“Health warnings” and legitimate expectations: Samarkand

In the recent Samarkand case, the Court of Appeal upheld the conclusions of the Upper Tribunal, thereby dismissing the taxpayers’ appeals and judicial review claims, in addition to dismissing HMRC’s cross appeal. The case itself has gained attention generally for being one of the many cases concerning schemes which attempted to utilise the now notorious film tax relief. Whilst the discussion in the case primarily turned on whether the relevant entities were engaged in a “trade”, the taxpayers also sought to rely upon the argument that HMRC’s internal manual, the Business Income Manual, had given rise to a legitimate expectation. It was claimed that the taxpayers had simply followed the advice in HMRC’s Manual.

The Court of Appeal succinctly summarised at paras 118 and 119 what the taxpayers would have to demonstrate in order for their claim to be successful:

“The pioneer decision in this area was R v IRC, ex p. MFK Underwriting Agencies Ltd [1990] 1 WLR 1545, where a strongly constituted Divisional Court (Bingham LJ and Judge J) gave important guidance on the circumstances in which a taxpayer might be able to found a legitimate expectation on rulings or statements of practice issued by the Revenue…Of particular relevance to the present case are the following observations of Bingham LJ at 1569:

“I am, however, of the opinion that in assessing the meaning, weight and effect reasonably to be given to statements of the Revenue the factual context, including the position of the Revenue itself, is all-important. Every ordinarily sophisticated taxpayer knows that the Revenue is a tax-collecting agency, not a tax-imposing authority. The taxpayer’s only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law … No doubt a statement formally published by the Inland Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them. But where the approach to the Revenue is of a less formal nature a more detailed inquiry is in my view necessary. If it is to be successfully said that as a result of such an approach the Revenue has agreed to forgo, or has represented that it will forgo, tax which might arguably be payable on a proper construction of the relevant legislation it would in my judgment be ordinarily necessary for the taxpayer to show that certain conditions had been fulfilled. I say “ordinarily” to allow for the exceptional case where different rules might be appropriate … First, it is necessary that the taxpayer should have put all his cards face upwards on the table … Secondly, it is necessary that the ruling or statement relied upon should be clear, unambiguous and devoid of relevant qualification.”

For such a claim to succeed, the taxpayers would have had to demonstrate that there was a representation from HMRC in the Manual which was “clear, unambiguous and devoid of relevant qualification” and that frustrating such a resulting legitimate expectation would be so unfair as to amount to conspicuous unfairness.”

The problem for the taxpayers case however was that the relevant HMRC Manual which they sought to rely upon was “permeated with qualifications relating to tax avoidance” (para 126). In essence, the taxpayers lost their case on the basis that the Manual was not “devoid of relevant qualification” as it provided that taxpayers could not rely upon the Manual if it were to be used for tax avoidance.

This is not the first time that a “health warning” relating to tax avoidance has helped to defeat a taxpayer’s public law claim. In R v Inspector of Taxes, ex parte Fulford-Dobson [1987] 1 QB 978, the taxpayer concerned attempted to take advantage of an “Extra-Statutory Concession”, but was foiled in the attempt to do so by virtue of a health warning which preceded the text of the Extra-Statutory Concession. The proviso stated that a “concession will not be given in any case where an attempt is made to use it for tax avoidance” and in the circumstances, the court held that the taxpayer was attempting to abuse the concession in such a manner. The relevant parts of the judgment are found at pages 991-992:

“Mr. Moses submitted for the revenue that the rubric [i.e the proviso to the ‘Extra-statutory concession’] was to be construed as part of the concession, and I have already indicated that I so regard it. As I have said before the rubric is part of each concession and is so to be read…. It seems to be plain as a pikestaff upon the facts that this was tax avoidance as that term is used in the rubric [i.e the proviso to the concession]. The taxpayer here, Mr. Fulford-Dobson, suffered no reduction in income, suffered no loss, incurred no expenditure…[nothing which] Parliament intended to be suffered by any taxpayer qualifying for a reduction in his liability for tax…What was done was done deliberately for the admitted purpose of tax avoidance, but in total disregard of the clear words limiting the availability of the concession.”

In truth, health warnings are to be found in most HMRC publications and the Samarkand case provides just another example of how difficult it is to establish a legitimate expectation on the basis of publicly available HMRC advice and guidance. A trio of blogs (here, here and here) from last summer deal generally with the issue of legitimate expectations in the hands of taxpayers.

