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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Article in the British Tax Review

Consider the following example. A taxpayer has an assessment issued against her by HMRC. Her argument is that the tax is not due under the relevant taxing provision, or in the alternative that she is entitled to rely upon Extra-Statutory Concession (ESC) A19 which provides that HMRC will “give up” tax due where the body has failed to make timely use of information supplied by the taxpayer.In such a case, the taxpayer will have to institute two separate proceedings. In one, she will appeal against the assessment to the First-tier Tribunal. In the second, she will institute judicial review proceedings in the Administrative Court claiming a legitimate expectation that she was entitled to rely upon ESC A19 (or that HMRC’s decision not to apply the concession was irrational). This situation is entirely unsatisfactory. The result in either of the proceedings may render the other redundant, with the effect being a waste of the time and money of all concerned. In such a case, why should the expertly constituted First-tier Tax Tribunal not have the capacity to resolve both disputes?

In an article just published in the British Tax Review, which is available on westlaw and which can be downloaded from SSRN (available here), I seek to demonstrate that the underlying restriction is unjustified. Further, there are considerable practical benefits to extending the ambit of the First-tier Tribunal’s jurisdiction. The article will propose that taxpayers should be allowed to bring public law issues before the First-tier Tribunal where there is additionally a substantive dispute. The Tribunal is the best placed forum for resolving such cases.

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The LDF, legitimate expectations and conspicuous unfairness

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.

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When public authorities make mistakes

A recurring issue that this blog has sought to explore is the problem of public authorities making mistakes. This blog for instance has spent some time considering the case of Hely-Hutchinson, wherein the Court of Appeal placed reliance upon the fact that public authorities like HMRC are entitled to renege on earlier commitments where this is necessary to correct a mistake. A different result however, albeit on different facts and in different circumstances, arose in the case of R (Gallaher) v Competition and Markets Authority. This case concerned an agreement to settle a dispute. 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 is being litigated at the moment in the Gallaher case. Gallaher (and another company Co-op, but this post for the purposes of simplicity will refer only to Gallaher) lobbied the public authority to get the same treatment as TMR, but this was refused. Gallaher 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 is to be heard by the Supreme Court in March (though the case name used there erroneously is “Gallagher”).

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 Gallaher had been treated unfairly and unequally as compared with TMR in 2008 and that the refusal to make payment to Gallaher in 2012 required objective justification. But the distinction in treatment was indeed justified – not because of principles of finality and legal certainty, but because the initial assurance was itself a mistake. Thus, it was not wrong for the public authority to seek to remedy or contain this mistake: “a mistake should not be replicated where public funds are concerned” (this quotation was taken from the case of Customs and Excise v Natwest [2003] EWHC 1822 which the Court placed some reliance upon).

The Court of Appeal too found that the parties were in materially similar circumstances but was not convinced that there was an objective justification which was sufficient. The Master of the Rolls gave the only speech and reaffirmed the notion that this issue was grounded in fairness and that a mistake alone would not be sufficient to justify differing treatment. The matter must be considered against all of the circumstances of the case and thus offering differing treatment because a mistake had arisen would not be sufficient if in the circumstances the result would be so unfair as to amount to an abuse of power (see para 54 in particular). In the circumstances, the only real reason for the distinction in treatment was that TMR just so happened to ask for an assurance whilst Gallaher did not and there should not, according to the Court, be a distinction in treatment following from that fact alone.

The Court of Appeal also rejected the reasoning of the Administrative Court that public authorities should be entitled to offer differing treatment where a mistake has arisen in so far as the Administrative Court’s reasoning was based upon an earlier case of Customs and Excise v Natwest Bank. There Customs and Excise had made an error in repaying overpaid tax to some taxpayers but failing to take into account any reduction in the amount due on the basis of unjust enrichment – the idea being that some of the overpaid taxes, in this case VAT, were actually passed on to customers (by way of higher prices) and so the financial burden of the overpaid tax did not squarely fall upon the taxpayer. In this sense, the taxpayer should not be repaid the full amount of overpaid tax, as the taxpayer would then be unjustly enriched. One taxpayer received a reduced amount of overpaid tax on this basis and was disgruntled about not receiving the more benevolent treatment that others had received. The taxpayer was unsuccessful because Customs and Excise were entitled to apply dissimilar treatment in order to rectify the initial mistake(s).

