Oversight of HMRC soft-law: lessons from the Ombudsman

My latest article entitled ‘Oversight of HMRC soft law: lessons from the Ombudsman’ has just been published in the Journal of Social Welfare and Family Law. There is a link to the published version here. The article seeks to set out the important contribution that the Ombudsman has played in the past in respect of overseeing HMRC guidance. The abstract reads as follows:

“An investigation of the role which the Ombudsman plays in tax law, on which comparatively little has been written, reveals that the body makes an important and distinct contribution. There is now almost universal acceptance that tax law is overly complex and indeterminate. If the primary law offers few answers to the taxpayer, then HMRC’s role as administrator of the system becomes apparent. Soft law elaborating upon how HMRC will apply the primary law to a given class of taxpayers is rendered indispensable. In practice however, HMRC soft law has often been found to be deficient. Analysis of the current oversight arrangements for HMRC soft law immediately reveals the genesis of these issues. Select committees exercise Parliamentary control, whilst an independent body performs external audits. These entities however only incommensurately examine the soft law. Into this void steps the Parliamentary and Health Service Ombudsman, a body which has ‘carved for itself a distinctive niche’ in the public law framework. The paper accordingly seeks to elaborate upon the important role that the Ombudsman plays in scrutinising HMRC soft law and the lessons which can be derived from this analysis.”

A previous version of the article is now also available for free on my SSRN page.

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HMRC, the Panama Papers and the use of leaked information

Last week at the Society of Legal Scholars conference in Oxford, Michael Dirkis of the University of Sydney presented a paper entitled Having your cake and eating it too: The role of the judiciary in facilitating the effectiveness of exchange of information agreements and imposing limitations on the use of the information obtained’. Professor Dirkis’ paper compared the approach in different jurisdictions towards the legality of revenue authorities’ using information given to them from, for instance, whistleblowers. The timing of the presentation coincided with the revelation that the Danish Tax Authority would pay £1mil for secret financial information on hundreds of Danish nationals. The data itself is said to relate to the now infamous Panama papers leak.

Could HMRC do the same?

The first thing to note is that this is not the first time that a revenue authority is thought to have paid for tax information: Germany, the UK and France are thought to have done so in the past. Moreover, information given to HMRC from ‘interested’ third parties is a significant well from which the body draws when deciding whether to initiate investigations.

Other than the practicalities however, two questions of legality arise. First, is HMRC prevented from using the information due to the privacy rights of the individuals concerned? That is a question of international rather than national law. Put this way, countries are sovereign. The laws of one country do not apply in another country unless there is a specific provision providing that the second country allows itself to be so bound in certain circumstances. Thus, this might arise if there were a provision in the double tax treaty between the UK and Panama that it would not use confidential information. Whilst the DTT between the two countries does contain provisions on the use of information exchanged between the two revenue authorities, it is silent on the issue of information provided by other sources in those countries (see: here). Thus, HMRC is not legally impeded from using the information concerned. (However, the ability to rely in court upon information transmitted to HMRC from a leak is a separate issue, and the difficulty in verifying the veracity of the information obtained may explain HMRC’s apparent reluctance in recent years to pursue criminal prosecutions in light of the Falciani disclosures. Nevertheless, the reason that HMRC only pursued one prosecution in that case remains unclear)

What about the legality of paying for information?

The legality is determined by the scope of HMRC’s collection and management powers (most important in this respect is Commissioners for Revenue and Customs Act 2005, s.5). In the Fleet Street Casuals case, it was pronounced by Lord Diplock that this endowed the Revenue with:

“a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection.”

