Too many powers, too little oversight?

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

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

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

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that proposed extensions to HMRC powers (in relation to offshore time limits and civil information powers) be withdrawn by the government as these are disproportionate or fail to incorporate sufficient safeguards.

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

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

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

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

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Scott v HMRC: Principles, policies and interpretation

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

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

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

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

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


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

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

Permissible disclosure of information?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The OTS strategic review on HMRC guidance

Guidance is an important part of the tax system – indeed, I would suggest that HMRC guidance is both legally appropriate and normatively desirable. At the VPG Annual Lecture this year in September[1] I advanced the claim that HMRC guidance is desirable as it advances the rule of law, thereby valuing human dignity, and produces efficiency.

Until recently however, HMRC guidance had escaped the attention of policymakers. Now however, the Financial Secretary to the Treasury, HMRC, and the representative bodies are particularly interested in the issue. Importantly to this end, the Office of Tax Simplification (‘OTS’) has just produced a strategic review of HMRC guidance which seeks to provide a New Model for the future (accessible here). It contains 12 recommendations relating to the substance of HMRC guidance, the framework for its production, its reliability and how it might be integrated with new technology (Disclosure – I met with the OTS to discuss the framework for HMRC guidance when a review was first mooted).

The review merits reading not only for the recommendations that it proposes, but also for its incisive observations about the utility of HMRC guidance in the tax system. Later this month, I shall have an article in the Tax Journal reviewing the OTS recommendations in light of concerns over when you can and can’t rely on HMRC guidance.

[1] Please contact me if you would like a copy of the lecture.

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The canons of taxation and tax collection

It is the start of the academic year and those taking tax law, whether at undergraduate or graduate level, will probably now be introduced to Adam Smith’s canons of taxation. The idea is that a good tax system will comply with several benchmarks. These are helpful for getting students to think critically about the design of tax systems. But they are not only useful for that – they can be used by tax authorities in order to determine how to go about the task of collecting taxes. In this way the benchmarks can be demonstrated to have practical utility in terms of understanding how tax authorities ought to act. In this blogpost I wish to first set out different benchmarks for designing tax systems and thereafter explore how one set of benchmarks, Adam Smith’s canons, can be used in understanding tax administration.

Designing tax systems

It is orthodox to begin tax modules by mentioning Adam Smith’s four canons of taxation. Taxes ought to be equitable (though there can be much debate about what this means, such as whether it requires progressive taxes or whether ability to pay refers to money available to pay taxes or the ability to work to pay taxes and so on), taxes ought to be certain and not arbitrary, taxes ought to be levied conveniently from the perspective of the taxpayer and taxes ought to be economical (leaving for the taxpayer all but that which is required to be given to the State)

The Meade Committee on the other hand, albeit in the context of direct taxes, produced different criteria for judging tax systems. The focus there is upon the effects on taxes:

  • Incentives and economic efficiency – we should take into account for instance the income effect (the idea that one must work harder to increase income as tax rises) and the substitution effect – (the desirability of substituting leisure for work, which would be more pronounced as tax rates increase);
  • Distributional effects – how the tax burden is and should be distributed across taxpayers;
  • International aspects – there is a need to take into account the fact that taxpayers and the effects of taxes are not limited by borders;
  • Simplicity and costs of administration and compliance
  • Flexibility and stability – from both an economic and political perspective. The tax system must leave room in a mixed economy for the operation of effective incentives for private enterprise. The tax system must at the same time give scope for effective modification of the distribution of income and property, which would otherwise result from the unmodified operation of the “free markets”;
  • Transitional problems – major upheavals should be avoided for myriad reasons, such as the significant costs which will be incurred as well as the distortion to taxpayers’ activities.

The Mirrlees review meanwhile made a unique contribution by adding three rules of thumb for designing tax systems: neutrality, stability and simplicity. As they are rules of thumb, they are not inflexible and so departure from them is permissible provided that there is a good justification for doing so.

