Mansworth v Jelley revisited in the Court of Appeal

Listed for hearing before the Court of Appeal today is the case of R (Hely Hutchinson) v HMRC. The case revolves around the controversial Mansworth v Jelley claims. The taxpayer Ralph Hely-Hutchinson was successful before the High Court in this judicial review (which I reviewed in a lengthy case note for the British Tax Review which can be downloaded here), which HMRC are today appealing.

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?

That is precisely the issue which arose for Ralph Hely-Hutchinson. The taxpayer relied upon the 2003 guidance, but the case was not closed by 2009 (owing to a dispute between HMRC and the applicant 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. For Whipple J, it was ultimately a question of whether HMRC could frustrate a legitimate expectation in circumstances which would lead to significant unfairness to the taxpayer. The court balanced the duty of fairness against the duty to collect taxes and held in favour of the taxpayer. One significant component of Whipple J’s reasoning was that it was intrinsically unfair to provide differing treatment to persons who had their cases closed as against those whose cases were open. A problem with this approach however is that in situations where different treatment is provided to persons in similar legal and factual positions, the proper approach for the court is to ask if there are rational reasons for the distinction in treatment. The imposition of sections 9A and 29 TMA 1970 could arguably constitute a rational reason for distinguishing between the taxpayers, although this specific argument was not put to the judge.

The appeal will be heard by a strong bench: Sales LJ, Arden LJ and McCombe LJ and is scheduled to last for 10 hours, thus spanning two days. It is a finely balanced and important case which will illuminate further upon the relationship between the duty to act fairly towards taxpayers and HMRC’s primary duty to collect and manage taxes, as well as the effect of this interrelationship with regard to HMRC guidance. In particular, the assessment will concern how this interrelationship constrains HMRC from retroactively withdrawing treatment prescribed in a publication which is based upon an incorrect interpretation of the relevant law.

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Another ‘Accelerated Payment’ case, another loss for the taxpayers

Accelerated Payment Notices (‘APNs’) and Partner Payment Notices (‘PPNs’) have since 2014 been clogging up the Administrative Court. A rough estimate suggests that up to 87 cases have been petitioned for review.[1] In fact, there are currently 4,116 applicants or potential applicants seeking interim relief from APNs/PPNs which HMRC’s records show amount to a total sum in excess of £756m.

In order to understand why, one need simply to understand what an APN (or a PPN) does. It accelerates the payment of ‘disputed’ tax. The APN/PPN regime broadly requires that taxpayers pay disputed tax upfront, before being able to challenge HMRC’s assessment through the normal channels. APNs may be issued where the following conditions are present:

  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 (section 311 of the Finance Act 2004); or a GAAR counteraction notice has been issued (paragraph 12 of Schedule 43 of the Finance Act 2013).

Once an APN has been issued to the taxpayer, the money becomes payable within 90 days. There is no right of appeal against the APN, but merely the right to make representations to HMRC, as a means only of objecting to either the satisfaction of the conditions or to the amount submitted to be due. After taking into account the representations, HMRC may refuse to withdraw the APN. If an APN has been issued to a taxpayer who entered into the once seemingly popular film schemes, the amount due could well be into the hundreds of thousands. Taxpayers are left with little option but to fight the APN, but without any right of appeal against the APN available, the only route which can be taken is through the Administrative Court. PPNs are almost identical to APNs but apply to parties who have invested through partnerships.

This blog has covered the emergence of the APN/PPN regime and the cases concerned in several posts (see: here and here). To date, no taxpayer has been successful in the JR applications to have the APN/PPN set aside (the closest has been minor successes in acquiring interim relief).