More recently in Gaines-Cooper, it was cited that this discretion permits the use of cost-benefit analysis:

“In particular the [R]evenue is entitled to apply a cost-benefit analysis to its duty of management and in particular, against the return thereby likely to be foregone, to weigh the costs which it would be likely to save as a result of a concession which cuts away an area of complexity or likely dispute” (para 26 (Lord Wilson))

HMRC’s collection and management powers allow the body, inter alia, to settle tax disputes, gives them flexibility in respect of what test cases to take, and to make prudent arrangements for the smooth collection of tax which may result in less tax than is strictly owed under the law. Whilst most obviously, HMRC’s discretion allows the body to collect less tax than is due, there is no reason why, taking Lord Wilson’s words to their natural conclusion, the body could not apply this cost-benefit analysis to the purchase of information from a whistleblower. HMRC is entitled to invest in upgrading technological equipment which will facilitate the collection of tax. There is no difference in principle with investing in information that can be used to collect more taxes that are due. This is predicated on the assumption that the leaked information could actually be used and that HMRC would have verified that the information itself was not faked, but this seems to be precisely what the Danish Tax Authority verified prior to agreeing to purchase the information.

The source of the information was careful to only give the information to the Danish authority which concerned Danish individuals. It is unlikely that HMRC investigations could simply piggy-back on the Danish ones. HMRC would have to actually cough up for the information which relates to the UK. Perhaps the most prudent move for now might be for HMRC however to wait to see what comes of the Danish investigations. If they are successful, then HMRC will know the utility of the leaked data.

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The APN litigation continues

Introduced in 2014, the ‘Accelerated Payments Regime’ has been challenged now numerous times. This is unsurprising. Taxpayers who engaged in schemes some years ago are finding themselves with a significant tax bill which must be paid within a very short time frame. With no formal appeal, taxpayers are left with little option but to try for Judicial Review.

So far, the challenges in the High Court by taxpayers seeking to have the APNs issued to them set aside, have all failed. This is also unsurprising when it is recalled that the first case concerning APNs was rejected by Simler J (Rowe v HMRC) in a comprehensive and robust judgment. The judgment of Green J in Walapu v HMRC thereafter was of a similar order, thereby effectively closing off the possibility for a successful challenge at the High Court level (or at least creating a significant hurdle for High Court judges to overcome if they choose to depart from these cases. None so far have chosen to do so). Both Rowe and Walapu will be heard before the Court of Appeal however in the coming months (Rowe is set for December whilst Walapu is set for April of next year). As such, watch this space.

An immediate development of note however is that which arose in the case of Vital Nut v HMRC. As I’ve written elsewhere, APNs are a dramatic legislative intervention and as such, given the effect on taxpayer’s rights, the conditions under which they may be issued will be guarded jealously by the courts. Public Law norms will likewise act so as to constrain the actions of HMRC and prevent them from using the power to issue APNs in a manner in which the courts deem to be ‘unfair’. This is precisely what arose in the case of Vital Nut. Charles J in the High Court was not satisfied that an APN could be issued anytime that a scheme had been notified under DOTAS. Rather, an APN could only be issued where HMRC had been satisfied that the scheme notified under DOTAS would also be ineffective (see Paragraphs 17 to 40 of the judgment in particular):

“[T]he Notice Requirement for the issue of a valid APN cannot be satisfied unless, to the best of his information and belief, the designated officer is of the view that he is not satisfied that as a matter of law and fact the claimed tax advantage is lawfully available and so should be allowed and so, in that sense, the designated officer has determined that the claimed tax advantage is disputed.” [Para 35]

As the litigation in respect of APNs continues to develop, it is likely that there will be additional requirements that will be read into the legislative scheme. It has been reported elsewhere, in this regard, that taxpayers have successfully challenged APNs before HMRC on the basis that whilst the relevant schemes had been notified under DOTAS, they were not “notifiable”, thereby again strictly interpreting the words of the legislation.

Given the power that the APN regime places in the hands of HMRC, it is entirely correct that the courts should continue to act as suspicious umpires of HMRC’s use of this statutory scheme. For now, all eyes should be on Rowe.

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The curious case of Apple

What to make of the Commission’s decision that Ireland granted State Aid to Apple to the tune of up to €13bn? On the one hand, very little as we are yet to see the full decision and all the relevant details. The decision will be released as soon as there has been agreement as to what parts should be redacted, and in the case of the Starbucks decision earlier this year, that process took just over 8 months.

