of review in the case should not be one of intensive judicial scrutiny, but rather one of rationality. Sales J however was in fact of the view that a narrow scope of review was correct in this case (as stressed above and in line with Lord Hoffmann’s assertion). Moreover, his assessment of evaluative judgments related more generally to the idea of HMRC engaging the media, not HMRC disclosures of taxpayer information. To follow the logic of the Court of Appeal through, the courts should generally defer to HMRC’s judgment any time it has disclosed taxpayer information. That cannot be correct.

The Court of Appeal seemed to imply also that, even if the court were to have applied a stricter standard, such as proportionality, it would still have held that the disclosure was permissible on the basis that it would have been “unreal” for HMRC not to mention McKenna and Ingenious Media:

“There is a sense of unreality here. It seems clear that Mr McKenna and another individual were the two big promoters of film schemes (albeit their schemes were not exactly the same). That The Times already knew. It was in a position to publish their names, the names of their companies and that they were in a big way of business with potentially significant effects on tax collection. If Mr Hartnett had just said HMRC was very concerned about film schemes and expected to be able to clean them up, without any specific mention of Mr McKenna and Ingenious, everyone at the meeting would still have taken it that HMRC must have had them at the forefront of their thinking” (para 39)

To this point, I make the same reply that the connection between the disclosure of confidential information about McKenna himself having used “lots of tax relief” and the duty not to disclose confidential information needs to be reconciled. Is it permissible for HMRC to confirm that which journalists already know?

My hope is for the Supreme Court to iron out this issue. I’ll be in the courtroom from 11am on Monday watching keenly. At the very least, it’s a nice distraction was the current morass of distractions.

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The free movement of people: a quick defence

As an Irishman, a referendum on the EU is nothing new.

Since the Supreme Court in Crotty v An Taoiseach [1987] interpreted our constitution as requiring a referendum any time there is a shift of powers to the European Institutions not “necessitated by the obligations of membership of the Communities”, there have been 7 referendums on EU membership. Twice the Irish people rejected Treaty changes (Nice and Lisbon), only to be asked politely again to reconsider the matter and arrive at the “correct” result. Much can be criticised about asking the people directly to vote on a matter, only to later reject their answer. Much can also be criticised on the other hand of the politicians who have taken overly strict interpretations of the Crotty case (Lisbon did not need a referendum; Nice is arguable), and abdicate their decision-making responsibilities by asking the people to decide on complex matters requiring consideration of legal, economic, social and political factors.

A haze of confusion emerges, brought about by ridiculous scare stories and hyperbolic assessments of the future. I remember a good friend telling me that if Ireland ratified the Lisbon treaty that the EU would start an army and that her younger brothers would be conscripted. As a lawyer, I tried to assure her that Lisbon was mostly about administrative change, with an additional human rights element so convoluted that nobody quite understands it. She voted against Lisbon nevertheless, as did 53% of voters.

EU referendums allow otherwise fringe personnel to be elevated to positions of responsibility. And the centrists are tasked with defending a system for which they have long forgotten the underpinning logic. Free movement of people is one such ideal of the EU which the Remainers have struggled to remember how to defend. So let me try to help. There are two strands to this. First, people move. People always will move. And they will do so in significant numbers. The ‘free movement of people’ then simply is a pragmatic acceptance of the fact that swimming against the tide will never be a fruitful endeavour. Ignorance of this reality simply drives people into the “sub-economy” where their wages go untaxed and unregulated. As David Blunkett likes to remind us, when the Eastern European countries acceded to the EU in 2004, 40% of those who registered to work in the UK were already in the country.

Secondly, there is a question about deciding upon numbers. I’ll concede for now (although there are also important nuances to this) the point that there must be some kind of limit on the number of people that a country like the UK can hold without frustrating the goals of the welfare state. The question which follows however is not, what is that limit? It is rather, who decides that limit? What body, person or entity is best placed to decide upon such matters? One answer is that the matter should be dictated by government. That would entail the Home Secretary adopting a rule, or schedule of rules, to figure out which people should come to the UK and which should not. That (schedule of) rule(s) then would have to be enforced by bureaucrats. So, it would be the Home Secretary and bureaucrats which would have to establish which areas of the economy required more or less labour and would also be deciding upon the individual merits of candidates. Are these people particularly skilled in deciding upon these issues?

