The Margin of Appreciation in Tax Law

In a recent article for the British Tax Review (see here for Peacock, ‘The “Margin of Appreciation” Afforded in the Tax Tribunals: is there any Limit to Judicial Deference?’ (2017) BTR 404), Jonathan Peacock QC explores recent caselaw where taxpayers have sought to challenge actions by HMRC where a “margin of appreciation” is present. In other words, those cases where the challenge directed itself towards policy choices made by the government or Parliament. In his article he concludes that:

“challenges to primary legislation are almost certain to fail; challenges to operational decisions made by HMRC might succeed…[and importantly] the taxpayer needs to point to some other cardinal principle offended by the actions of HMRC which the courts can balance against the incredible weight on the other side of the balance”

Peacock is absolutely correct. Challenges to policy choices by government or Parliament face an almost insurmountable hurdle in the tax arena, where it is orthodox for the courts to respect those choices (an interesting exercise would be to compare this to for instance challenges to immigration policy choices). This deference is entirely understandable and there are good reasons to support it – there are difficult policy choices which need to be made in respect of tax for which our politicians are ultimately accountable and these are made with the benefit of the best available evidence. Judges simply are not institutionally competent to lightly second guess in such instances. At the same time, one does query the degree to which there is genuine scrutiny of legislation as it passes through the House of Commons and or serious deliberation over the way in which policy choices are formulated in legislation – the recent case of Vrang should give pause for thought on whether the implications of policy choices are fully appreciated by those responsible for their promulgation.

Peacock is right too to point out that taxpayer challenges will be more successful if they point to some particular choice made by HMRC in the operation of the particular legislation, rather than being directed to the legislation itself. This is something that I have raised here on this blog in the context of the current lot of challenges to Accelerated Payment Notices (see here and the links therein). Taxpayers should try to argue for instance that, even though the express statutory conditions attached to the discretionary power to issue an APN may have been satisfied in the case, there may be some other implied condition which has not (see here), or that HMRC failed to take into account a relevant consideration (or took into account an irrelevant consideration) when exercising the power (see here), or that the exercise of the power in the circumstances breached some important constitutional principle, such as access to justice (see here). Even then, taxpayers must still overcome the hurdle that courts in practice will in turn give a “margin of appreciation” (in Peacock’s words) to actions taken by HMRC pursuant to its discretionary powers (see here).

The article is a thoroughly enjoyable read and to be recommended both for its substance and also because it displays Peacock’s unrivalled ability to distill complex issues into simple, discrete points.

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The latest twist in the Mansworth v Jelley tale

Late on Wednesday afternoon, the Court of Appeal handed down judgment in the case of R (Hely-Hutchinson) v HMRC [2017] EWCA Civ 1075. It is the latest twist in the long running saga concerning what has come to be known as ‘Mansworth v Jelley losses’ (and has been the subject of this blog here, here and here, in addition to being the subject of a case note by the author in the British Tax Review (downloadable here)).


The Mansworth v Jelley (2003) case concerned an assessment to CGT. The taxpayer in this case was granted options to purchase shares in JP Morgan at the market price of those shares. He duly exercised the options and thereafter, promptly sold the shares. The issue in dispute, between the taxpayer and HMRC, was whether the chargeable gain or loss ought to be calculated by reference to the proceeds from the sale of the shares, (a) minus the market value of the options when originally granted (which was nil) or (b) minus the market value of the options when exercised. The Court of Appeal ultimately held in favour of the latter construction, in other words, in favour of the taxpayer.

Following the case, the Inland Revenue issued guidance on the matter in 2003 to the effect that the chargeable gain or loss in such circumstances should be calculated on the disposal of shares acquired by such options by deducting both: the market value of the shares at the time the option was exercised; [and (controversially)] any amount chargeable to income tax on the exercise of that option

In 2009, Dave Hartnett and HMRC acknowledged this to be incorrect. The guidance was revised to provide that all that would be deductible would be the market price of the shares and not, additionally, the income tax that would be paid. As regards closed cases in which the earlier guidance was relied upon, HMRC’s position was that the revised 2009 guidance could not be applied and thus that the position created by the 2003 guidance would not be revisited.

What about open cases (in order words, instances where there is an open enquiry)? Would those persons get the same treatment?

R (Hely-Hutchinson) v HMRC

That is precisely the issue which arose for Ralph Hely-Hutchinson in the R (Hely-Hutchinson) v HMRC case. The taxpayer relied upon the 2003 guidance, but the case was not closed by 2009 (owing to a dispute between HMRC and the applicant’s employer about the tax treatment of the scheme used to distribute the shares to him). Accordingly, the taxpayer was refused the 2003 guidance treatment, and subjected to the harsher (albeit correct) 2009 guidance. Whipple J in the High Court found that this breached the taxpayer’s legitimate expectation that he would obtain the treatment specified in the 2003 guidance.