These three sources are the ones I use in introductory classes, but there are others that can also be used. For advanced courses for instance, it would seem appropriate to introduce students to Murphy and Nagel who challenge us to look at tax systems in a different way – focusing upon after tax outcomes that we would expect to see in a just society. Viewing taxes in this way means that the utility of the aforementioned benchmarks is limited to the extent that they can be used to produce just outcomes.

Tax Collection

Taking the UK as an example and testing it against Adam Smith’s canons of taxation, it would not take long for us to realise that UK taxes are not always equitable, certain, convenient and economical. But looking at the way in which HMRC operates, we can see examples where the canons can be said to apply.

Equity: HMRC strives in its administrative practice to treat like people alike and unlike people differently (though it may be difficult in practice to determine who should fall into which category). Take for instance the case of Hely-Hutchinson where a taxpayer claimed that he was entitled to be treated in accordance with certain guidance. The problem for the taxpayer was that he was seeking to rely upon 2003 guidance, but his case was still “open” (i.e. subject to an open enquiry) in 2009 when HMRC replaced the guidance. He wished to be treated in the way as others had been treated (i.e. in accordance with the 2003 guidance). But HMRC distinguished between the taxpayer and those others on the basis that his case was “open” and theirs were “closed”. To this end, they treated him the same way as those whose cases were “open” and differently to those whose cases were “closed”.

Certainty: in order so that taxpayers acquire certainty as to tax outcomes, HMRC engages in a wide array of initiatives such as providing informal rulings and general guidance. This is in spite of the fact that HMRC is under no general legal obligation to provide advice to taxpayers (though in specific circumstances, some taxpayers have a right to apply for binding rulings as in TCGA 1992, s. 138).

Convenience: there are many examples of instances where HMRC will work with the taxpayer, such as through payment plans, to ensure that tax is collected in a reasonably convenient manner. HMRC will generally not exercise its powers where to do so would cause hardship for taxpayers[1] (see for instance here in the context of tax credits).

Economy: It is one of HMRC’s key priorities to provide efficient tax administration, whilst at the same time striving (even if not succeeding in doing so) to collect from taxpayers no more than that which is due until the law (which is at times unhelpfully put as “maximising revenues due”). This can be seen for instance in the notorious Litigation and Settlement Strategy. This is a policy which should reduce the costs of collecting tax, by providing a streamlined system for dealing with disputes. The policy document and the commentary regularly refer to “efficiency” in administration. At the same time, it is made clear that HMRC should only seek to collect the taxes properly due.

This exercise could be undertaken in respect of different benchmarks, such as those set by the Meade Committee, Mirrlees, and Murphy and Nagel. Of course, the different benchmarks can also be used to further effect to critique whether in fact tax authorities are acting in a normatively desirable way by testing whether tax administration complies with the benchmarks. But in order to do this, it would first be necessary to recognise that each set of benchmarks in fact comprises values, each of which would have to be justified on their own terms. For instance, before we can say that tax authorities ought to act equitably, we would first have to define equity and justify why it is a “good thing”. Only then could we properly test whether tax authorities do act equitably.


[1] I must admit, I am yet to fully investigate the legality of this power. It is longstanding – there are references to the hardship ‘discretion’ in some 19th century Inland Revenue documents. If I were to hazard a guess, I would say that today it would be justified on the basis of statutory interpretation – Parliament would surely not legislate so as to impose hardship.


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

At the International Fiscal Association’s annual congress, Advocate General Kokott weighed in on the European Commission’s State aid cases concerning tax rulings. AG Kokott’s comments suggest that tax authorities, in effect, ought to have a degree of authority about how their national laws ought to apply (the remarks are reported in law360). This echoes an argument of mine in a working paper which I presented at the Oxford Sydney Tax Research Conference in June 2018. The link to the conference website is now broken (a cached version is here) but I am also happy to send a Pdf of the most recent version – just send me an email (