It should come as little surprise then that the latest judgment to be produced from the Administrative Court concerning the APN/PPN regime also found against the taxpayers. In R (VVB Engineering Services) v HMRC, three cases were heard together in which the claimant taxpayers sought an interim injunction against HMRC enforcing APNs and PPNs. As the law currently stands, the claimants would be entitled to relief if they could establish “hardship” (ie that they would be unable to trade/run their businesses in the manner in which they ordinarily operate). The claimants however argued that they were entitled to relief without having to establish hardship on the basis of deleteriousness of HMRC’s part and the administrative burden which arises where conditions are attached. This argument was rejected by the Court on the basis that the balance of convenience lay in not granting the injunction having particular regard to the fact that Parliament purposefully enacted the APN/PPN regime and that the taxpayers themselves entered into tax schemes accepting the risk that tax could become payable in the future. The Court also rejected the argument that the hardship test created too high a burden, again having particular regard to Parliament’s intention in enacting the regime.

This case then will offer little comfort to the thousands seeking relief from APNs/PPNs. There are two cases that will be heard this year, Rowe and Walapu, by the Court of Appeal which are the ones to watch closely. The High Court judgments in those cases, from Simler J and Green J respectively, were so comprehensive and robust that they effectively closed off the possibility for a successful challenge at the High Court level (or at least created 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).

However, with so many cases coming before the Administrative Court concerning APNs/PPNs where the taxpayers are seeking a judicial review in an instance where the substantive case will be heard by the Tribunals (recall that one condition of the APN being granted is that an enquiry and appeal are ongoing), one might query why there needs to be ongoing two parallel proceedings. Yes, there will need to be separate proceedings where taxpayers have sought interim relief (injunction applications can for the most part generally only be granted by the High Court), but the point is that each case for interim relief could go on to be a full judicial review. At the same time, the substantive dispute will be heard before the tribunals. With two parallel proceedings ongoing, I again ask the question why should the expertly constituted First tier Tax Tribunal not have the capacity to resolve both disputes?

[1] See the JR stats at this page, download the zip file (Civil Justice and Judicial Review data) and look for the “Tax Avoidance” JRs in the JR spreadsheet. All have been since 2014-the same time that the legislation for APNs/PPNs and Follower Notices was introduced. It is hypothesized that all those cases are concerned with APNs/PPNs rather than Follower Notices for the reason that Follower Notices themselves do not require taxpayers to pay the tax, but rather the later issuance of an APN/PPN. Of course, some could be JRs of Follower Notices pre-empting the later issuance of an APN/PPN, but there has yet to be an administrative court judgment concerning Follower Notices, but there are myriad concerning APNs/PPNs).
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The Good Law Project’s Uber case

Jolyon Maugham QC recently started the ‘Good Law Project’, which seeks to “use strategic legal cases both to change how the law works and to drive demand for further law change”. The first such case seeks to challenge the business model of Uber by questioning whether VAT ought to be charged by drivers. The case can be read about here and one can donate some money (it’s crowdfunded) here.

This is not the first time where there has been a third-party challenge to tax arrangements. Most famously, the National Federation of Self-Employed and Small Businesses challenged an apparent “tax amnesty” that was arrived at between the Fleet Street Casuals (casual printworkers on Fleet Street newspapers) and the then Inland Revenue. In more recent times, the tax advocacy group UK Uncut challenged an apparent “sweetheart deal” between Goldman Sachs and HMRC. In both instances the court found in favour of the revenue authority, but only after allowing the case to proceed to a full hearing.

In these cases, the challenge was by way of judicial review. What is interesting about Maugham’s case however is that it is not a judicial review. Instead, Maugham wants the “High Court to order Uber to provide him with a VAT receipt for a journey from his office to meet a client last week. He claims that the law gives him a right to a VAT receipt for that journey and that Uber cannot give him the receipt without accepting it is liable to charge VAT.”

That is an interesting approach which avoids having to demonstrate that there was some decision issued by HMRC which could be challenged by way of judicial review and further avoids issues in relation to standing. It is a development worth watching for that reason alone, but also given the significant amounts of tax that are at stake not just in the United Kingdom (20% on every ride), but across the EU (as VAT is levied in each Member State) and in the many other countries around the world where a value added tax is levied on the supply of services.

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Gulliver v HMRC and the appeal/review distinction

Many countries operate a system of ‘rulings’ whereby taxpayers can approach the revenue authority of that country and ask for a determination in relation to particular elements of their tax affairs or in relation to specific transactions. Some countries have a comprehensive system for regulating rulings (as in Australia). Others like the UK offer formal rulings in specific circumstances. In situations where a formal ruling has been provided, the revenue authority will generally be precluded from going back on its word.