Or, the decisions could rest not with politicians and bureaucrats, but with the market. Employers, wealth creators, business persons are best placed to decide which people they need to fill particular roles. It is the market which is most adaptive to changing needs. So is the market not best placed to decide?

These two strands can be argued to underpin the logic of free movement within the EU. And the evidence so far is that it has worked for the UK. Unemployment has been dropping steadily whilst net migration has been increasing. Furthermore, studies generally demonstrate that migrants are net contributors to the economy. If there are constraints on public services, it is impossible to lay that at the feet of migrants. If they (including me) are needed in the economy, as is demonstrably clear, and they bring more money to the economy, rather than take away from it, then the blame must lay elsewhere. Putting the blame for cash shortages on the free movement of people who increase the country’s wealth, is like blaming the best sales staff for financial mismanagement of the company; like blaming the bar staff for the failure of the fruit machine.


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Oxfam’s legitimate expectation

Oxfam’s tag a bag scheme, whereby you make a claim for gift aid on donations of goods rather than just cash, has come under scrutiny from the tax community. It has been claimed by some that the scheme falls foul of the law. But HMRC’s guidance explicitly makes an allowance for it (see: Chapter 3.42 Claiming Gift Aid when goods are sold by, and the proceeds gifted to, charities of HMRC’s ‘Gift Aid’ guidance). If the scheme does indeed fail under the law, surely there is a defence in saying that HMRC took the taxpayer up the garden path?

Not quite.

The doctrine of legitimate expectations is the most developed tool to prevent public authorities from reneging on representations made to citizens. There are broadly two limbs to the doctrine and if satisfied, a public authority will be bound to its representation. Put in the context of tax, it means that HMRC will be to a position it has represented to a taxpayer if (i) the representation was clear, unambiguous and devoid of relevant qualification and (ii) reneging on that position would be so unfair as to amount to an abuse of power.

However, where HMRC’s representation to the taxpayer has been based upon an incorrect assessment of the law, the second limb of the legitimate expectations test will be more difficult to satisfy. As has been often quipped by the courts (first stated by the great Lord Bingham (then LJ) in MFK Underwriting), the taxpayer’s only prima facie expectation is that she will be taxed in accordance with the law. If a taxpayer has relied upon an HMRC representation to her detriment such that she would have to sell assets to pay the tax properly due, it may be considered so unfair as to amount to an abuse of power for HMRC to seek to enforce the law. As was held in the case of Hely-Hutchinson (a case on which I have written in greater detail in the second issue of this year’s British Tax Review), it may also be so unfair as to amount to an abuse of power to insist upon the strict legal position against one person, but not another where their tax affairs are identical.

If HMRC were to turn around and change its interpretation of the Gift Aid rules accordingly, applying the revised view across the board, the legitimate expectations argument would likely offer little consolation, as Oxfam already found out to its detriment in 2010 (h/t Aisling Donohue) (see the judgment here paragraphs 45-60). And if that state of affairs seems slightly unfair, then you’ll understand what inspired my PhD…

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Taxes are the price we pay for a civilized society

The above quote is apparently to be found above the entrance to the IRS headquarters at 1111 Constitution Avenue, Washington DC and is attributed to Oliver Wendell Holmes. But there are many other variants that are equally attributed to the “The Great Dissenter”, such as “I like to pay taxes. With them I buy civilization”; “Taxes are the price we pay for civilization” and most intriguingly, a quote sometimes attributed to his father Oliver Wendell Holmes Sr, “I hate paying taxes. But I love the civilization they give me.”