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The Commission, rulings and a prior question of deference

Noise in terms of the Commission’s investigation into purported breaches of State aid provisions by Member States has been increasing steadily over the past two and a half years. To recap, the Commission has opened a number of investigations (and produced some decisions) concerning rulings agreed between multinationals and various Member States, namely, Luxembourg, the Netherlands and Ireland. At the same time, it has produced a Decision in relation to a Belgian regime for excess profits. The latter is different in nature from the former investigations. The Belgian regime does not break new ground in terms of the jurisprudence on State aid law. The State is considered by the Commission to have effectively introduced a tax relief, in economic terms, for large companies. Such a selective advantage, if proven, undoubtedly comes within the scope of the State aid provisions.

It is the investigations into the rulings given by Ireland to Apple, by the Netherlands to Starbucks and by Luxembourg to Fiat, Amazon and McDonalds which do break new ground. What is unique about them is that the Commission is questioning the application of the transfer pricing rules by the revenue authorities in those individual countries. In brief, it is posited that the revenue authorities gave unduly favourable rulings to the multinationals in departure from the transfer pricing rules and that this constituted State aid.

Much has been written (including by myself here, here, here and here), and will continue to be written, about these investigations. In the case of Apple, the Irish government and Apple have published their grounds of appeal. Amongst other things, including a throwaway argument on the basis of the Charter of Fundamental Rights, the government and Apple argue that the Commission has misconceived how the law in relation to transfer pricing ought to be applied. Indeed, the Netherlands, Luxembourg and Fiat have appealed against the Commission’s decisions (the McDonalds and Amazon investigations are still ongoing) and they too will question the Commission’s understanding of the underlying law.

I think there is a prior question which needs to be asked however. Let’s assume then that the Commission is correct and that in each case, the revenue authorities did grant rulings which departed from the underlying rules. Should this constitute State aid and so engage the authority of the Commission? What I am driving at, and what I have flagged up elsewhere is the functional sustainability of such a conclusion. Is the logical conclusion not that all multinationals, when seeking rulings from revenue authorities, will thereafter seek to have the Commission approve the ruling? Is that sustainable across all 27 Member States?

Taking a step back, why do we even have revenue authorities?

The idea is that it is necessary to equip a body with the powers and resources to collect tax that is due. Now it is not possible for the revenue authority to ensure that it collects every single penny of tax that is due. Two important reasons for this can be highlighted. First, it is impossible to ensure that there is no evasion, fraud or avoidance. Instead, the relevant authority must make judgement calls as to how best to ensure compliance-whether that is targeted campaigns, engaging with representatives or unions of taxpayers, strategic litigation, threatening letters, whatever. Second, it is incorrect to say that there is a definite amount of tax that is due. For instance, many taxes are not imposed upon revenue streams themselves. They are for instance levied upon income or profits. In that sense, I do not pay tax on the money that I receive from selling a jumper. I pay tax on the profit (which is the sales price minus the costs). The calculation of cost, even in the simple case of an article of clothing like a jumper, is not particularly straightforward. What if I have wool left over for the subsequent tax year. How should I price that wool? What if I make that jumper in my own home-can I offset some of the cost of rent? Thus, whilst revenue streams may have definite values, incomes do not and thus neither do the taxes that are imposed. This is particularly the case when it comes to transfer pricing as we are already looking at something pretty unique and artificial. The arm’s length principle looks for a comparator. A comparator is not identical, it is comparable. The relevant revenue authority and the company must hammer out a price that is agreed to be appropriate in the circumstances. Thus again there is a requirement that the relevant revenue authority make a judgement call as to the appropriate amount.

In essence then, we equip a revenue authority to collect and manage taxes and in doing so endow the body with authority to make judgement calls as to how to go about the collection of tax. That is the nature of administrative discretion-the public body is given authority to decide between a range of choices and the courts respect the public body’s resulting decision. It is not right that the courts should micromanage the manner in which the public body carries out its task, as the public body is infinitely better placed to perform the particular function and nor would it even be practically possible for the courts to do so. In the case of tax, that means that there is some allowance given to decisions which are technically incorrect in law. Thus, in the famous Fleet Street Causals case, the House of Lords endorsed a decision of the Inland Revenue to collect less than the full amount of tax that was due. The tolerance is not unlimited of course. The standard that the courts apply in determining how far they should intrude into decisions made within the public body’s discretion is known as reasonableness or rationality. In short, it is a high standard-it requires the decision to be so incorrect that no reasonable official would arrive at it.

