The Court of Appeal has just handed down judgment in the case of City Shoes v HMRC, in which the taxpayers claimed to have a legitimate expectation as to certain treatment from HMRC. That treatment related to the ‘Liechtenstein Disclosure Facility’ (LDF). The LDF allows taxpayers to settle outstanding tax liabilities relating to assets in Liechtenstein (or assets held offshore more generally, by following particular steps). It offers terms more favourable to taxpayers than other forms of tax investigation – a carrot for being proactive, but still a stick in the form of a reduced fine. There are three stages to be undertaken: application to register for the LDF (Stage 1); registration with the LDF, HMRC having considered the taxpayer to be eligible and at which point HMRC and the taxpayer seek to settle the matter (Stage 2); finalisation of the settlement (Stage 3).
The taxpayers in this case had engaged in tax schemes using employment benefit trusts (EBTs) and sought to get the benefit of the LDF. Accountants on behalf of the taxpayers were in discussions with HMRC as to the possibility of using the LDF, and had received assurances from HMRC that the taxpayers could apply to use the LDF. So, the taxpayers registered to apply for the LDF (Stage 1). HMRC then changed its policy on eligibility for using the LDF – that those engaged in EBTs should not benefit from the LDF. A reason for the change in policy was that allowing those with offshore EBTs to use the LDF would be unfair given that a different settlement offer had been proposed to the general body of taxpayers engaged in EBTs. The only difference here was that the taxpayers so happened to have the assets offshore. Another reason was that the purpose of the LDF was to bring to light information that HMRC did not already have, whilst on the other hand HMRC was aware of the goings on in respect of EBTs.
Whipple J in the High Court found that the taxpayers’ only expectation was being able to apply to register for the LDF – but there was no legitimate expectation as to the substantive benefit of the LDF itself. Here the taxpayers had received no assurance from HMRC that they would benefit. They had not actually been registered for the LDF and in the process of settling their affairs. Rather they had simply applied to register for the LDF (Stage 1).
The taxpayers then fell back on an argument based on conspicuous unfairness – that the taxpayers were nevertheless treated conspicuously unfairly. Whipple J noted that failure on the legitimate expectation argument did not augur well for success on the conspicuous unfairness argument, given that the latter can be a factor leading to the former, but accepted in principle that the arguments differed. At best however, the taxpayers were “led up the garden path” by HMRC, but never treated conspicuously unfairly. There was never a guarantee as to particular treatment. Further, the taxpayers were not treated dissimilarly to similarly placed taxpayers and the process of HMRC changing its policy came after considering all the relevant factors.
The Court of Appeal (Henderson LJ, Holroyde LJ and Longmore LJ) unanimously agreed with Mrs Justice Whipple’s judgment. Lord Justice Henderson gave the only speech of the Court and there were in reality only two things that the judgment did. First, it affirmed that Whipple J was correct in rejecting the taxpayers’ claims. Second, it rejected the taxpayers’ arguments, which the Court found had little or no weight, that Whipple J was for some reason incorrect. All that was new in the judgment effectively was that the taxpayers in the case were discriminated against vis a vis other non EBT taxpayers were admitted to the LDF after the time that the claimants were refused admission to the LDF. But the Court held on balance that the evidence did not support this.
There are four points that are worth making about this judgment. The first is about the language used. In another blogpost, which was published later in the Tax Journal, I noted that sometimes in cases concerning tax avoidance cases the language used by judges can be an early indicator of the later result in the case. Paragraph 9 of the judgment indicated in this case that the prospect for success on the part of the taxpayers might be limited. Lord Justice Henderson there noted as follows:
“It is well known, however, that EBT arrangements of various kinds have been widely used as vehicles for tax avoidance schemes, typically designed to enable companies to remunerate their employees through arrangements involving the use of third parties and offshore trusts in a way that it was hoped would avoid liability to income tax and national insurance contributions (“NICs”), while enabling the company to obtain an immediate deduction in computing its profits for the money so expended.”
Secondly, the gist of a successful judicial review is that a citizen has been shafted by the State in some way. It must be more than just a bit hard done by. To this end, in respect of arguments based on “conspicuous unfairness”, Lady Justice Arden in Hely-Hutchinson noted that there “must be some material factor which makes its exercise unfair.” Simon Brown LJ in MFK Underwriting distinguished between situations where the action was a bit rich and those instances where the action was outrageously unfair. The problem for the taxpayers in this case is that they were a bit hard done by – HMRC had taken them up the garden path. HMRC had discussions with the taxpayers and led them to believe that the LDF would be open to them. They did not keep them informed about their thinking on the matter and that they were in the process of internally consulting on changing the policy. They were hard done by. But they were not shafted.
Third, this case again underlines an important distinction between cases in which the taxpayer either has some assurance on which they have relied to their detriment and those cases in which there is no reliance or detriment in that sense, but rather dissimilar treatment applied between similarly placed taxpayers. These are different claims and the requirements on the taxpayers in either will be different. In the former, detrimental reliance will generally need to be shown. In the latter, this is not necessary. Nor should it even be necessary for the taxpayer to be aware of the policy in advance of entering in to a particular transaction or arranging their affairs in a particular way. The point is that the public authority has published a policy and it is right that the public authority apply that policy consistently. The claimants in this case attempted to argue both, at least initially, but in respect of the first type of claim could not demonstrate that a legitimate expectation as to treatment arose at all. As for the second, there was no lack of consistency as the only persons who came close to being in the same material position as the claimants were those taxpayers who had already had their applications for registration for the LDF accepted. But these two classes of persons are clearly different. They are separated not merely by the effluxion of time, but also by the fact that the applications of those successfully registered were actually considered and decided to be eligible for registration.
Finally, in terms of what I might loosely label “judicial politics” it is interesting to note just how much weight Lord Justice Henderson put upon the judgment in the High Court of Mrs Justice Whipple – there were 50 or so paragraphs dedicated to restating what was said or found in that judgment (including a paragraph effectively supporting Whipple J’s implied criticism of HMRC processes in respect of the decision to change its policy in another case, namely Hely-Hutchinson – see para 26). Further, around 10 paragraphs were dedicated to defending Mrs Justice Whipple from the accusation that she had failed to deal with a particular argument apparently put to her in the High Court. Indeed, the judgment really only starts at paragraph 65 and ends effectively at paragraph 80.