Ingenious Media Part 4: confidentiality, the Public Accounts Committee and Anthony Inglese

I would be a terrible lawyer in practice. Far too much of my time is spent thinking about the way that things ought to be and why they are the way they are. The most important thing for a client and a court however is what the law is. To this end, whilst there is an interesting argument to be had about whether there ought to be confidentiality surrounding individuals or corporations tax affairs, and one which I indeed pondered in the case of politicians’ tax returns, it is not disputed that HMRC’s duty of confidentiality does indeed exist. It arises at common law and is enshrined in section 18 of the Commissioners for Revenue and Customs Act 2005 (‘CRCA 2005’). The central issue in the case of Ingenious Media, the judgment of which was handed down by the Supreme Court last Wednesday, was the scope of this duty.

The facts of the case are brief. 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”. Did these disclosures amount to a breach of HMRC’s duty of confidentiality enshrined in section 18 of the Commissioners for Revenue and Customs Act 2005?

The Supreme Court unanimously held that they did, thereby overturning the decision of the Court of Appeal (which in turn had followed the decision on the matter in the High Court). I have blogged about the case previously (here, here and here) and it is subject to a lengthy case note of mine to be published hopefully early in the new year. For that reason, I wish to highlight here only one aspect of the decision (which is only briefly touched upon in the case note), namely the defence that was run by HMRC and which found favour in both the High Court and Court of Appeal.

HMRC argued that there was no breach of the duty of confidentiality owed under CRCA 2005, s. 18 by reason of the fact that the disclosure of information pursued a ‘function’ of HMRC. s. 18(2)(a)(i) does indeed provide that there will not be a breach of the duty where the disclosure of confidential information ‘is made for the purposes of a function of the Revenue and Custom’. As the collection and management of taxes is a function of HMRC, HMRC are entitled to disclose confidential information if it is considered that this will help to fulfill this function (through fostering good relations with the press and making the populace aware of its attitude to tax avoidance for instance). This argument mirrors that which the Public Accounts Committee put to Anthony Inglese, then General Solicitor and Counsel for HMRC, during a hearing on 7 November 2011, as signposted by Judith Knott, albeit in the context of pursuing HMRC’s function to assist Parliament. That was the hearing at which Inglese was notoriously made to swear an oath. The pretext to that controversial occurrence, which then head of the Civil Service Gus O’Donnell called a “theatrical exercise in public humiliation”, was a disagreement between Inglese and the Public Accounts Committee as to the scope of legal professional privilege and the duty of confidentiality (see Ev 39-44 of the report). In respect of the latter, the Committee was arguing that there was no statutory bar to the disclosure of confidential taxpayer information where it would assist Parliament, but that it fell within the discretion of HMRC and that HMRC’s refusal to exercise it in favour of disclosure was based upon policy, not law (see pages 5, 9 and Qs 491-Q526 for instance). Inglese was contending meanwhile that he could not disclose taxpayer specific (identifying) information (Q509 for instance). Richard Bacon MP from the Committee took him back through the relevant provisions of the legislation and asserted that there was nothing in the legislation which differentiated between identifying and non-identifying information, and so there was nothing by statute absolutely precluding HMRC from disclosing taxpayer identifying information:

“It is fairly clear to me, reading the legislation, that there are lots of circumstances in which disclosure is possible. That is plain on the face of the Act. Basically, section 18, which you have referred to a couple of times, says in subsection (1): “Revenue and Customs officials may not disclose information which is held by the Revenue and Customs in connection with a function of the Revenue and Customs.” Subsection (2) then states: “But subsection (1) does not apply to a disclosure”, and it lists paragraphs (a), (b), (c), (d), (e), (f), (g) and (h) as exemptions to the rule that information may not be disclosed. So there are lots and lots of cases just under section 18 in which one can disclose information. The Act goes on to say in section 20 that “Disclosure is in accordance” with section 20 “if”—and it then gives a whole load of possible examples, one of which is disclosure “to a person exercising public functions”. Lots of things are plain on the face of the Act, with regard to why disclosure may, in certain circumstances, be allowable…[I am led to believe] that there is nowhere in the statute that draws a distinction between identifying and nonidentifying. Is it correct that nowhere is a distinction drawn? I do not know why you are getting all these notes from people behind you; you are supposed to be the general counsel for HMRC. You are the top dog in the legal area; in so far as one has legal dogs, you are the top one, so why you have these people woofing behind you I am not clear. You are the one who should be advising them, frankly. Is what Mr Barclay was pursuing correct? Is there no statutory definition that distinguishes between non-identifying and identifying? Is that correct?”

