The judicial review challenges to accelerated payment notices to date have failed comprehensively. Taxpayers should question their legal advisers carefully about bringing future challenges if they are not to throw good money after bad. APNs are not quite as devastating as some advisers think, given that they do not determine the tax liability at stake and merely determine who holds the amount of money at stake, pending appeal and resolution of the substantive issues. APNs are not in breach of natural justice or legitimate expectation and are not irrational. Nor do they engage the protections of the Human Rights Act. This change could have been largely brought about by HMRC speeding up its enquiries and then simply recalibrating its practice on almost always agreeing to applications to postpone tax, pending the outcome of an appeal. Follower notices are a different matter because, unlike APNs, they do engage the Human Rights Act.
Taxpayers should question their legal advisers carefully about bringing future challenges to the accelerated payment notices regime if they are not to throw good money after bad. Patrick Cannon (15 Old Square) reviews the four reported judicial review challenges to APNs of note.
In my article entitled ‘Challenging follower and accelerated payment notices’ (Tax Journal, 3 October 2014), I suggested that taxpayers should think carefully before mounting a challenge to the legislation in FA 2014 on APNs by way of judicial review.
The specific challenges faced by taxpayers included:
the deliberate absence of a statutory right of appeal;
the fact that HMRC will point to a strict and rigorous internal review process at a senior level in relation to taxpayer representations;
the current judicial climate in relation to tax avoidance schemes, where 80% of the cases that HMRC chooses to litigate go its way; and
the restricted role of Human Rights Act 1998 article 6 in civil tax avoidance cases.
Since then, there have been four reported judicial review challenges to APNs of note. All have failed so comprehensively that one is reminded of the prayer to St. Jude, which honours him as the patron of hopeless causes and things despaired of and prays ‘for me who am so miserable’. The cases, in date order, are Rowe and others v HMRC [2015] EWHC 2293 (Admin); Dr Walapu v HMRC [2016] EWHC 658 Admin; R (on the application of Graham and others) v HMRC [2016] EWHC 1197 (Admin); and R (on the application of Vital Nut Co Ltd and another) v HMRC [2016] EWHC 1797 (Admin).
Essentially, each challenge to HMRC has foundered on the rocks of the matters listed in the bullet points above. With each failure, the taxpayer has tried desperately to distinguish the subsequent case by flagging up what he hoped were material differences to try and escape the judicial broadsides on the taxpayers’ grounds of challenge.
The lessons learned
There is a consistent judicial thread running through each of the four judicial reviews, starting with Rowe. This is that APNs were not a bolt out of the blue, which retrospectively changed tax law against the established English legal principles of fairness and natural justice.
In essence, APNs achieve a simple and modest rebalancing; namely, that it will be HMRC, rather than the taxpayer, who will hold the tax in dispute pending resolution of the dispute. There is no determination of tax liability with the issue of an APN and, if the taxpayer ultimately wins the dispute, the tax is repaid by HMRC with interest. The absence of a formal right of appeal is counterbalanced by the right to make representations to HMRC before any payment obligation arises, plus ultimately the ability to challenge the APN by way of judicial review. Moreover, article 6 is on established case law not engaged because this is a civil tax matter – and tax is part of the hard core of public law prerogatives entrusted to states which do not give rise to the protection of article 6 (in contrast with criminal matters such as tax penalties, which do engage article 6 under its criminal head). Nor did APNs infringe the right to property in article 1 of protocol 1 in the Human Rights Act 1998.
Looked at in this light, it is not surprising that the four challenges have capsized, even though each challenge after Rowe sought to distinguish itself from that defeat on increasingly detailed grounds.
Rowe set the tone for those that followed. In that case, the taxpayers were defeated on the following contentions:
The APNs (or partner payment notices (PPNs), as these were partners) were issued in breach of natural justice as they were not afforded the opportunity to make representations.