Court of Appeal judgment

The Court of Appeal opened its consideration of the factual matrix by first setting out the general principles which apply in cases of legitimate expectation, and in particular where the expectation arises from HMRC and its guidance. Precedence holds that HMRC is a public body invested with the power to collect tax and in doing so may provide guidance to assist the collection of tax. However, the duty to collect tax must be balanced with the duty of fairness owed to taxpayers. This duty is itself imbued with the considerations that a) not all taxpayers must be charged with tax which is strictly owed due to interests of good management and b) the public body must retain the ability to correct past mistakes, even if this results in inconsistent treatment. When balancing the duty of fairness against the duty to collect tax, the taxpayer needs to demonstrate conspicuous unfairness in order for a claim that tax ought not to be paid to succeed. Thus, it needed to be demonstrated in this case that there was unfairness which mounted to an abuse of power by reason of HMRC resiling from its previously published position.

However, as stressed in a previous blog, this was not an orthodox case concerning legitimate expectations where a citizen is given an assurance directly by a public authority and changes her position in reliance upon that assurance. Rather it was a case concerning consistency. The taxpayer thus was ultimately arguing that he did not receive the same treatment as similarly placed taxpayers. Before the court, this argument was split into two sub-arguments (although the author’s opinion is that they collapse into one). The first was that HMRC’s action produced comparative unfairness. The second was that, even if it was not comparatively unfair, it was nevertheless conspicuously unfair thus amounting to an abuse of power.

In respect of the first argument, the court responded that HMRC are entitled to change policy where the body has realised that a mistake was made. This amounts to a ‘good reason’ to depart from previous policy. Further, the Court found that in terms of consistency, HMRC were required to compare taxpayers at the time of assessment, not the time that the guidance was produced. In other words, the treatment of the taxpayer in the case should be compared with the treatment offered to other taxpayers whose cases were ‘open’, not those whose cases were ‘closed’. In this way, there was no inconsistency. The taxpayer was treated similarly to other taxpayers in materially similar circumstances. Thus, the Court found that there was not comparative unfairness in resiling from the previously published position.

The second argument was dealt a killer blow by the failure to land on the first. The fact that there was no comparative unfairness in turn meant that in the circumstances, it could not be said that there was conspicuous unfairness. The taxpayer’s second argument also introduced the idea that conspicuous unfairness could arise by virtue of breach of the taxpayer’s human rights. The taxpayer’s arguments on the basis of discrimination under Article 14 ECHR however and the right to enjoyment of private property under A1P1 ECHR were dismissed in short shrift on the basis that such rights were not established in the case.

The taxpayer deployed a further third argument which sought to set aside HMRC’s decision not to apply the 2003 guidance to the taxpayer on the basis that it was unlawful having regard to the considerations taken into account when HMRC made the relevant decision. The Court was being asked to set aside the decision itself, thus requiring conspicuous unfairness to be demonstrated. The taxpayer argued that

  • HMRC took an overly narrow view of the concept of detrimental reliance, ignoring the fact that respondent’s expectation that the 2003 guidance would be applied to him was reinforced by the passage of time. HMRC’s policy today in respect of Mansworth v Jelley losses is that the 2003 treatment will be applied where the taxpayer can demonstrate inter alia detrimental reliance.
  • HMRC failed to take account of the fact that the enquiry remained ‘open’ for reasons not personal to the taxpayer, but to his former employer.
  • HMRC did not take into account the fact that the 2003 guidance was thought to be correct when the taxpayer made his Mansworth v Jelley loss claims.
  • HMRC did not take into account the delay of 11 years from the opening of the enquiry to refusal of the taxpayer’s claim.

The Court found that there was no unlawful decision. The taxpayer was returned to the position he was in when he exercised his options. He was warned since 2003 that HMRC did not accept his claims. His enquiry was ‘open’ and not ‘closed’ and thus the fact that there was different treatment applied to the different categories was immaterial. And the relevant HMRC officer did consider the detriment, a powerful factor, to the taxpayer when arriving at the decision. The taxpayer’s detriment was caused by financial difficulty, not reliance upon the 2003 guidance.

The taxpayer’s fourth and final argument, that the High Court should not have remitted the decision to HMRC but should have substituted its own judgment instead, was academic in the context but nevertheless rejected by the Court.