On the other hand however, some broader points can be made both about the political nature of the State Aid investigation and about the framework for using State Aid to combat perceived abusive tax practices. In order to elaborate upon these points, it is worth revisiting first principles and setting out what actually is State Aid. It arises where:

  • there has been an intervention by the State or through State resources
  • the intervention gives the recipient an advantage on a selective basis. Two separate questions arise as to whether an advantage has been granted and whether that advantage is selective. This is where the real battle ground will take place in respect of the current State Aid cases generally.
  • competition has been or may be distorted;
  • the intervention is likely to affect trade between Member States.

The State Aid provisions of the Treaty are found in the Competition Law chapter and as a matter of principle, it is uncontroversial that the EU should seek to prevent Member States from intervening in the market in order to unduly benefit particular undertakings. That the tax system can be utilised as a means of selectively benefiting certain undertakings is similarly uncontroversial. For instance, R&D tax reliefs could be designed so as to de facto discriminate between otherwise similarly placed undertakings, thereby unduly favouring some. The Belgian excess profits scheme, which the Commission found to amount to State Aid, is a good example similarly of a Member State intervening through the tax system so as to selectively benefit certain companies. The effect of this scheme was to reduce the tax payable by 35 Multinationals, thereby advantaging these companies over their competitors. To this end, remarks that the EU and Commission have no competence to intervene in respect of Member State’s tax policy is misconceived. Member States do have a significant degree of autonomy in respect of direct taxes, but this freedom is and always has been subject to the Treaty provisions.

At the core of the Apple decision accordingly is a dispute as to whether rulings issued by the Irish Revenue Commissioners selectively advantaged Apple. The accusation is that the Revenue rubber stamped unduly beneficial advance pricing arrangements. That is the crux. The press release however contains quite a bit more information which on its face is not relevant to the determination of the State Aid issue. However, these can only be understood when viewed in light of the political nature of the dispute. The State Aid provisions are here being used as a means of combating abusive tax practices and to accelerate and buttress international tax reform. This explains why the press release refers generally to Ireland’s tax treatment of Apple enabling the company to record all European sales in Ireland, which itself is recognised as being ‘outside the remit of EU state aid control’. This is a fact which is irrelevant for the legal arguments in the case at hand, but pertinent politically. It similarly explains why the Commission states that the State Aid bill would be reduced if the US authorities were to require Apple to pay larger amounts of money to their US parent company for this period to finance research and development efforts.

But a more important point which is often overlooked in the conversations about the Apple et al decisions is whether the State Aid provisions actually provide a suitable framework for dealing with transfer pricing arrangements. Elsewhere, I’ve written about this issue (see: here, here, and a semi-satirical piece here) but did also some time ago express scepticism as to the legality of the Apple rulings under Irish law. There is one further point which ought to be added however. It is uncontroversial that State Aid law should be utilised to prevent Member States intervening through the tax system by introducing legislation which de facto favours selectively. It is right that Member States should refer any dubious looking legislative amendments to the Commission for approval. More controversial however is the application of State Aid law not to legal provisions themselves, but rather to the administration of these general provisions such as the arm’s length principle. Note the difference in frequency. Tax legislation is passed annually, biannually and occasionally triennially. It is entirely feasible for a Member State government to seek prior approval of tax measures with a potential State Aid edge. What is much less feasible is the idea of Member State Revenue authorities seeking Commission approval anytime they agree a transfer pricing arrangement, even if this were to be restricted just to transfer pricing arrangements of large companies in the 28 Member States (however, how this could be restricted in such a manner without itself giving rise to State Aid concerns in respect of the agreements arrived at by the other companies is equally far from clear). The reason that multinationals seek rulings in the first place is as an assurance that their tax affairs are in order. The logical conclusion of the fact that transfer pricing arrangements which administer broad standards and are potentially disputable are subject to State Aid would be that multinationals would first seek rulings from the revenue authorities and would urge the revenue authorities to thereafter seek approval from the Commission.

Presumably the Commission has little intention of becoming a supranational revenue authority and there will doubtlessly be some kind of settlement of the infrastructure for dealing with transfer pricing arrangements if the Commission’s case is successful. But it is a concern which requires some thought.

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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 bailii.org 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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