The PPNs were ultra vires, in that a condition for the issue of the PPNs (in FA 2014 Sch 32 para 3(3)) had not been met. Namely, the partnership return was made on the basis that a particular tax advantage resulted from the tax arrangements. This was that for those losses allocated to a partner which were not used by him in the current year but were carried back, the tax advantage arose not from an item in the partnership return itself (which is a precondition for the issue of the PPN), but from a separate claim by the partner himself to carry back the loss relief.
Breach of legitimate expectation arose from the previous postponement of the tax in issue by HMRC.
There was unreasonableness/irrationality in all the circumstances.
There was unlawful interference with property rights under article 1 of the protocol 1 and breach of article 6 of the Human Rights Act 1998.
In contrast, HMRC’s submissions were that the exercise of discretion in issuing PPNs accorded with the language and purpose of the statutory provisions in FA 2014; they did not breach natural justice or legitimate expectations and were not irrational; and that there were no breaches of the Human Rights Act 1998. These submissions were accepted by the court.
Assessed liability v unassessed liability
Given the comprehensive demolition of the taxpayers’ arguments in Rowe, the next challenge in Dr Walapu before Green J sought to rely on what was said to be an important factual distinction from the Rowe case heard by Simler J. In Rowe, HMRC had formally assessed the taxpayers’ liability so that what was at issue was a crystallised tax liability; while in Dr Walapu, the taxpayer had claimed relief against past income but had not yet had this claim formally assessed. Hence, Dr Walapu argued that his APN required payment of an unassessed liability that had not actually accrued, and that this represented an unacceptably draconian power that was incompatible with the Human Rights Act 1998.
Despite this factual distinction, the claim failed, largely on the same legal grounds as those in Rowe. In addition, the taxpayer sought to argue that his scheme was exempt from being notifiable under DOTAS; and so was not susceptible to an APN at all because it was substantially the same as an earlier scheme that had been notified to HMRC. Green J rejected this argument, on the grounds that the earlier scheme was a partnership scheme which had been blocked by ITA 2007 s 113, and the present scheme was a syndicate scheme that was devised specifically to create a sufficient difference to avoid the block on using partnerships. Hence, the two schemes were legally fundamentally different, even if economically and financially they were almost the same. It followed that the scheme used by Dr Walapu had remained notifiable under DOTAS, so that this condition for the issue of the APN had been satisfied.
Ahoy, shipmates
By the time of the next challenge to APNs in Graham, a certain wry humour had set in, at least in the mind of the judge, Sir Kenneth Parker. This may have arisen from the fact that by the time the claim came on for hearing, the judgments in Rowe and Dr Walapu had been given, and these had torpedoed all but one of the grounds of challenge in Graham. This remaining ground involved a play on the transitional provisions for making the schemes in that case notifiable under DOTAS by arguing that, as there had been various partnerships marketed by the promoter concerned, there was therefore, in reality, just one set of DOTAS arrangements governing all the partnerships; and the date for notifying these arrangements had fallen before 1 August 2006, so that they were protected from disclosure under the transitional provision in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations, SI 2006/1543, reg 1. The generic ‘arrangements’ were set out in an information memorandum issued in April 2006 and hence were not notifiable, so that an essential condition for the issue of an APN was absent; namely, that the arrangements were DOTAS arrangements.
Sir Kenneth Parker roundly rejected this submission, holding that the emphasis of DOTAS was on each specific partnership; therefore, in respect of the partnerships concerned in the challenge (Liberty Fund Partnerships 5–8), which were implemented after August 2006, these were in fact individual notifiable arrangements in existence under DOTAS after August 2006 – this being a condition for, and justifying the issue of, the APNs.