There is much that can be said about this case, and will be explored elsewhere in more detail. Some matters however stand out for comment. First, the Court’s finding appears to apply the orthodox understanding of the relevant public law principles. The decision to withdraw the previous guidance is one which falls squarely within HMRC’s managerial discretion to which courts will generally give significant leeway. To this end, the taxpayer was in the unenviable position of having to overcome the significant ‘conspicuous unfairness’ threshold. That is not to say that one cannot find sympathy with the taxpayer – the length of the dispute and its consequences are particularly unfortunate. Secondly, the case raises much broader questions about the limitations of the legitimate expectations doctrine. One aspect in particular relates to HMRC publications. The doctrine is the best legal protection for taxpayers who seek to rely upon assurances produced by HMRC. However even in this case (where the guidance was clear as day and had been in place for many years), HMRC was found to be entitled to resile from the previously published assurance. Taxpayers will now legitimately ask what is the utility of an HMRC publication, if at some unspecified time in the future the body can simply reverse its position? Thirdly and following from this point, the Court provided little guidance on when HMRC will be entitled to do so. The Court’s approach was that HMRC was entitled to reverse its position in order to correct a mistake. Must the Court be satisfied that a mistake was in fact made (something which the Court does not seem to have interrogated)? What about the case where it is highly unclear that HMRC has made a mistake of law in its publication? How grave must the mistake have been? Further, what counts as a mistake – does internal legal advice pointing out a possible mistake suffice? What about if a tribunal or other judge finds against an HMRC interpretation? One reading of this omission on the Court’s part would be that the error on HMRC’s part was particularly obvious such that it would go without saying that HMRC was entitled in such an obvious case to reverse its position (h/t @AislingTax). Indeed, the tax press in 2003 expressed amazement at HMRC’s mistake (see para 12 of the High Court judgment). But if this formed part of the Court’s reasoning, then it ought to have formed part of the judgment. Moreover, the Court at the beginning of the judgment wrote that “We are not concerned with the correctness of HMRC’s view”.

These issues may be given a further hearing in the Supreme Court if the taxpayer decides to appeal, something which this blog will keep an eye on. A final comment should be made about the taxpayer’s legal representation. It is clear from reading the judgment that the taxpayer has had unfortunate financial difficulties in the past decade, and it is to their credit that Rory Mullan and Harriet Brown of Old Square Tax Chambers represented him pro bono.

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The language of tax avoidance cases

The opening line of single Supreme Court judgment in UBS v HMRC [2016] UKSC 13 from Lord Reed reads as follows:

“In our society, a great deal of intellectual effort is devoted to tax avoidance. The most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax”

With an opening line like that, it is unsurprising to learn that the taxpayer went on to lose the case. This is certainly not the first time that the opening remarks from judges in tax avoidance cases signal how those judges will find in the end. In the recent Rangers case (in Rangers v Advocate General for Scotland [2017] UKSC 45), Lord Hodge’s opening line was far subtler:

“This appeal concerns a tax avoidance scheme by which employers paid remuneration to their employees through an employees’ remuneration trust in the hope that the scheme would avoid liability to income tax and Class 1 national insurance”

By conceptualising the appeal in this way however, David Goldberg QC and Nigel Doran have pointed out that this effectively determined the result, in this case, a taxpayer loss.

More subtle again, and perhaps I am reading too much into this, is the opening line from the single judgment in Pendragon from Lord Sumption (HMRC v Pendragon [2015] UKSC 37):

“This appeal is about an elaborate scheme designed and marketed by KPMG relating to demonstrator cars used by retail distributors for test drives and other internal purposes. In the ordinary course, a car distributor will buy new cars for use as demonstrators, paying VAT on the full amount of the sale price. This will in due course be recoverable as input tax by being set off against the output tax for which the distributor was accountable on its taxable supplies. The object of the KPMG scheme was to ensure that companies in the distributor’s group were able to recover input tax paid on the price of new cars acquired as demonstrators from manufacturers, while avoiding the payment of output tax on the price at which the car was ultimately sold second-hand to a consumer.”

Note can be taken of the use of language such as “elaborate scheme”, the fact that it is “marketed” and the use of the word “avoiding”.

The single judgment from Lord Walker in Futter and Pitt (Futter and Pitt v HMRC [2013] UKSC 26) (although note that there was a part taxpayer victory in this case) and his lead judgment in Tower M’Cashback (HMRC v Tower M’Cashback [2011] UKSC 19) more clearly evince the judge’s disdain for avoidance schemes. However, Lord Walker’s style was not to open with such lines, but rather to plant them towards or in the conclusion. In Futter and Pitt, he wrote as follows:

“[S]ome cases of artificial tax avoidance the court might think it right to refuse relief, either on the ground that such claimants, acting on supposedly expert advice, must be taken to have accepted the risk that the scheme would prove ineffective, or on the ground that discretionary relief should be refused on grounds of public policy. Since the seminal decision of the House of Lords in WT Ramsay Ltd v IRC [1982] AC 300 there has been an increasingly strong and general recognition that artificial tax avoidance is a social evil which puts an unfair burden on the shoulders of those who do not adopt such measures.”