The Master of the Rolls for three reasons distinguished the present case from Natwest. First, the taxpayer in that case had no strong right to expect equal treatment – in Gallaher the public authority expressly committed itself to affording equal treatment to a defined category of parties and this was set out too in a more general internal policy; second, there was no large administrative system in Gallaher as was at issue in the case of Natwest and so the effects would be limited and finally, there was no complex legal issue comparable to that in Natwest facing the public authority in Gallaher.

A better reason can be given however for distinguishing the cases. The mistake in Natwest that the public authority sought to rectify was of a different order to the mistake in Gallaher that the Office for Fair Trading sought to rectify. Whilst the underlying reason for the disparity of treatment in Natwest was administrative inconsistency – there was no coherent, consistent process or policy for dealing with these claims across the different offices of Customs and Excise – the actual “mistake” which Customs and Excise sought to rectify was substantive in that as a matter of law some taxpayers were receiving money to which they were not entitled: “Just because a tax gatherer makes a blunder which favours some taxpayers by way of a windfall does not mean that he should perpetuate the blunder in favour of others”. (Tangentially, in Hely-Hutchinson it was a mistake of this order too that HMRC claimed needed to be rectified).

In Gallaher on the other hand, the public authority’s “mistake” was not substantive, but simply administrative. As a matter of substantive law, Gallaher in this case had settled amounts that were not due. By effluxion of time, Gallaher’s claim to overturn the incorrect settlement was barred (the time within which an appeal against the initial decision could have been brought had passed). The public authority’s “mistake” related to allowing another party (TMR) the benefit of the substantive law. It was in this sense administrative in that the authority did not need to give the assurance in the first place. As the mistakes in these cases are of a different order, then the policy reasons justifying their rescission will likewise be different. Recourse to the reason of “public funds” means different things across the different mistakes – in the case of overpaid tax, it would be wrong to pay out monies from the public purse which are not owed as a matter of substantive law. In the case of an internal administrative mistake, the policy justification is less strong in that public authorities regularly have to pay out for maladministration – that for instance is why we have the Ombudsman!

The Supreme Court hearing in March will hopefully set out some guiding principles as to when it is appropriate for public authorities to renege on earlier commitments, or refuse to roll out commitments to other affected parties, where a mistake has been made. The resulting decision of the Supreme Court will be relevant too to the case of Hely-Hutchinson, where the taxpayer has sought permission to appeal to the Supreme Court, and more generally to HMRC.

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HMRC’s right to get it wrong

This blog and some published work which has emanated from it has focused upon what happens when HMRC gets it wrong – when the authority advises a taxpayer, but that advice turns out to be wrong for instance whether the advice is in the form of general guidance or in a more bespoke ruling issued directly to the taxpayer. In this blog, I will go one step further back to investigate and provide a theory behind HMRC’s power to get it wrong when it comes to collecting taxes.[1]

The starting point is that taxpayers have an obligation to comply with the tax code, just as citizens have an obligation to comply with the law generally: a citizen should not break the speed limit on a particular road for instance and a taxpayer should not fail to pay taxes that are due under the law. Compliance with the law is the responsibility of the person to whom the law is directed. Managing compliance with the law, on the other hand, will be the responsibility of the State, which in turn will be delegated to different public bodies and officials. Managing law and order is the responsibility of the police, local planning authorities manage planning, and managing compliance with the tax code is the responsibility of HMRC. Where there is a failure to comply with the law, the failure falls prima facie on the citizen (though enforcement in respect of that failure may not occur in the case where the public authority itself has led the citizen into non-compliance). The essential point is that there is a distinction between the responsibility for compliance (being on the taxpayer) and the responsibility for managing compliance (being on HMRC).