In this article I argued that the European Commission’s investigations into tax rulings are predicated on the assumption that misapplications of the law should give rise to State aid concerns. The article argues that this is wrong. Tax authorities, within limits, have the authority to “get it wrong” and this is desirable. EU law should only intervene then where national tax authorities have breach these limits and used their discretion derived from the responsibility to manage compliance improperly, not simply where they have misapplied the law. But therein lies a role for the Commission in checking to ensure that the powers have been used lawfully. The Commission could still succeed in its cases against Ireland, Luxembourg and the Netherlands if it can be demonstrated that the national tax authorities departed from standards governing the exercise of the authority to grant rulings. Moreover, the investigations ultimately demonstrate that there is a lack of confidence that certain tax authorities dispassionately and objectively carry out their functions. The Commission here too should have a role in seeking institutional reform to rectify this problem of trust

Any and all comments are welcome on the paper!

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Update and case note on Hely-Hutchinson

The issues surrounding the Mansworth v Jelley losses plow on. In the case of HMRC v Hely-Hutchinson, the taxpayer claims that he is entitled to the benefit of HMRC guidance which provided that losses could be claimed as a result of the 2003 Mansworth v Jelley case. HMRC’s response is that the guidance was wrong; that it is lawful for the body to correct that mistake and that the taxpayer should not accordingly be entitled to the benefit of the erroneous guidance. The taxpayer succeeded before the High Court, as I explained in a lengthy case note for the British Tax Review. The result was reversed however in the Court of Appeal. A short case note that I wrote on the Court of Appeal judgment has now been published by the Cambridge Law Journal and is available to read here (a pre-publication version is available here). The taxpayer has sought to appeal that judgment and the decision on permission to appeal is still outstanding (the latest permission to appeal results from May to June 2018 do not contain the case).

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Understanding “deductibility of expenses” in terms of equality

This blog has sometimes noted the contribution that legal philosophy can make to understanding matters of tax law and policy: for instance, using Hart’s “Core and Penumbra” analogy to understand how the limits of language can result in tax avoidance, or how Tony Honore and Joseph Raz can help us to understand why people pay taxes. To this end, the collection Philosophical Foundations of Tax Law edited by Monica Bhandari of UCL is a must read for those interested in the insights in to tax that can be gleaned from legal philosophy. In that collection, Professor David Duff has written about Dworkin’s conception of equality and redistributive taxation – using Dworkin’s work to argue for progressive income and wealth transfer taxes as essential elements of a just tax system. It could also be said that Dworkin’s conception of equality could be used to explain the approach of UK tax law to the deductibility of expenses and the “wholly and exclusively” rule and also point out a flaw.

Duff writes as follows about Dworkin (footnotes omitted):

“For this purpose, Dworkin relies on two principles of what he calls “ethical individualism”: (1) a principle of “equal importance” that requires any political community that exercises dominion over and demands allegiance from its citizens to treat them with equal concern; and (2) a principle of “special responsibility” that regards individuals as having a particular responsibility for the choices that shape their lives. While the first principle “requires government to adopt laws and policies that insure that its citizen’s fates are, so far as government can achieve this, insensitive to who they otherwise are – their economic backgrounds, gender, race, or particular sets of skills and handicaps,” the second principle “demands that government work, again so far as it can achieve this, to make their fates sensitive to the choices that they have made.” Together, these principles define a conception of distributive justice that distinguishes between a person’s circumstances and their choices, making the justice of distributive outcomes as insensitive as possible to people’s circumstances and as sensitive as possible to their choices.”

It is this idea of insensitivity to circumstance as against sensitivity to choice that can help us to understand the “wholly and exclusively” rule. By way of brief background, in the case of a trade that is carried on, expenses will be deductible if they are of a revenue and not capital nature and “wholly and exclusively” incurred for the purposes of the trade. There have been many battles over the years about the meaning of “wholly and exclusively”, with the cases themselves being highly fact sensitive and at times difficult to reconcile. However, one can see a trend of ignoring circumstance and respecting choice in deciding whether expenses are deductible: if the expense is incurred ordinarily in a trade, the courts will respect this, applying this equally to all in those circumstances, but where the expense instead a matter of personal choice, then the courts will reject its deductibility.