The final paragraph of Tower M’Cashback reads as follows:

“If a majority of the Court agrees with my conclusion, it is to be expected that commentators will complain that this Court has abandoned the clarity of BMBF and returned to the uncertainty of Ensign. I would disagree. Both are decisions of the House of Lords and both are good law. The composite transactions in this case, like that in Ensign (and unlike that in BMBF) did not, on a realistic appraisal of the facts, meet the test laid down by the CAA, which requires real expenditure for the real purpose of acquiring plant for use in a trade. Any uncertainty that there may be will arise from the unremitting ingenuity of tax consultants and investment bankers determined to test the limits of the capital allowances legislation.”

There might well be a thesis behind the extracts, but it should not be overstated. These are just four examples of statements from Supreme Court judges in tax avoidance cases. When the words “tax avoidance” are searched in the BAILII database of Supreme Court judgments (i.e. judgments arising from the UK’s highest court since 2009), seventeen cases are found. Thus, whilst some might argue that the current Supreme Court wind blows in favour of the Revenue in avoidance cases, the idea that this is evidenced by language used in those cases is not sustainable on the evidence produced here.

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Yet another case concerning APNs

Accelerated Payment Notices (‘APNs‘) have been frequently visited as a topic on this blog (see here, here, here, and here). To recap, APNs require taxpayers to pay disputed tax upfront before proceeding with an appeal (provided that certain conditions are satisfied). APNs may be issued, pursuant to section 219 of Finance Act 2014 where the following conditions are satisfied:

  1. Either an enquiry or appeal are in progress;
  2. A tax advantage accrues from the particular arrangements; and
  3. A follower notice has been issued; the arrangements are DOTAS notifiable (FA 2004, s. 311); or a GAAR counteraction notice has been issued (FA 2013, Sch. 43, para 12).

Several cases where the claimants sought to challenge the issuance of the APNs have already failed before the Administrative Court (see here, here and here for instance), with the Court of Appeal due to begin hearing one of those cases (Rowe v HMRC) on the 18th of July.

In the most recent case Dickinson, an element which differentiated it from the other APN challenges was that HMRC had previously agreed (by virtue of a postponement agreement) not to seek the tax purported to be due until after the outcome of the appeal. This agreement took place before the APN legislation was introduced. The problem however for the claimants in Dickinson was that section 214 of Finance Act 2014 specifically envisages a situation where a postponement agreement is already in place and allows nevertheless HMRC to issue an APN. The court’s task accordingly was to resolve whether “it was an abuse of power for the Revenue to resile from its express promise not to enforce the payment of the tax it had assessed and which had become due pending the resolution of the disputes relating to the validity of its assessments?”

In a strange concession, the Revenue accepted that it gave “no consideration” to the original postponement agreement when deciding to exercise the power to issue APNs in this case –  a concession which the judge found “surprising”.

The claimants’ argument in the case was that HMRC had abused its power by issuing the APN, taking into account all the circumstances of the case (such as the fact that it was not a complicated DOTAS arrangement, initial positive reception by the Revenue about the schemes effectiveness, and long delays in the processes and investigations of the Revenue). The Revenue’s response effectively revolved around “macro-political” issues of policy, in other words that the claimants were ultimately seeking to challenge a political choice made by Parliament when it expressly provided the body with the power to issue APNs in such circumstances.

When assessing whether there has been an abuse of power, the court set out the factors that should be taken into account:

  • categories of case or situations are not hermetically sealed but are of assistance as a matter of analysis of the competing factors and so in reaching the result,
  • all the competing factors have to be assessed and weighed in the round to assess and identify the proportionate balance between the rival contentions,
  • the competing factors engage private and public interests,
  • the clarity of the promise and the circumstances in which it is made are relevant. They can be weighty, and require the public authority to provide compelling reasons to depart from it,
  • “macro-political” issues of policy are relevant. They can be weighty and present a steep climb for a person to whom the relevant promise has been made,
  • once the promise is proved the onus shifts to the authority to justify the departure from the legitimate expectation it creates (and see Paponette v A-G of Trinidad and Tobago [2010] UKPC 32 at paragraph 37,
  • if a claimant wishes to reinforce his position by relying on detriment he must prove it. The existence of detriment is not a necessary ingredient, but is often present when a claimant succeeds (and see R (Bancoult) v Foreign Secretary (No 2) [2009] 1 AC 453 at paragraphs 73 and 179),
  • where a public authority is considering whether to act inconsistently with a promise that has given rise to a legitimate expectation good administration and elementary fairness demands that it takes its promise into account (see Lord Mustill in Doody and Paponette at paragraph 46),
  • in assessing the scales of fairness and so whether the breach of a promise is so unfair as to amount to an abuse of power the court asks itself whether the breach of the promise is conspicuously unfair to the persons to whom it was made, and
  • that focus on the relevant individuals is an important aspect of the necessary balance between private expectations and policy objectives.