Inglese’s attempted response to this question was that s. 18(2)(a)(i) needed to be interpreted by reference to its context and purpose (but he was interrupted in the course of doing so).

In a nutshell, the Supreme Court in Ingenious agreed with Inglese’s interpretation. Lord Toulson held that:

“In passing the 2005 Act, Parliament cannot be supposed to have envisaged that by section 18(2)(a)(i) it was authorising HMRC officials to discuss its views of individual taxpayers in off the record discussions, whenever officials thought that this would be expedient for some collateral purpose connected with its functions, such as developing HMRC’s relations with the press…[that] would have significantly emasculated the primary duty of confidentiality”

The Supreme Court went on to provide that the circumstances in which s. 18(2)(a)(i) could be used to disclose taxpayer information to the media would be very limited:

“The whole idea of HMRC officials supplying confidential information about individuals to the media on a non-attributable basis is, or should be, a matter of serious concern. I would not seek to lay down a rule that it can never be justified, because “never say never” is a generally sound maxim. It is possible, for example, to imagine a case where HMRC officials might be engaged in an anti-smuggling operation which might be in danger of being wrecked by journalistic investigations and where for operational reasons HMRC might judge it necessary to take the press into its confidence, but such cases should be exceptional.”

The Public Accounts Committee might well argue that if this is the way that the law is, restricting heavily the ability for HMRC to make disclosures, then the law ought to be amended. As I said, there is an interesting debate to be had about this. However, it is not the way that the law currently is, and the Supreme Court judgment serves to vindicate Anthony Inglese’s stance. He was put in the particularly unenviable of being asked to affirm that he could disclose information on which the legal advice was that this would be a breach of CRCA 2005, s. 18 (something which in turn s. 19 makes a criminal offence in the absence of reasonable belief as to lawfulness).

Well, I say it is a vindication, but looking back through the transcripts of the hearing, I can’t help but feel very sorry for the man (on his first ever appearance before a select committee). If it is a vindication, it is a bittersweet vindication.

Posted in Tax Law | Leave a comment

The Taxing Consequences of Brexit

With Article 50 now set to be triggered before the end of March 2017, it is timely to reflect upon the extent of what shall be up for grabs in the negotiation. In an article entitled ‘The Taxing Consequences of Brexit’ to be published in a special Brexit edition of the King’s Law Journal, I set out the impact that EU Tax Law has had upon the UK and speak tentatively about the prospect that post-Brexit, the UK shall be subject to both hard-law and soft-law over which the UK will have no formal say. The abstract for the piece reads as follows:

“The European Union is a complex and confusing instrument even for those well-versed in its institutions, procedures and acquis. EU Laws in respect of taxation to this end are unsurprisingly complicated. The impact of the UK’s decision to leave the EU in turn arouses an enormity of questions in respect of the post-Brexit settlement. One can speculate about what this might look like and what EU Laws in respect of taxation the UK will continue to subscribe to. However, this would be mere speculation as the eventual settlement will be the result of a negotiation between the UK and the EU, and in a negotiation, everything is potentially up for grabs. This article will seek to highlight the extent to which non-EU members can be subject to EU rules. As a prerequisite to this analysis however, it is first necessary to elaborate upon the UK’s current relationship with the EU in respect of taxation.”

An early draft of the article is also available from my SSRN page.

Posted in Tax Law | Leave a comment

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.

Posted in Tax Law | Leave a comment

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.

Posted in Tax Law | 1 Comment

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.

Posted in Tax Law | Leave a comment

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.

Posted in Tax Law | Leave a comment

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.

Posted in Tax Law | Leave a comment

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.

Posted in Tax Law | 1 Comment

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.

Posted in Tax Law | 2 Comments

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.

Posted in Tax Law | Leave a comment