The only real source of substance which can be readily found in relation to this quote is from a dissenting speech (of course!) in a 1927 US Supreme Court case:

“It is true, as indicated in the last cited case, that every exaction of money for an act is a discouragement to the extent of the payment required, but that which in its immediacy is a discouragement may be part of an encouragement when seen in its organic connection with the whole. Taxes are what we pay for civilized society”

What does this quote tell us about Oliver Wendell Holmes’ true attitude to taxes? It seems to suggest a more nuanced relationship than either love or hate, which the various incarnations of the quote suggest. It is somewhere between. An understanding of the need, but equally perturbed to the extent that the “exaction” discourages. As he proceeds to state in that case, underlining his familiarity with the “exaction”:

“to earn one’s livelihood by any lawful calling certainly is consistent, as we all know, with the calling being taxed” [emphasis added]

And deep down in our hearts, I don’t believe that we love paying taxes either. Intellectually we understand the importance of tax. Very few would decide amongst us to locate ourselves in the kinds of places, for instance, where taxes fall below 20% of GDP. However, when I go to the shop and pick up a can of Coke (well, Diet Coke-my teeth definitely cannot handle the sugar and I can’t handle another scolding from my dentist), I can’t say that I’m delighted that I pay VAT of 20%. Likewise I would frankly be much happier if I didn’t get a massive bill for council tax every year. And it really is massive when compared to my income – my effective income tax rate for last year was 0%!

But taxes do pay for civilization. They pay for our essential services, schools and health. They pay for the kind of services that I know are indispensible in the fight to increase social mobility, tackle poverty and reduce inequality, issues that I genuinely care so deeply about. But that equally doesn’t mean I’m happy to see public funds squandered and improperly used. I’m annoyed as the next person about expenses’ fiddling or pointless garden bridges. Bringing this back to my council tax woes for a minute, go to Google Maps and click on Finsbury Park (not the actual park or the tube station, just the area). You see it? You see the rubbish bin overflowing in the picture? I’m not exactly overjoyed that my massive Council Tax bill goes towards that non-collection of rubbish.

So what is there that can be learned from this? The first thing that could be attempted is to try to circumvent this inherent dislike of tax by not calling things taxes. But when there’s a political incentive from the opposing side to undermine any such attempts, this seems fairly futile. To this end, note how the “spare room subsidy” became the “bedroom tax” or the “community charge” the “poll tax”, as Stian Reimers cites in a brief, punchy article which more than merits a reading (h/t Jolyon Maugham QC). Even then, it’s not clear that the wool can be pulled over the electorate’s eyes even if a different label sticks. The introduction of the ‘water charge’ in Ireland has been met with a prolonged and popular campaign of protest for instance.

Or, maybe then it’s just time to have an open and frank conversation about taxes. About the need for both horizontal and vertical equity: that those in similar positions in terms of wealth should pay similar amounts and those in different positions pay different amounts. About the need for progressivity as adjudged across the entire system of taxes and benefits. About the fact that yes it is annoying when something is taken away from you, but about how what is “exacted” will either pay for things you need, or pay for the needs of those less fortunate. Politicians, the media and lay commentators also have a duty not leap upon the introduction of de facto taxes, or increases, or decreases, as if these themselves are intrinsically bad rather than looking at our overarching goals and whether any changes conform to these.

If taxes are what we pay for civilised society, then we ought to act like a civilised society when talking about taxes.

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To tax and to please

The life cycle of a PhD is curious. It begins with an awning vision and an inspiration to make a great change to the world. That slowly whittles as time and personal crises elapse, so that closing to the end one can barely summon the enthusiasm to produce and defend a significant contribution to the field. The early days for me also were very pretentious. Far too many nights were spent in the Law Faculty ingesting classic jurisprudence works, attempting to cram a philosophical framework into an already overstretched thesis. I resolved around that time that it would be incredibly unique (yeah, cos nobody has ever thought of doing this!) to place tendentious quotes at the beginning of each chapter and so kept a document into which I would place fitting quotes that I came across. As my thinking evolved the quotes I extracted shifted from being pretentious and philosophical to anything I thought witty, poignant or even simply well expressed: from Aristotle to the Ombudsman. That bit of context explains why I now have such a mixed bag. I now place them here for all to see and get a glimpse into my weird journey as a doctoral student. Enjoy!

And please feel free to add in the comments any quotes that you like.