The court rejected in part HMRC’s argument. The fact that there is a macro political issue at stake does not trump all other considerations. Thus, that there might be express provision for the Revenue to issue APNs when the statutory conditions are satisfied does not mean that there are no further restrictions upon the use of the power (such as for instance public law or the need to align with the underlying purpose of the legislation, or indeed the fact itself that there had been a postponement agreement). However, the court accepted that Parliament had expressly and deliberately “changed the goal posts” with respect to where the disputed tax should lie pending an appeal. On that basis, ultimately, the court found that the Revenue was using the power to issue an APN for the purposes provided by Parliament and thus the power was not abused.

The case highlights that although Parliament has endowed HMRC with a power to issue APNs provided that certain conditions set out in legislation have been satisfied, there are also other implied considerations which must be taken into account when exercising the power. This too was found in the case of Vital Nut, wherein Charles J in the High Court found that a necessary implied condition was that the relevant HMRC officer regarded the underlying tax scheme as ineffective.

Something slightly confusing about the case is however that the court seemed to suggest that HMRC had failed to take into account a relevant consideration when exercising the discretionary power, namely the postponement agreement. This of course is a ground for judicial review and should amount to a success for the claimant (provided that, had the consideration been considered mandatory and been taken into account, the same decision would not have inevitably been arrived at). But it does not appear that this point was argued in the case. Nor does it seem that this point was argued in the recent Vrang case, concerning a taxpayer who suffered at the hands of the 2011 Swiss/UK Tax Cooperation Agreement. A possible argument there could have been made that a relevant consideration when deciding to exercise discretion to repay monies was whether there was any tax initially due. In the case itself it seems that the taxpayer in fact owed little if any tax. It is canonical nevertheless that a public authority must not fail to take into account mandatory relevant considerations (and should not take into account irrelevant considerations) when exercising a discretionary power.

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Legal philosophy and a “voluntary” obligation to pay taxes

Legal philosophers (and philosophers more generally) have a beautiful way of cutting through the noise and expressing in the simplest language that which takes us mere mortals thousands of words to explain. This clarity presents itself of course whenever these people stumble upon tax. Take for instance this one paragraph from Tony Honoré in which he explains that whilst a moral obligation to pay taxes might arise, it is law which provides its substance:

“The need for determinants of morality is particularly clear as regards obligations owed by members of a community to their community. Taxation affords a good example. According to most people’s moral outlook members of a community should make a contribution to the expense of meeting collective needs. A morality which denied this would hardly count as co-operative. In a monetary economy the contribution has to be mainly in money, and takes the form of paying taxes. So members of a community have in principle a moral obligation to pay taxes. But this obligation is incomplete or, if one prefers, inchoate, apart from law. It has no real content until the amount or rate of tax is fixed by an institutional decision, by law. What amounts to a reasonable contribution is not otherwise determinable, since what is required is a co-ordinated scheme which can be defended as fair not merely in the aggregate amount it raises but in its distribution. Taxpayers cannot settle it for themselves, as people can within limits settle for themselves, say, the proper way of showing respect for the feelings of others. Apart from law no one has a moral obligation to pay any particular amount of tax. An obligation to pay an indeterminate sum is not an effective obligation; it requires only a disposition, not an action. So, apart from law no one has an effective obligation to pay tax. If there were a society in which morality was taken as a sufficient guide to conduct apart from law it would therefore not be viable. It would grind to a halt and disintegrate for lack of resources. For this crucial moral and political obligation, vital to the life of a complex community, morality depends on law in the sense that to create an effective obligation it must have recourse to law” (Tony Honoré, ‘The Dependence of Morality On Law’ (1993) 13 OJLS 1)

Tony Honoré would be little surprised then that when provided with a voluntary opportunity to pay more taxes, people might choose not to do so. The obligation to pay tax has been discharged. There is no further moral duty owed. This seems to be precisely what has occurred in Norway. In an interesting experiment, the government introduced a scheme whereby taxpayers could voluntarily pay more taxes than due under the law. From June 2016 to July 2017 however, the scheme raised just $1,325 (which is perhaps less than the cost of administering the scheme).

However, the Honoré thesis relates only to the idea of an effective obligation – it does not remove the possibility that people might still feel inclined to contribute more to the common pot than is specified in the law. For this reason, different results may be witnessed elsewhere. The US for instance has had a voluntary scheme in place since 1961 and has raised over $100mil to date. Even accounting for population size, there is still a significant difference in outcomes between the US and Norway.

Raz might use the “normal justification thesis” to help us understand the divergent results. Raz wrote as follows:

“the normal way to establish that a person has authority over another person involves showing that the alleged subject is likely better to comply with reasons which apply to him (other than the alleged authoritative directives) if he accepts the directives of the alleged authority as authoritatively binding and tries to follow them, rather than by trying to follow the reasons which apply to him directly” (Raz, The Morality of Freedom (OUP 1986) 53)

Thus, a prerequisite for authority normally is the presence of independent reasons which apply to the subject. When it comes to tax, people will normally accept as authoritative law which prescribes the need to pay a specific amount as there already is reason to give a fair share of resources for the common good.