Bringing this back to the issue of rulings and assuming that the rulings themselves are indeed a departure from the underlying law, does that in itself mean that a supervising authority should condemn the rulings? Is there a case to be made that EU State aid law should make some allowance for incorrect applications of the law by the revenue authorities? The argument could be made that there should be some degree of deference afforded to revenue authorities to misapply the law, as is afforded by courts. This would be in line generally with the principles underpinning the EU concept of subsidiarity, namely, that decisions should be taken by those best placed to take them. This would also ensure that the Commission is not called upon to investigate all errors of law committed by revenue authorities. That is an important consequence that should also be considered. If the Commission’s case is upheld, this would mean that any time there is a misapplication of law by the revenue authorities in favour of multinationals, then that could potentially amount to State aid. So this would not just be transfer pricing arrangements, but also all settlements of tax disputes and any tax arrangement, binding or otherwise, between multinationals and revenue authorities.

Of course, that is not to say a carte blanche should arise and that there is no place for the Commission in this area. It is simply that Competition rules should not overreach unnecessarily upon the machinery of tax collection. Indeed, it has been found in other areas that Competition law must have tolerance for arrangements which may have a distortive effect on competition (such as in allowing for trade unions). The fundamental issue appears to be that there is a lack of trust that the revenue authorities of certain countries in the EU properly carry out their function of dispassionately collecting tax. There is merit to that concern. There is merit too to the idea that favourable treatment can distort competition. I have flagged already elsewhere that a route could lie through the application of Article 102 TFEU which proscribes abuse of a dominant position. Another hypothetical solution could lie in institutional reform. The EU has long been in the business of reforming national institutions and could set out guidelines for Member States for the institutional set-up of their revenue authorities so that observers can be assured that the revenue authorities are properly and dispassionately carrying out their functions. Of course, it would first be necessary to distil what is best practice in this area and that would be a mammoth research task (although I can think of one early career scholar who would fancy the task…)

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Legal accountability in the case of HMRC

The Public Accounts Committee, a body charged with responsibility on behalf of Parliament for holding HMRC to account, noted in 2011 that it had ‘serious concerns that large companies are treated more favourably by [HMRC] than other taxpayers’ (Public Accounts Committee, HM Revenue & Customs 2010–11 Accounts: tax disputes (HC 2010-12, 1531) 4.). The fact that HMRC changed its governance structure five years ago to address this problem appears to have had little impact, for in 2016 the Committee wrote similarly that the ‘public is highly sceptical about whether large businesses pay the corporation tax they should in the UK, and HMRC must address this’ (Public Accounts Committee, Corporate tax settlements (HC 2015-16, 788) 5). Put another way, the public is sceptical of HMRC’s ability to collect the correct amount of tax from large corporations. Professor Freedman has called for the creation of a sustainable, institutional solution to this issue (Judith Freedman, ‘UK institutions for tax governance: reviewing tax settlements’ [2016] 1 BTR 7, 12). The problem however goes deeper than simply ensuring multinationals are being properly subjected to the law by HMRC. The distrust of HMRC is merely a symptom of a deeper issue of accountability.

‘Quis custodiet ipsos custodies’ [who guards the guardians] is a question little explored in the literature in the case of HMRC. Who holds the body to account? Given that it is a non-ministerial governmental department, the traditional avenue of individual ministerial responsibility is eschewed. Parliamentary control is instead handed to select committees, in this case the Public Accounts Committee and the Treasury Select Committee. The National Audit Office in turn audits HMRC’s accounts and lays them for scrutiny before the Public Accounts Committee. Meanwhile the Adjudicator’s Office and the Parliamentary Ombudsman seek to ensure that individual taxpayers are treated fairly by HMRC. Each of these bodies is endowed with broad powers so that they can carry out their functions effectively. In combination, the bodies are adequately equipped to ensure the efficiency of HMRC operations and, to an extent, propriety in the treatment of taxpayers. It is highly questionable however whether they are not properly competent to hold HMRC to account with respect to the body’s wide-ranging functions.