  • “The organisation must stop the perpetual, frenetic reorganisations driven by those wet, crew cut youngsters in the management consultancies” (Yuri Grbich, ‘After Bellinz and Ralph: A New Focus for Decision Making in the Australian Tax System’ in M Walpole and C Evans (eds)Tax Administration in the 21st Century (Prospect, 2001))
  • “In a time of universal deceit – telling the truth is a revolutionary act” (Orwell)
  • “History is a race between education and catastrophe” (HG Wells)
  • “What fate lies ahead for those unfortunate taxpayers who, while swerving to miss the potholes on a narrow road through the hills, crash into the guardrail on a wet and dark night? The likelihood is that rather than have the yellow flashing lights of ‘tax assist1 greet them, they are more likely to be met by dark suited gentlemen alighting from an unmarked car, with pens poised and charge sheets opened” (Martin Crowe, ‘National Decisions’, ‘More Signposts Needed on Rocky Tax Road’, National Australia Bank Limited, November 1992, p. 19 noted in Joint Committee of Public Accounts, Report No. 326, An Assessment of Tax – A Report on an Inquiry into the Australian Taxation Office (1993), p. 225)
  • “To tax and to please, no more than to love and be wise, is not given to men” (Edmund Burke)
  • “Not being trained to umpire the debates of the economic’s profession, judges invariably decide in favor of the school of thought that coincides with their own preconceptions.” (Richard Posner, ‘Conglomerate Mergers and Antitrust Policy: An Introduction’ (1969) 44 St. John’s Law Review 529, 530)
  • “Not the least evil features of the modern tax system are the army of unproductive civil servants concerned with the assessing and collecting of taxes, the enormous volume and constantly changing detail of the chaotic and largely incomprehensible body of verbiage called the law of taxation, the incomprehensible and frequently incorrect assessments, and the utterly irrational nature of the whole topic. In the law of taxation justice has no place at all” (D M Walker, The Oxford Companion to Law (1980) 1208 taken from Tony Pagone, ‘Tax Uncertainty’ (Annual Tax Lecture, Melbourne Law School, 20 August 2009) at page 2)
  • “It is a truism that equity cannot be secured in taxation laws without complexity. Complex law involves complex forms of return for income and the complicated forms give rise to demands for simplification of the law.” (Robert Ewing, Annual report 1923–24 – 1924–25, 3 as cited in Leigh Edmonds, Working for all Australians 1910-2010: A brief history of the Australian Taxation Office (ATO, 2010) 75).
  • “[The resignation of David Heaton from the GAAR panel] was not just bad luck or an indication that the wrong person was chosen. It is the result of a failure to create a robust institution with a clear function. That in itself is the result of rushing developments, partial consultation with busy people and lack of an underlying route map about where we are going with our tax institutions.” (Judith Freedman, ‘Creating new UK institutions for tax governance and policy making: progress or confusion?’ (2013) BTR 373, 380)
  • “The only function of economic forecasting is to make astrology look respectable.” (JK Galbraith)
  • “HMRC has considerable power at its disposal, but with that power comes a responsibility to act proportionately, appropriately and fairly, and with regard for the law and its own internal procedures” Ann Abraham (PHSO, Annual Report 2008-09 (HC 2008-09, 786) 12)
  • “The pension appointed to be paid me at Michaelmas I have not received, and know not where or from whom I am to ask it… To interrupt your Lordship…with such petty difficulties is improper and unreasonable; but your knowledge of the world has long since taught you that every man’s affairs, however little, are important to himself. Every man hopes that he shall escape neglect” (Samuel Johnson, to the Earl of Bute, 3 November 1762)
  • “Something important is being said about democracy when the only legislative chamber to perform the functions that people expect – deliberation, revision, improvement – contained not a single elected politician” (Hugo Young, Guardian, 18 December 2001)
  • “There is no strong constituency that opposes complexity and, above all, no constituency that is galvanised by simplicity.” (Joel B. Slemrod, “The Simplification Potential of Alternatives to Income Tax”, Tax Notes Today, March 1, 1995.)