For instance in the case of a barrister purchasing a “wig and gown” will be an inevitable expense incurred wholly and exclusively for practising at the bar. The purchase of dark clothes however is not a cost that only relates to the trade, as the clothes can be worn more generally. The decision not to do so might be a personal choice, but that should not be a concern of the tax rules (see Mallelieu v Drummond). If a personal is ill and decides to go to a private hospital where she or he may conduct business, again this is a personal choice given that healthcare is free generally in this country (see Murgatroyd v Evans-Jackson). So too is the personal choice to live in a different town to where one permanently works necessitating the incurrence of travelling costs – these should not be deductible (Newsom v Robertson).

But therein lies the problem: the two principles of Dworkin’s ethical individualism, equal importance and special responsibility, are intimately linked and at times inseparable– the choices that we make may be dictated by our circumstances. Some choices are only open to certain people, and some people will never be required to make certain choices. In the context of deductibility of expenses we can see this playing out perversely in that some trades provide significant freedom as to how expenses should be incurred and yet still remain whole and exclusive. Though all engaged in trades may deduct expenses wholly and exclusively incurred (“equal importance”), some trade expenses de facto allow for personal choice, even though such choice should otherwise be respected (“special responsibility”). A plumber cannot deduct lunch expenses generally, but what about a barrister having a client meeting over lunch at work? A painter cannot deduct the cost of a holiday to Spain, but an academic conference could well take place there.

Thus fundamental rules of the tax system, such as those concerning the deductibility of expenses, might seem facially neutral while in reality providing advantages to certain taxpayers.

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The Supreme Court decision in Gallaher and its impact on tax

The Supreme Court on Wednesday 16 May gave judgment in the case of R (Gallaher) v Competition and Markets Authority. This case concerned an agreement to settle a dispute and the Court of Appeal judgment was given some attention in a previous blogpost. The Supreme Court judgment will be of particular relevance to those following the ongoing Hely-Hutchinson dispute (see the ICAEW website for a timeline of the dispute) and to those generally interested in tax administration.

The Office for Fair Trading (now subsumed within the Competition and Markets Authority) investigated several companies in relation to tobacco pricing and decided in 2008 that the companies had engaged in anticompetitive behaviour (namely price fixing). The public authority gave the companies the opportunity to settle the dispute on the same express terms. One provision provided that the parties could pursue an appeal (though if that option was taken, the public authority would increase the fine and pursue costs). All the companies agreed to the settlement agreement, but one party (TMR) was given an assurance additionally. This assurance provided that TMR would be entitled to a refund effectively of the fine paid (and a contribution to costs and interest) if any one of the other companies successfully appealed against the decision (in the proceedings this has been referred to as the “2008 decision”).

Some of these companies did in fact successfully appeal against the decision. TMR then got the benefit of the assurance and was refunded (the fact of this refund was published online and this has been referred to in the proceedings as the “2012 decision”). What about the other companies who did not pursue an appeal and did not receive an assurance like TMR (which in fact was the only company which received such an assurance)? That is precisely the issue that arose in the Gallaher case. Gallaher (and another company Co-op, which was “Somerfield” at the relevant time) lobbied the public authority to get the same treatment as TMR, but this was refused. Gallaher and Somerfield then took a judicial review case against the public body which was unsuccessful in the Administrative Court, succeeded in the Court of Appeal (unanimously) and was ultimately unsuccessful in the Supreme Court.