A fundamental question then must be asked: are the mechanisms for ensuring that HMRC is properly carrying out its functions fit for purpose? If not, what alternative structure can be instituted to shore up the inadequacy? It would be blunt to say that transparency alone, whether of revenue operations or tax returns, could shore up problems of accountability. So too would it be to suggest that a supranational body such as the EU Commission could be a supervisor for the wide range of actions undertaken by revenue authorities. What is required is a comprehensive, holistic, dispassionate approach to these issues which takes account amongst other things of best practices in other countries. It would be wrong to acquiesce as we are already on to our second iteration of a Public Accounts Committee which stresses that something must be done.


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MyWaitrose Card and Taxpayer Privacy

A confession: I shop at Waitrose.

Readers with similar shopping habits will know that signing up for and using a Waitrose card comes with many benefits – free coffee, newspaper at the weekend, discounts on selected items etc. All you have to do is use your MyWaitrose Card when you shop. Why does Waitrose provide such benefits for card holders (and for that matter all major supermarket chains in the UK offer some kind of card with benefits)? Loyalty is one obvious answer. The more sinister is so that the company can collect information about each Waitrose shopper individually. With more information about us collectively, Waitrose can get a better sense of shopper preferences. By having information about us as individuals, the company can target persons distinctly.

A few weeks ago, I came home to find a letter from Waitrose with coupons. Some provided discounts on items that I’ve purchased in the past, but haven’t purchased in some time. Another provided a discount of 10% if I were to spend above a certain amount. My initial reaction to these was: “wow, this is a lovely coup”. This was because I thought I was getting one over on them: “I was probably going to buy these items anyway” and “I usually spend close enough to that amount anyway to get the discount, so this just means I have to spend a few pounds more.”

But then elation turned quickly to apprehension. This was not a “coup”. This was a prediction with precision by Waitrose. Because I did indeed use these vouchers on my next trip, and I felt uncomfortable in the process that in effect my ability to choose where to shop and what to buy had been manipulated. Putting it bluntly, Waitrose mapped out my preferences with such specificity that my liberty was removed.

A week or so later, I received another letter from Waitrose with coupons. The discounts this time were on different items (but ones I had purchased in the past) and the 10% discount was for a different overall amount (slightly higher than the last). But again, I use all the coupons in my weekly shop and felt even more uneasy about the whole process.

To reiterate, it is not just Waitrose that is engaging in this practice-all major retailers try it. And it has a name: price discrimination. It is the process of applying dissimilar prices to similar transactions and it is a concept well known to Competition Lawyers.

But why do I bring this up in a blog primarily concerned with tax law and policy? Because it has relevance for the debate about transparency over tax affairs. In a previous blog, I had noted that privacy rights seek generally to protect individuals from the State, corporations and other individuals, whilst conversely HMRC is vested with a duty of confidentiality in order to ensure that taxpayers are forthcoming in their affairs. The short blog concluded that on balance, elected MPs ought to disclose their tax returns. I also tentatively noted that “the justification for privacy over tax affairs is on fairly shaky ground in general.”

Today, I want to just briefly revisit this thought in light of my relationship with Waitrose. We live in times of increasing transparency. These are the days of big data. Corporations can predict our actions with an unnerving accuracy. It is an age in which algorithms, and not individuals, can fix prices between companies. Artificial intelligence meanwhile is both fascinating and frightening.

What does this mean for the argument that all of our tax returns should be published online a-la Norway? That would be more data in the hands of those entities that can use it to manipulate our choices and restrict our liberty. This, I believe, is the strongest ground today for protecting taxpayer privacy in western democracies. It is hard to imagine that compliance in the UK would be reduced for instance (as was thought would occur when taxpayer privacy was initially introduced) if tax affairs were made public. But it is eminently foreseeable that more information in the hands of corporations could cause problems.

This is not a complete volte face on my part (not yet anyway). As it stands, I do still think that the “justification for privacy over tax affairs is on fairly shaky ground in general.” But there a strong argument to be explored in respect of the malevolent uses of data and that is where there should be some focus. Perhaps that will be my next project…first though, I’ll have to do the shopping.