This conception of authority based on reasons might give us an insight into the divergent result in Norway and the US. The reason to pay tax – to give a fair share of resources for the common good – might be felt no longer to apply in Norway generally after satisfaction of statutory obligations, whilst in the US there might still remain some residual reason for some people. And indeed, that makes sense when the tax systems are compared (for instance with respect to income taxes: lower in the US than in Norway).

Perhaps these twin theories about obligations and authority should be applied more broadly to debates around tax law and policy. Do they help illuminate issues around tax avoidance and evasion? About the relationship between states and supranational bodies when it comes to tax reform? The setting of tax rates? Or perhaps legal philosophy itself is merited a place more generally in the debates (in a previous blog for instance, I wrote about Hart’s “core” and “penumbra” idea in the context of tax avoidance). The texts cut through the noise, and that is something which is pretty desirable right now…

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Tax Exceptionalism – A UK perspective

In July 2016, I was tasked with responding to a presentation on “Trends in Tax Exceptionalism and Tax Litigation” by Professor Kristin Hickman of the University of Minnesota and Donald Korb of Sullivan and Cromwell. The event was organised jointly by the Journal of Tax Administration and the Centre for Tax Law, University of Cambridge. For those not aware of her work, Professor Hickman has established herself as the foremost academic commentator on matters of administrative law in US taxation, whilst Donald Korb was formerly Chief Counsel for the US Internal Revenue Service.

The forthcoming volume of the Journal of Tax Administration bears fruit from that workshop. Professor Hickman has produced a piece entitled “The growing influence of administrative law and judicial review on US tax administration” which explores recent litigation relating to idea of “tax exceptionalism”, namely the idea that tax deserves special treatment from administrative law. In response to themes from her paper, I make my own contribution with a piece entitled: “Tax exceptionalism: a UK perspective”. The introduction to my piece reads as follows:

“In her article in this issue, Professor Kristin Hickman explores the relationship between the US Treasury and Internal Revenue Service (‘IRS’), and exceptionalism to general administrative law principles, dubbed “tax exceptionalism”. It builds upon work that Hickman has produced in response to the 2011 case of Mayo Foundation for Medical Education and Research v. United States in which the Supreme Court is generally considered to have rejected the idea of tax exceptionalism. Indeed, Hickman’s article deals a decisive blow to the idea of tax exceptionalism by noting that the functions of the IRS are not dissimilar to those of other administrative agencies. Why then “should the IRS avoid general administrative law requirements when other agencies administering substantially similar programs must follow them?” But that does not mean that questions do not remain. Whilst it can be accepted easily that there should be no general exceptionalism, that tells us little about “which administrative practices are susceptible to legal challenge under general administrative law principles?” or whether provisions of the tax code might in fact “justify certain tax-specific departures from general administrative law requirements, doctrines, and norms.”

A similar dichotomy can be said to arise in the UK between on the one hand the idea that there are no special principles of public law which apply to tax law and on the other hand the fact that the application of general principles of law in respect of the tax administration, Her Majesty’s Revenue and Customs (‘HMRC’), will differ from treatment given to other administrative agencies. This article will explore this dichotomy by first exploring briefly the history of the prospect of tax exceptionalism in the UK, and thereafter looking in depth at instances where HMRC may be said in practice to benefit from distinct treatment. The article will further assess situations where greater tolerance was given to HMRC actions than ought to have been afforded.”

Both articles will be available to read on the JOTA website and an early draft of my article can be accessed on SSRN.

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Studies in the History of Tax Law

The Centre for Tax Law at the University of Cambridge hosts a biannual Tax History conference. Papers selected for the conference are reviewed, edited and later published in the collection “Studies in the History of Tax Law” (published by Bloomsbury) which is now on to its 8th Volume. I had the pleasure of presenting my paper “The Life and Times of ESCs: a defence?” at the conference in July 2016 and that will soon be published in the latest collection. The abstract for my chapter reads as follows:

“In 1897, the UK Public Accounts Committee became simultaneously both aware and alarmed at the practice of the then Inland Revenue providing extra-statutory dispensations to taxpayers. Despite criticisms in the interim, it was not until the judgment of Lord Hoffmann in Wilkinson that HMRC began to put the brakes on this practice. Almost 120 years since the Public Accounts Committee’s awakening to the Revenue’s habit and over a decade since Lord Hoffmann’s judgment, it is timely to reflect upon the life and times of ESCs.”

The book should soon be available in all good libraries and can be pre-ordered here. For those who cannot wait for their local library to obtain a copy, an early draft of the paper can be found on SSRN and also on the Tax History Conference 2016 webpage.