Cases such as this concern the principle of consistency and can broadly be broken down into the consideration of two questions. First, are there two persons or entities in comparable positions which have been subjected to different treatment? Second, is there a good reason for distinguishing between the two? The Administrative Court found that the parties were in comparable positions, but that there was good reason for distinguishing between them. The Court of Appeal found that there was no good reason for distinguishing between them and the Supreme Court on Wednesday ultimately found that there was good reason for the distinction in treatment. Several “good reasons” were provided by the court: 1) it was a mistake in the first place to give the assurance to TMR who, 2) had the assurance been rescinded, would have likely succeeded in convincing a court to hear an appeal out of time (given the reason for not appealing earlier was the assurance) and would have succeeded on the substantive argument given the precedence set by the other appeal; 3) Gallaher and Somerfield had not lobbied for the same assurance as TMR had in 2008.

In the judgment, Lord Canwarth spent some time “tidying up” administrative law. The principle of consistent treatment is not a free-standing principle of administrative law which can be relied on by litigants, but rather is parasitic on established grounds for review, such as rationality. In other words, lack of consistency is only relevant in so far as it demonstrates that a decision was irrational because no good reason for distinguishing between similar parties existed. Use of language such as “abuse of power”, “conspicuous” and “unfairness” in earlier cases (Unilever, Preston and Fleet Street Casuals) only obfuscated this point. It is not that the previous case law is bad, it is simply that the case law should now be interpreted either in terms of rationality or legitimate expectations. So when the previous case law mentions that some action might be so unfair as to amount to an abuse of power, the court is simply saying that the decision was irrational.

The judgment itself is important from a tax perspective. Cases should no longer be argued solely in the language of abuse of power or conspicuous unfairness but rather must be anchored around an established ground for review – such rationality or legitimate expectation. Moreover, at the time of writing, it has still not been decided whether the case of Hely-Hutchinson will be granted permission to appeal to the Supreme Court. The judgment in favour of the public authority in this case deals a blow to the prospects of either permission being successfully granted or the taxpayer ultimately succeeding in any appeal. The problem is that when viewed in light of the two questions mentioned above – has there been a lack of comparable treatment, and is the distinction in treatment justified – a strong argument from HMRC would be that it had good reason to renege of its published position. It was seeking to minimise the impact of a mistake, as the OFT successfully argued in Gallaher. Introducing more explicitly the standard of rationality too will be unhelpful for the taxpayer – as it makes it more difficult for the taxpayer to establish that no “good reason” was present. It raises the threshold in favour of the public authority.

On the other hand, the cases are distinguishable on the basis that in Hely-Hutchinson, the commitment to particular treatment was published in general guidance and in practice promised to the taxpaying community at large. To renege on such a commitment deals a blow to the utility of such HMRC communications which are integral to the smooth operation of the tax system. Thus, it might be said that there is a strong argument based around “good administration” that HMRC should not renege on a published practice save in exceptional circumstances.

In any event the judgment in Gallaher is certainly helpful from HMRC’s perspective (for a case note on the Court of Appeal judgment, see here).

One final point should be made about the judgment. There were three concurring judgments and one almost throwaway remark from Lord Sumption will be of interest to those interested in tax administration. In relation to the Competition and Markets Authority, he mentioned that a “competition authority is not an ordinary litigant, but a public authority charged with enforcing the law. It therefore has wider responsibilities than the extraction of the maximum of penalties for the minimum of effort” [para 46, emphasis added]. And yet in several significant tax cases where at issue was the use of HMRC’s managerial discretion, the highest courts in the law affirmed that HMRC may use its discretion to collect the maximum amount of tax due having regard to resources (see Gaines-Cooper, Wilkinson and Fleet Street Press). That has been taken, not unreasonably it should be said, by HMRC to be a statement of the legal limits of its overarching managerial discretion (see for instance, HMRC’s manual on collection and management powers). But the statement by Lord Sumption adds an important nuance not explicitly mentioned heretofore in the tax cases. Public authorities such as the Competition and Markets Authority and HMRC have overall responsibility for managing compliance with the relevant law. It therefore has an overarching discretion as to how that task is achieved. It may make decisions which seek to maximise compliance, having regard to resources. But that is not a statement of a rule, and hence a demarcation of the limits of its overarching discretion. Rather, it is an example of a rational use of discretion in particular circumstances (such as the production of guidance in Gaines-Cooper to reduce the cost of compliance, or settling a dispute as in Fleet Street Casuals). Thus, a public authority should not always use its powers to maximise compliance, having regard to resources. It has “wider responsibilities”. In the case of tax, such wider responsibilities will be treating taxpayers fairly (in the sense of abiding by various public law standards), maintaining and increasing trust in the administration of the law, fulfilling its constitutional role of enforcing legislation and so on.