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

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

The facts of the case are brief. On 14 June 2012, two journalists from The Times had a background briefing on tax avoidance schemes with Mr David Hartnett, Permanent Secretary for Tax at HMRC. It was explicitly agreed that this meeting was “off the record”, which Mr Hartnett understood to mean that nothing would be published. During this meeting, Mr Hartnett expressed views about film schemes. On 21 June 2012, some of what was said at the briefing was published in a Times article as coming from a “senior Revenue official”. The article included statements that Mr McKenna had “never left my radar”, that “he’s a big risk for us” that “we would like to recover lots of tax relief he’s generated for himself and for other people” and that “we’ll clean up on film schemes over the next few years”. Did these disclosures amount to a breach of HMRC’s duty of confidentiality enshrined in section 18 of the Commissioners for Revenue and Customs Act 2005?

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

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

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

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

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

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

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

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

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

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

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The Taxing Consequences of Brexit

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

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

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

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Oversight of HMRC soft-law: lessons from the Ombudsman

My latest article entitled ‘Oversight of HMRC soft law: lessons from the Ombudsman’ has just been published in the Journal of Social Welfare and Family Law. There is a link to the published version here. The article seeks to set out the important contribution that the Ombudsman has played in the past in respect of overseeing HMRC guidance. The abstract reads as follows:

“An investigation of the role which the Ombudsman plays in tax law, on which comparatively little has been written, reveals that the body makes an important and distinct contribution. There is now almost universal acceptance that tax law is overly complex and indeterminate. If the primary law offers few answers to the taxpayer, then HMRC’s role as administrator of the system becomes apparent. Soft law elaborating upon how HMRC will apply the primary law to a given class of taxpayers is rendered indispensable. In practice however, HMRC soft law has often been found to be deficient. Analysis of the current oversight arrangements for HMRC soft law immediately reveals the genesis of these issues. Select committees exercise Parliamentary control, whilst an independent body performs external audits. These entities however only incommensurately examine the soft law. Into this void steps the Parliamentary and Health Service Ombudsman, a body which has ‘carved for itself a distinctive niche’ in the public law framework. The paper accordingly seeks to elaborate upon the important role that the Ombudsman plays in scrutinising HMRC soft law and the lessons which can be derived from this analysis.”

A previous version of the article is now also available for free on my SSRN page.

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HMRC, the Panama Papers and the use of leaked information

Last week at the Society of Legal Scholars conference in Oxford, Michael Dirkis of the University of Sydney presented a paper entitled Having your cake and eating it too: The role of the judiciary in facilitating the effectiveness of exchange of information agreements and imposing limitations on the use of the information obtained’. Professor Dirkis’ paper compared the approach in different jurisdictions towards the legality of revenue authorities’ using information given to them from, for instance, whistleblowers. The timing of the presentation coincided with the revelation that the Danish Tax Authority would pay £1mil for secret financial information on hundreds of Danish nationals. The data itself is said to relate to the now infamous Panama papers leak.

Could HMRC do the same?

The first thing to note is that this is not the first time that a revenue authority is thought to have paid for tax information: Germany, the UK and France are thought to have done so in the past. Moreover, information given to HMRC from ‘interested’ third parties is a significant well from which the body draws when deciding whether to initiate investigations.

Other than the practicalities however, two questions of legality arise. First, is HMRC prevented from using the information due to the privacy rights of the individuals concerned? That is a question of international rather than national law. Put this way, countries are sovereign. The laws of one country do not apply in another country unless there is a specific provision providing that the second country allows itself to be so bound in certain circumstances. Thus, this might arise if there were a provision in the double tax treaty between the UK and Panama that it would not use confidential information. Whilst the DTT between the two countries does contain provisions on the use of information exchanged between the two revenue authorities, it is silent on the issue of information provided by other sources in those countries (see: here). Thus, HMRC is not legally impeded from using the information concerned. (However, the ability to rely in court upon information transmitted to HMRC from a leak is a separate issue, and the difficulty in verifying the veracity of the information obtained may explain HMRC’s apparent reluctance in recent years to pursue criminal prosecutions in light of the Falciani disclosures. Nevertheless, the reason that HMRC only pursued one prosecution in that case remains unclear)

What about the legality of paying for information?

The legality is determined by the scope of HMRC’s collection and management powers (most important in this respect is Commissioners for Revenue and Customs Act 2005, s.5). In the Fleet Street Casuals case, it was pronounced by Lord Diplock that this endowed the Revenue with:

“a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection.”