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Publication in the Bulletin for International Taxation

I have recently published a short article in the Bulletin for International Taxation entitled “The Relationship between Tax Authorities, Large Multinationals and the Public”, the abstract for which reads as follows:

In this article, the author explores accusations levelled at the revenue authorities of Ireland and the United Kingdom in response to their treatment of multinationals, analyses the statutory scheme underpinning the powers of those revenue authorities and provides a preliminary proposition as to why subsequent developments have been so distinct.

It was something I worked on tangentially to my doctoral work and explored the different reactions to accusations that revenue authorities in Ireland and the UK had gave preferential treatment to multinationals. Whilst in the UK, this caused much opprobrium, the reaction in Ireland has been much more muted. The paper was presented originally at the 2015 IBFD Doctoral Meeting of Researchers in International Taxation. The article can be accessed here, (although it is subscription only), whilst a very early version of the paper can be accessed here. If you’d like a copy of the Bulletin for International Taxation version, please Direct Message me on Twitter.

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Remember that Swiss/UK Tax Cooperation Agreement? Vrang v HMRC [2017] EWHC 1055

I have written previously about the 2011 Swiss/UK Tax Cooperation Agreement (‘the Agreement’), which provided for UK resident taxpayers with bank accounts in Switzerland:

  • to be subject to a one-off payment on 31 May 2013 to clear past unpaid tax liabilities and/or to be subject to a withholding tax on income and gains for the future from 1 January 2013 (between 27% and 48% annually); or
  • to authorise the Swiss bank or paying agent of the taxpayer to provide details of the Swiss assets to HMRC. This option does not provide relief from past or future tax liabilities.

The Swiss Account holders could remain anonymous if the first of the above two routes was chosen.

The claimant in a recent case before the Ouseley J in the Administrative Court (Vrang v HMRC [2017] EWHC 1055 (Admin)) was subjected to the full force of this Agreement. The Swedish claimant worked for Credit Suisse in Switzerland between 1988 and 2005, before moving to London. She amassed an amount of money in several bank accounts in Switzerland during that period which she intended for use when she would return to Sweden. In 2012, the bank warned her about the need to make a voluntary disclosure to HMRC pursuant to the Agreement and the possibility of a one-off lump sum being extracted. True to their word, a lump sum of £58,000 (ca.) was extracted in 2013.

The claimant sought the return of the bulk of the money from HMRC, claiming that something between £1,000 and £7,000 was in fact owed. HMRC refused the request on the basis that she did not qualify for a refund under the express terms of the Agreement (which provides for repayment where the amount was ‘wrongly levied’, Article 15(3) of the Agreement) or under HMRC’s managerial discretion which according to HMRC:

afforded to the Commissioners for HMRC enabled them, in exceptional cases, to offer repayment in cases of “hardship at the margins”, that is in “circumstances where keeping the charge in place would cause significant hardship and result in a situation which a court would view as grossly unfair to the individual paying the charge, as a result of actions entirely beyond that person’s control.

The sum, it was said by HMRC, was not wrongly levied as the extraction from the claimant’s accounts followed the letter of the Agreement, and hardship was not established (the personal hardship that the claimant had suffered at the time was insufficient to reach the threshold).

The judicial review sought to challenge HMRC’s refusal on the following grounds primarily (although other arguments relating to EU law and human rights were raised):

  1. that there is no Parliamentary authority for the levying of the sum, and so it cannot be levied, where there is no tax due in that amount;
  2. if there is legislative authority to that effect, it has been misconstrued in a number of respects by HMRC and
  3. that HMRC has not exercised its powers, notably its discretionary powers, lawfully.

Dealing with the first ground, it is a well-known aphorism that there must be Parliamentary authority for the levying of tax. However, the court held that it the payment was not a tax levied by HMRC, but rather a payment from a cooperating authority under an international agreement.

Dealing with the second ground, the judge noted that the phrase ‘wrongly levied’ in s. 15(3) of the Agreement was ‘clearly confined to an error in the interpretation or application of the Agreement by the paying agent or the Swiss Tax Authority’ and no such error arose in the case.

In relation to the final ground, the judge expressed ‘considerable sympathy’ for the claimant, but that aside, HMRC had formulated lawfully and rationally a policy on refunds whereby it would exercise its discretion in certain, limited circumstances. The claimant simply did not fall within a class of persons in favour of whom HMRC would exercise its discretion.

When previously writing about the Agreement, I had been sceptical about its merits. Here however is a cautionary tale about a person who negligently fell on the wrong side of the Agreement, failing to follow the steps that would have meant she had little tax to pay and in the end being subjected to a considerable extraction from her savings. It was a case of mala prohibita not mala in se. People researching, writing and working in the tax sphere understand only too well the sharp edges of taxing provisions and agreements. Ordinary citizens will not be so well informed and this is a case showing the severe consequences.