  • ‘There is no such thing as a good tax, there is no such thing as a good tax story’ (Winston Churchill)
  • “However beautiful the strategy, you should occasionally look at the results” (Winston Churchill) [disputed source]
  • “Letting in the light is the best way of keeping those responsible for exercising the judicial power of the State up to the mark and for maintaining public confidence.” (Lord Toulson in Kennedy v Charity Commission [2014] UKSC 20; [2015] AC 455, [110])
  • “As with most instances of judging by catch-phrase, the law evolves in three stages: (1) An extreme case arises to which a court responds. (2) The language of the response is then applied -often mechanically, sometimes cleverly- to expand the application. With too few judges experienced enough with the subject to resist, the doctrine expands to the limits of its language, with little regard to policy. (3) Such expansions ultimately become ridiculous, and the process of cutting back begins“ (Philip Areeda, ‘Essential Facilities: An Epithet in Need of Limiting Principles’ (1989) 58 Antitrust Law Journal 841, 841)
  • “to lay down a law about things that are subjects for deliberation is an impossibility. Therefore men do not deny that it must be for a human being to determine such matters” (Aristotle, Politics, III.xi.8 as cited in Andrew Halpin, ‘The Theoretical Controversy concerning Judicial Review’ (2001) 64(3) MLR 500, 511 fn 21)
  • “Few discoveries are more irritating than those which expose the pedigree of ideas” (Lord Acton)
  • “With us, every official, from the Prime Minister down to a constable or a collector of taxes, is under the same responsibility for every act done without legal justification as any other citizen” (AV Dicey, Law of the Constitution (10th edn., 1959), 193)
  • “Human nature, at its best as well as at its worst, has to be protected against itself, and where power is concerned the very existence of the possibility of restraint is a safeguard against that gradual degeneration – so easy, so insidious, often so imperceptible – by which the end justifies the means and the good in intent becomes the evil in effect. That, at all events, is the whole core of the theory of the balance of powers in our constitution” (Carleton Kemp Allen, Law and Orders (3rd edn., Stevens & Sons 1965), 297)
  • “In this regards, my friend, you’re like the public, to whom one should never offer a delicate perfume. It exasperates them. Give them only carefully selected garbage” (Charles Baudelaire, Translated by William H. Crosby, The Flowers of Evil & Paris Spleen, BOA Editions, Ltd., 1991)
  • “[M]an in our times has a need to preserve his identity, to refuse the total transparency of society, to maintain the privacy of his personality” (Judge Pettiti in Malone v UK (1985) 7 E.H.R.R. 14, 55)
  • “But if taxation is the scourge of the twentieth century – the civilized evil as it were – we must learn to live with it.” (JRL Anderson in the Foreword to Basil Sabine, A History of Income Tax (1st edn., George Allen & Unwin, 1966), 5)
  • “So the thing be understood, I am indifferent as to the name” (John Locke)
  • “Nothing so undermines your financial judgment as the sight of your neighbour getting rich.” (JP Morgan)
  • “Should government refrain from regulation (taxation), the worthlessness of the money becomes apparent and the fraud can no longer be concealed” (John Maynard Keynes)
  • “For all its untold blessings, the harnessing of atomic energy may lead to the destruction of man’s physical world; so perfecting the instrument of income tax may destroy the structure of human society. For many God has been all-but argued out of existence, and mammon taxed out of existence: in a world without God or mammon, what is left?” (JRL Anderson in the Foreword to Basil Sabine, A History of Income Tax (1st edn., George Allen & Unwin, 1966), 5)
  • “One man’s evasion is another man’s increased taxation” (Harold Wilson)
  • “It was Benjamin Franklin who said that there were two certain things in this world, death and taxes. If there is anything this brief summary of fiscal history in the last 60 years illustrates, it is that, in fact, there is nothing certain about taxes, either in incidence or effect” (Basil Sabine, ‘Life and taxes 1932-1992. Part 3: 1965-1992: Reform, Rossminster and reductions’ (1993) BTR 504, 516)

*** Added 16 April 2016. A cracking link here (h/t David S. Lesperance) with a host of excellent tax quotes.

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