That distinction is what ultimately allows HMRC to sometimes “get it wrong”. To explain this, it is necessary to visit the Commissioners for Revenue and Customs Act 2005 which sets out HMRC’s primary responsibilities. Section 5 of the Act provides that HMRC is “responsible for the collection and management” of taxes. How that phrase should be interpreted is a matter of public law. A strict interpretation would lead to an absurdity – namely that HMRC would be regularly and involuntarily acting beyond its powers by failing to ensure that every single penny of tax due is paid (which in practice too is impossible to perfectly quantify). A different interpretation which looks to the purpose of the Act then should be adopted and for that reason the highest court in the UK has very occasionally explained what the purpose of the provision is: it is to allow HMRC to decide upon 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” (IRC v National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617, 637 (Lord Diplock)). It seems utilitarian – obtaining the most amount of tax from the most amount of taxing provisions. The courts then should defer to decisions that HMRC makes in respect of the collection of tax – if HMRC decides that it is appropriate to offer advice to taxpayers whether in a generalised form or in a bespoke manner, that is a decision that the Court will generally respect as it helps in the efficient collection of tax (see for instance R (Davies) v HMRC; R (Gaines-Cooper) v HMRC [2010] EWCA Civ 83, (2010) STC 860 (Moses J) at para 12).

But that respect that the courts will give to HMRC decisions is not without limits. HMRC must not use the “collection and management of tax” for an improper purpose. HMRC should take into account relevant considerations, and disregard irrelevant considerations either for instance. Also, HMRC must not act in a way that is unreasonable in the Wednesbury sense. Thus, where HMRC, under the guise of collecting taxes, does something so outrageously stupid or unfair, then the body will be held to have acted beyond its powers (see R v Inland Revenue Commissioners, ex parte Unilever plc [1996] STC 681).

The result is that HMRC may provide advice to taxpayers as this assists in the collection of tax and the courts will generally respect that decision to do so, but the courts will intervene to find that HMRC has not acted in accordance with its responsibilities where it gets the advice “catastrophically wrong” as in the case of Al-Fayed v IRC [2004] ScotCS 112, [2004] STC 1703. There, HMRC had an agreement with several taxpayers that it would not investigate their tax affairs provided that they paid a lump sum in “tax” each year. That advice and agreement was “ultra vires”: it was the antithesis of the collection and management of taxes as it sanctioned future non-compliance with the law. Similarly, HMRC may not get the law so wrong as to provide a concession to a taxpayer which Parliament clearly did not grant (R (Wilkinson) v IRC [2005] UKHL 30, [2006] STC 270 [20] (Lord Hoffmann)). Where HMRC gets the law wrong in its advice and is advised of the error, then HMRC too will have a responsibility to correct this (see: HMRC v Hely-Hutchinson [2017] EWCA Civ 1075, [2017] WLR(D) 517).

But between those two points – where HMRC provides advice to taxpayers and it is not unreasonably incorrect and no other public law constraint applies – then HMRC will be said to be acting within its powers. That its advice to taxpayers is incorrect does not mean that the body has acted in breach of its responsibility to collect and manage tax. The taxpayer who followed the advice may have failed to comply with the law, but HMRC has not failed in its responsibility to manage compliance. Within certain limits then, HMRC has the right to get it wrong.

[1] The issues that arise in respect of HMRC’s other responsibilities such as administering tax credits will not be dealt with here

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EU FairTax working paper on tax competences

A new peer-reviewed working paper from Dr Ulrike Spangenberg (Umea University), Prof Ann Mumford (King’s College London) and myself has just been uploaded here. The abstract for the piece reads as follows:

“This paper analyses existing tax competences in EU law, in the light of European and international obligations, and their evolution since the initial founding of the European Economic Community. It approaches this task not just from the perspective of competences, but examines values, objectives, obligations and actual governance capacities underpinning the implementation and realisation of these aims and duties in the field of taxation. The analysis is linked to discourses addressing sustainability gaps within EU taxation law and policy, in particular: a prevailing focus on economic growth; a lack of EU-level environmental taxation; an absence of tax measures that tackle, much less consider inequalities in income and wealth; and, persisting socio-economic inequalities between men and women.