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Reflections on the Mansworth v Jelley hearing in the Court of Appeal

The author of this blog has written previously about the fabled ‘Mansworth v Jelley’ losses. It has been the feature of an extended published case note and two blogposts (here and here). The Court of Appeal heard the appeal in the Hely-Hutchinson case, which concerns these Mansworth v Jelley losses, two weeks ago (at which the author was present). It is not clear when judgment will be handed down, but it will likely be another few weeks (given that we are now in the Easter recess). This blogpost seeks to set out some thoughts on the oral hearing of the case.

The case essentially boils down to whether HMRC is permitted to “go back” on its published position. HMRC produced guidance in 2003 which provided that taxpayers who engaged in particular share loss schemes would be able to generate an artificial loss (by deducting both the market price of the shares and chargeable income tax from the proceeds from the sale of the shares). In 2009, the body changed its position such that the income tax element was no longer deductible. The taxpayer, Hely-Hutchinson, fell within the terms of the 2003 guidance when published, and sought to obtain the benefit of that treatment. Unfortunately, his case (for reasons not relevant for the purposes of this post) was still open in 2009 and HMRC sought to apply the new, less benevolent 2009 treatment.

The case has in essence turned on whether the taxpayer had a legitimate expectation to be treated in accordance with the 2003 guidance. The High Court found in favour of the taxpayer. HMRC fought this point quite hard in the Court of Appeal, noting that the taxpayer had been on notice effectively since he first sought to benefit of the 2003 treatment that the Commissioners were challenging his claims (albeit not in relation to the 2003 guidance treatment specifically, but the possibility was still open that they would challenge that too). A further, important point which HMRC stressed in the appeal was that the taxpayer did not rely upon the 2003 guidance when he exercised his share options. The 2003 guidance postdated the taxpayer’s actions. In fact the taxpayer had to retrospectively amend his tax claims in order to benefit from the 2003 guidance. In this sense, the case is peculiar in that he did not ‘expect’ any benevolent treatment when he undertook the action. It was only several years later when HMRC published its guidance that he had any expectation as to the particular benevolent treatment. HMRC’s guidance did not change the way that he organised his affairs.

For this reason, it does seem a perversion of the English language to say that the taxpayer did ‘expect’ anything at the relevant time.

And indeed, this reveals a tension in the doctrine of legitimate expectations. This case is a far cry from the most famous tax cases concerning legitimate expectations whereby taxpayers received advanced assurances from HMRC and sought to arrange their affairs in accordance with those assurances, as arose in the case of Gaines-Cooper, MFK Underwriting, Matrix Securities, GSTS Pathology, Cameron, Unilver (although that was a practice rather than assurance) even the recent Veolia case. The idea underpinning these types of cases is that it would be unfair for a public authority to resile from its previous position given that the relevant party has changed their position in reliance upon the assurance, particularly where the taxpayer has incurred expenses in reliance. These are ‘reliance’ cases, in which the relevant public authority will be bound to its assurance if it would be ‘conspicuously unfair’ not to be so bound.

But that does not mean that the present case does not come within the doctrine of legitimate expectations, as the doctrine also encompasses cases where a public body seeks to depart from its guidance. The idea is that it would be unfair for a public body to fail to act consistently towards citizens. For this reason, it does not matter in the class of ‘consistency’ cases that the particular citizen was aware that a public body had adopted a particular practice towards persons in their position (see: Scheimann LJ in Bibi at para 55). The question in such cases is whether the public body could rationally apply different treatment. This can be for two reasons. The first is that different treatment is being applied to different classes of persons. The second is that different treatment is being applied to the persons within the same class, but that there are rational reasons for doing so. In the oral hearing of the case, the justices kept coming back to this point about whether it was permissible for HMRC to apply the 2009 guidance to the taxpayer when it applied more benevolent treatment to other taxpayers. What was different about this taxpayer to those persons whose cases had closed before the 2009 guidance was published (and hence benefited from the 2003 treatment).

And this is where things get particularly interesting. HMRC claimed that the taxpayers whose cases were still open after the 2009 guidance had been published could still be entitled to the 2003 treatment if they could demonstrate ‘detrimental reliance’. Several taxpayers could demonstrate such detrimental reliance. Thus, the taxpayer in the case was given the same option as these taxpayers but simply could not demonstrate detrimental reliance. In this sense, HMRC argued that they acted consistently across this group of taxpayers by applying the same standard to all that fell within the group by reason of having their cases still open in 2009.

This is the issue that it is posited the appeal will turn on. What is the relevant comparator group – is it all those who fell within the terms of the 2003 guidance, or is it only those whose cases were still open in 2009? If it is the 2003 group, was it fair to distinguish between those persons either because of the effluxion of time or by use of the ‘detrimental reliance’ criterion.

I await the judgment with interest.

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