More recently in Gaines-Cooper, it was cited that this discretion permits the use of cost-benefit analysis:

“In particular the [R]evenue is entitled to apply a cost-benefit analysis to its duty of management and in particular, against the return thereby likely to be foregone, to weigh the costs which it would be likely to save as a result of a concession which cuts away an area of complexity or likely dispute” (para 26 (Lord Wilson))

HMRC’s collection and management powers allow the body, inter alia, to settle tax disputes, gives them flexibility in respect of what test cases to take, and to make prudent arrangements for the smooth collection of tax which may result in less tax than is strictly owed under the law. Whilst most obviously, HMRC’s discretion allows the body to collect less tax than is due, there is no reason why, taking Lord Wilson’s words to their natural conclusion, the body could not apply this cost-benefit analysis to the purchase of information from a whistleblower. HMRC is entitled to invest in upgrading technological equipment which will facilitate the collection of tax. There is no difference in principle with investing in information that can be used to collect more taxes that are due. This is predicated on the assumption that the leaked information could actually be used and that HMRC would have verified that the information itself was not faked, but this seems to be precisely what the Danish Tax Authority verified prior to agreeing to purchase the information.

The source of the information was careful to only give the information to the Danish authority which concerned Danish individuals. It is unlikely that HMRC investigations could simply piggy-back on the Danish ones. HMRC would have to actually cough up for the information which relates to the UK. Perhaps the most prudent move for now might be for HMRC however to wait to see what comes of the Danish investigations. If they are successful, then HMRC will know the utility of the leaked data.

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The APN litigation continues

Introduced in 2014, the ‘Accelerated Payments Regime’ has been challenged now numerous times. This is unsurprising. Taxpayers who engaged in schemes some years ago are finding themselves with a significant tax bill which must be paid within a very short time frame. With no formal appeal, taxpayers are left with little option but to try for Judicial Review.

So far, the challenges in the High Court by taxpayers seeking to have the APNs issued to them set aside, have all failed. This is also unsurprising when it is recalled that the first case concerning APNs was rejected by Simler J (Rowe v HMRC) in a comprehensive and robust judgment. The judgment of Green J in Walapu v HMRC thereafter was of a similar order, thereby effectively closing off the possibility for a successful challenge at the High Court level (or at least creating a significant hurdle for High Court judges to overcome if they choose to depart from these cases. None so far have chosen to do so). Both Rowe and Walapu will be heard before the Court of Appeal however in the coming months (Rowe is set for December whilst Walapu is set for April of next year). As such, watch this space.

An immediate development of note however is that which arose in the case of Vital Nut v HMRC. As I’ve written elsewhere, APNs are a dramatic legislative intervention and as such, given the effect on taxpayer’s rights, the conditions under which they may be issued will be guarded jealously by the courts. Public Law norms will likewise act so as to constrain the actions of HMRC and prevent them from using the power to issue APNs in a manner in which the courts deem to be ‘unfair’. This is precisely what arose in the case of Vital Nut. Charles J in the High Court was not satisfied that an APN could be issued anytime that a scheme had been notified under DOTAS. Rather, an APN could only be issued where HMRC had been satisfied that the scheme notified under DOTAS would also be ineffective (see Paragraphs 17 to 40 of the judgment in particular):

“[T]he Notice Requirement for the issue of a valid APN cannot be satisfied unless, to the best of his information and belief, the designated officer is of the view that he is not satisfied that as a matter of law and fact the claimed tax advantage is lawfully available and so should be allowed and so, in that sense, the designated officer has determined that the claimed tax advantage is disputed.” [Para 35]

As the litigation in respect of APNs continues to develop, it is likely that there will be additional requirements that will be read into the legislative scheme. It has been reported elsewhere, in this regard, that taxpayers have successfully challenged APNs before HMRC on the basis that whilst the relevant schemes had been notified under DOTAS, they were not “notifiable”, thereby again strictly interpreting the words of the legislation.

Given the power that the APN regime places in the hands of HMRC, it is entirely correct that the courts should continue to act as suspicious umpires of HMRC’s use of this statutory scheme. For now, all eyes should be on Rowe.

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The curious case of Apple

What to make of the Commission’s decision that Ireland granted State Aid to Apple to the tune of up to €13bn? On the one hand, very little as we are yet to see the full decision and all the relevant details. The decision will be released as soon as there has been agreement as to what parts should be redacted, and in the case of the Starbucks decision earlier this year, that process took just over 8 months.