At other points, taxpayers receive informal rulings from the revenue authority. Such a situation arose in the recent case of Gulliver v HMRC, concerning the Group Chief Executive of HSBC Stuart Gulliver. In a case of this kind, the taxpayer may be surprised to learn that the dispute in relation to the ruling can result in two parallel proceedings, one before the tax tribunals and another before the High Court.

Gulliver had obtained an informal ruling from an officer of the Inland Revenue in 2002 to the effect that Gulliver was not domiciled in the United Kingdom (having moved to Hong Kong). The First tier Tribunal found that nevertheless, HMRC was not precluded from enquiring into Gulliver’s domicile in the tax year 2013-14, even if the effect would be that the tax authority would be looking comprehensively at Gulliver’s circumstances (including whether he had actually shed his domicile of origin in 2002). The Tribunal rejected the idea that HMRC was “stuck with” the consequences of the 2002 ruling for the simple reason that a “determination of fact made in relation to one tax year is not binding in relation to a later tax year” (para 8). The Tribunal noted in fact that even where there is a formal agreement reached between the taxpayer and HMRC by reason of section 54 of the Taxes Management Act 1970, it is open to both parties in an appeal to diverge from such an agreement. Thus Gulliver’s application for a closure notice was refused by the Tribunal.

What the Tribunal could not determine however was whether as a matter of public law, HMRC would be precluded from departing from the position set out in the ruling. That is a matter which can only be determined by the Administrative Court in a judicial review, as the First tier Tribunal is not granted the authority generally to hear public law matters. That is strictly the legal position, although in two upcoming conferences in April (at the SLSA Annual Conference and at the Annual TARC Workshop) I shall argue that this situation is totally obtuse. Consider for a moment the consequences of this bifurcation between issues of appeal and review in this instance. The taxpayer will likely seek judicial review claiming a legitimate expectation that HMRC cannot go back on the terms of its earlier ruling. At the same time, the taxpayer is likely going to appeal any substantive assessment which HMRC produces. Then, there will be two parallel sets of proceedings determination in one of which may render the other redundant and vice versa. In such a case, why should the expertly constituted First tier Tax Tribunal not have the capacity to resolve both disputes?

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Case note in the British Tax Review

In a piece published in the March issue of the British Tax Review (available on Westlaw and here), I look at the recent case of Ingenious Media. This is a case I have blogged about on numerous occasions (here, here, here and here). The case note is lengthy as it deals with the decision not just of the Supreme Court in the case, but also the decisions in the Administrative Court and Court of Appeal. The reason for doing so is twofold. First, the case seemed to go under the radar in commentary prior to the Supreme Court and so I thought it would be useful to have a comprehensive critique filling that niche. Secondly, the Supreme Court judgment departed quite significantly from the earlier judgments and it pays in such circumstances to look closely at how it came to be that 5 Supreme Court justices unanimously reversed the conclusion of the lower courts (which themselves had unanimously found against the taxpayers). The abstract reads as follows:

“It is a rarity that the highest court in the UK will unanimously disagree with the unanimous decision of the highest court in England and Wales. But that is precisely what occurred in R. (on the application of Ingenious Media Holdings plc and another) v HMRC (Ingenious Media), a recent case concerning HMRC’s duty of confidentiality. The Supreme Court overturned the Court of Appeal decision, which in turn had followed the reasoning of Sales J in the High Court (who, as it happens, was elevated to the Court of Appeal before the appeal was heard). Thus, nine of the brightest minds fell into separate camps as regards the appropriate outcome of a legal dispute. This calls for a comprehensive exploration of the reasoning underpinning the judgments at each instance. Whilst this note will ultimately welcome the Supreme Court’s judgment in the respect that it overturns misconceptions in the decisions of the lower courts and clarifies the nature of the duty of confidentiality, the Supreme Court decision’s failure to clarify the scope of “confidentiality” is likely to have chilling effects on HMRC’s public engagement”

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“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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