Thus, that subtle nuance from Lord Sumption should not be overlooked.

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Tax avoidance and the limits of language

In its 1955 Report, the Royal Commission on the Taxation of Profits and Income wrote that “Avoidance of tax is a problem that faces every tax system…but until some certainty is reached upon the question of definition, the question as to what sort of steps should be taken to prevent or correct it remains an aimless one”. So a two-stage approach should be adopted when discussing tax avoidance: define the problem and then propose solutions.

A 2012 Oxford University Centre for Business Taxation paper on tax avoidance similarly advocates the two-stage approach. In doing so, the paper makes a very important distinction between effective and ineffective domestic avoidance – effective being where the law is used successfully (in the sense of succeeding in a court or tribunal) to reduce tax liability in a way unintended by the legislature. Ineffective being where the avoidance is successfully challenged by HMRC. And that is important because it raises the issue of avoidance which would be ineffective but goes unchallenged (something which David Quentin highlights also in his paper on risk-mining the exchequer).

Meanwhile I view domestic avoidance[1] – the use of legislation in a way unintended by the Legislature (using HMRC’s definition) – as being an inevitable result of the limitations of language. HLA Hart explained this through the “core and penumbra” idea. Laws, like language, have a core meaning which is readily understandable. But there will also be a penumbra where the result of the application of the particular law in different situations is unclear. Where a rule states “no vehicles in the park” – it is obvious that this prohibits cars, but it is less clear if it prohibits bicycles, skateboards, electronic wheelchairs and so on.

The problem in tax is that there is an incentive to exploit the penumbra. Moreover, the core/penumbra idea highlights the fact that at the moment the relevant action is undertaken it may be unclear whether avoidance will be effective or ineffective. To put this in the context of domestic tax avoidance take the example of a speedometer which is very accurate up to 60mph, but after that point becomes gradually less and less reliable. Now imagine that you are driving in a car with this speedometer in an area where the speed limit is 80mph (‘the rule’). You have an incentive to try to go as close to the speed limit as possible, as this will get you to your location quicker. But the closer you try to get to the speed limit, the greater the risk that you will breach the rule. It becomes less clear whether you have in fact complied with the rule. Sometimes you will go over the limit but nobody will catch you – you have avoided the intended effect of the rule in a manner which would be ineffective if you had been caught. Other times you will be stopped by the police who will have their own calculation of your speed. Sometimes the police will be correct in their assessment of your speed, as adjudicated by an impartial third party. Sometimes the police will not be correct in their assessment of your speed, in which case you will be found determinatively to have complied with the rule.

When the problem is defined in this way, what does that tell us about the potential solutions? First, it highlights the fact that counteractive legislation such as TAARs and GAARs, in addition to the use of purposive interpretation can only go so far. They too are confronted with the limits of language. Secondly, it demonstrates that retrospective legislation does not necessarily undermine the rule of law. It seeks to catch and charge to tax those people who have tried to exploit the penumbra of legislation (a situation in which they have knowingly placed themselves) which they cannot be certain will succeed. Finally, it illuminates the wisdom at least from HM Treasury and HMRC’s perspective of legislative and administrative initiatives (such as The Code of Practice on Taxation for Banks and the Diverted Profits Tax) which seek to nudge persons away from placing themselves in the penumbra. Though these too are beset by the limits as language, as Prof Judith Freedman pointed out to me on Twitter, it might be said that the limits work in HMRC’s favour.

[1] (as opposed to avoidance using loopholes in the international tax system (p. 6))

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