On the other hand however, some broader points can be made both about the political nature of the State Aid investigation and about the framework for using State Aid to combat perceived abusive tax practices. In order to elaborate upon these points, it is worth revisiting first principles and setting out what actually is State Aid. It arises where:

  • there has been an intervention by the State or through State resources
  • the intervention gives the recipient an advantage on a selective basis. Two separate questions arise as to whether an advantage has been granted and whether that advantage is selective. This is where the real battle ground will take place in respect of the current State Aid cases generally.
  • competition has been or may be distorted;
  • the intervention is likely to affect trade between Member States.

The State Aid provisions of the Treaty are found in the Competition Law chapter and as a matter of principle, it is uncontroversial that the EU should seek to prevent Member States from intervening in the market in order to unduly benefit particular undertakings. That the tax system can be utilised as a means of selectively benefiting certain undertakings is similarly uncontroversial. For instance, R&D tax reliefs could be designed so as to de facto discriminate between otherwise similarly placed undertakings, thereby unduly favouring some. The Belgian excess profits scheme, which the Commission found to amount to State Aid, is a good example similarly of a Member State intervening through the tax system so as to selectively benefit certain companies. The effect of this scheme was to reduce the tax payable by 35 Multinationals, thereby advantaging these companies over their competitors. To this end, remarks that the EU and Commission have no competence to intervene in respect of Member State’s tax policy is misconceived. Member States do have a significant degree of autonomy in respect of direct taxes, but this freedom is and always has been subject to the Treaty provisions.

At the core of the Apple decision accordingly is a dispute as to whether rulings issued by the Irish Revenue Commissioners selectively advantaged Apple. The accusation is that the Revenue rubber stamped unduly beneficial advance pricing arrangements. That is the crux. The press release however contains quite a bit more information which on its face is not relevant to the determination of the State Aid issue. However, these can only be understood when viewed in light of the political nature of the dispute. The State Aid provisions are here being used as a means of combating abusive tax practices and to accelerate and buttress international tax reform. This explains why the press release refers generally to Ireland’s tax treatment of Apple enabling the company to record all European sales in Ireland, which itself is recognised as being ‘outside the remit of EU state aid control’. This is a fact which is irrelevant for the legal arguments in the case at hand, but pertinent politically. It similarly explains why the Commission states that the State Aid bill would be reduced if the US authorities were to require Apple to pay larger amounts of money to their US parent company for this period to finance research and development efforts.

But a more important point which is often overlooked in the conversations about the Apple et al decisions is whether the State Aid provisions actually provide a suitable framework for dealing with transfer pricing arrangements. Elsewhere, I’ve written about this issue (see: here, here, and a semi-satirical piece here) but did also some time ago express scepticism as to the legality of the Apple rulings under Irish law. There is one further point which ought to be added however. It is uncontroversial that State Aid law should be utilised to prevent Member States intervening through the tax system by introducing legislation which de facto favours selectively. It is right that Member States should refer any dubious looking legislative amendments to the Commission for approval. More controversial however is the application of State Aid law not to legal provisions themselves, but rather to the administration of these general provisions such as the arm’s length principle. Note the difference in frequency. Tax legislation is passed annually, biannually and occasionally triennially. It is entirely feasible for a Member State government to seek prior approval of tax measures with a potential State Aid edge. What is much less feasible is the idea of Member State Revenue authorities seeking Commission approval anytime they agree a transfer pricing arrangement, even if this were to be restricted just to transfer pricing arrangements of large companies in the 28 Member States (however, how this could be restricted in such a manner without itself giving rise to State Aid concerns in respect of the agreements arrived at by the other companies is equally far from clear). The reason that multinationals seek rulings in the first place is as an assurance that their tax affairs are in order. The logical conclusion of the fact that transfer pricing arrangements which administer broad standards and are potentially disputable are subject to State Aid would be that multinationals would first seek rulings from the revenue authorities and would urge the revenue authorities to thereafter seek approval from the Commission.

Presumably the Commission has little intention of becoming a supranational revenue authority and there will doubtlessly be some kind of settlement of the infrastructure for dealing with transfer pricing arrangements if the Commission’s case is successful. But it is a concern which requires some thought.

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