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.


About taxatlincolnox

Tax law academic. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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