The concept of sustainable development features prominently in the objectives of the European Union and is closely linked to the function of the internal market. The implications of sustainability for legal obligations, however, remain unclear, and particularly so in the context of taxation. This paper provides an outline of the current legal framework for positive and negative integration of taxation, and considers the evolution of values, objectives and obligations in European and International law with a particular focus on the legal concept of sustainable development. From this basis, it examines legislative capacities to address the economic, ecological and social dimensions of sustainable development in the area of taxation and offers preliminary options for the amendment of hard and soft law mechanisms, so as fully to support European values and objectives in the field of taxation.”

The lengthy piece was written as a report for the EU Commission as part of the FairTax project. The FairTax consortium consists of 11 partner universities from 9 countries which is undertaking to complete a series of Work Packages for the European Commission, the ultimate goal of which is to produce recommendations on how fair and sustainable taxation and social policy reforms can increase the economic stability of EU member states.

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HMRC as tax advisor

A college lecturer at the University of Oxford tutors students in a particular course, helping them on their voyage towards the exam (in addition to helping them pick up additional skills also). However, the college lecturer will generally not set the final exam nor mark the final scripts. Very few students will have been taught in a tutorial capacity by either the setters or markers. It could be said then that one of the roles of the college lecturer is to act as exam advisor. The ultimate responsibility for performing well in the exam lies with the student. The student will have legitimate grounds to complain if the advisor is not very good either because the teaching is not particularly clear or that some items ought to be taught which are not or that the student is taught something that in fact is incorrect. But these complaints will not result in a change to the exam mark that the student will eventually obtain. If these complaints were sufficiently serious, it would seem correct that the student should be put in a position the student would have been in but for the poor teaching (though of course, putting that principle into practice is marred by myriad interesting problems which would be the discussion for another day). Fairness would dictate too that a structure of accountability should be in place which could prevent, track and deal with such problems in the teaching. To this end, there are three broad things the student should expect in terms of the “exam advisor” – that the substance of advice or teaching should be of a sufficient standard (“substance”), that there are means for redress where there are failings (“remedies”) and that a structure of accountability exists (“accountability”).

The role of the college lecturer as exam advisor is similar to the role of HMRC when it performs the task of collecting and managing taxes and credits, or essentially managing compliance with the rules. It has not set the rules and is not the ultimate judge of whether the taxpayer has fully complied with the rules. The ultimate responsibility for complying with the rules rests with the taxpayer. HMRC could refuse to engage with taxpayers and let them navigate their way through the tax code, retrospectively challenging the taxpayer on any failings. But HMRC has long recognised that a better way of carrying out its task of managing compliance with the rules is to proactively engage with taxpayers. Taxpayers may approach HMRC individually to obtain advice on whether proposed transactions are in compliance with the rules (i.e. tax rulings). If enough taxpayers approach HMRC, it might think it wise to publish this advice in a generalised form (i.e. HMRC guidance). It may similarly produce guidance even without being approached if it believes that a sufficient number of taxpayers will likely struggle to properly understand the underlying rules and their application.

Just like the college lecturer then, HMRC acts as an advisor. And just like the college lecturer, the same principal issues in respect of substance, remedies and accountability arise. What if the advice is unclear, incorrect or not published? What remedies are in place where HMRC has been a poor advisor? Who holds HMRC to account when it acts as an advisor?

Some of these issues and their potential solutions I have written about here and elsewhere. The point of this blog is simply to bring these issues together under a single framework and to recognise the important role that HMRC plays as tax advisor.

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