The judicial humour arose out of taxpayers’ counsel suggesting that the arrangements for each of the promoter’s partnerships could, for DOTAS purposes, be likened to the spill over of the icy water flowing over the ‘watertight’ doors of the Titanic; and hence there had been just one set of ‘arrangements’ in this case, starting before the critical date of August 2006 and triggering notifiability under the 2006 DOTAS regulations. Somewhat surprised at the heroism of the taxpayers likening their case to the Titanic but warming to the nautical theme, the judge went on to criticise the taxpayers’ counsel’s appeal to consider the ‘reality’ of the situation in a challenge involving highly artificial tax loss schemes, by characterising this plea as a desperate tabula in naufragio, i.e. a plank in a shipwreck used to stop a sailor from drowning.
Rowing against the tide?
The final challenge of the quartet was Vital Nut Co Ltd, heard in May this year with the judgment released in July. With the previous grounds of challenge in Rowe et al lying at the bottom of the ocean, this time the taxpayer argued that the taxpayer had not known what HMRC’s position actually was, because the designated HMRC officer had not actually made a determination, which was a necessary requirement for the issue of an APN. Charles J, however, held that HMRC had not abandoned its primary argument that the claim for corporation tax relief was not valid; and that the taxpayers were, in fact, aware of HMRC’s view, which had been published. Looking at the position in the round, the APN did specify an amount which had been determined to the best of the designated officer’s information and belief. This amount was equal to the asserted amount, which was not a relief from corporation tax resulting from the EFRBS arrangements undertaken by the taxpayer; and so the necessary condition for the issue of the APNs had been made out.
Where will this voyage end?
Despite the shipwrecks to date, there may still be some brave and intrepid taxpayers willing to sail into the dark and foreboding waters of the Administrative Court in order to challenge the validity of their APN. There will always be the jolly matelots of the legal profession keen to be involved in a JR. However, in order to do so successfully they will need to be able to point to some further distinguishing feature of their own case that sets it apart from the grounds deployed in the quartet of failed cases to date and which deserves a reasonable prospect of success. Those who are willing and able to embark on such a voyage, however, would do well to check that they are not sailing in a Stultifera Navis or Ship of Fools.
The judicial review challenges to accelerated payment notices to date have failed comprehensively. Taxpayers should question their legal advisers carefully about bringing future challenges if they are not to throw good money after bad. APNs are not quite as devastating as some advisers think, given that they do not determine the tax liability at stake and merely determine who holds the amount of money at stake, pending appeal and resolution of the substantive issues. APNs are not in breach of natural justice or legitimate expectation and are not irrational. Nor do they engage the protections of the Human Rights Act. This change could have been largely brought about by HMRC speeding up its enquiries and then simply recalibrating its practice on almost always agreeing to applications to postpone tax, pending the outcome of an appeal. Follower notices are a different matter because, unlike APNs, they do engage the Human Rights Act.
Taxpayers should question their legal advisers carefully about bringing future challenges to the accelerated payment notices regime if they are not to throw good money after bad. Patrick Cannon (15 Old Square) reviews the four reported judicial review challenges to APNs of note.
In my article entitled ‘Challenging follower and accelerated payment notices’ (Tax Journal, 3 October 2014), I suggested that taxpayers should think carefully before mounting a challenge to the legislation in FA 2014 on APNs by way of judicial review.
The specific challenges faced by taxpayers included:
the deliberate absence of a statutory right of appeal;
the fact that HMRC will point to a strict and rigorous internal review process at a senior level in relation to taxpayer representations;
the current judicial climate in relation to tax avoidance schemes, where 80% of the cases that HMRC chooses to litigate go its way; and
the restricted role of Human Rights Act 1998 article 6 in civil tax avoidance cases.
Since then, there have been four reported judicial review challenges to APNs of note. All have failed so comprehensively that one is reminded of the prayer to St. Jude, which honours him as the patron of hopeless causes and things despaired of and prays ‘for me who am so miserable’. The cases, in date order, are Rowe and others v HMRC [2015] EWHC 2293 (Admin); Dr Walapu v HMRC [2016] EWHC 658 Admin; R (on the application of Graham and others) v HMRC [2016] EWHC 1197 (Admin); and R (on the application of Vital Nut Co Ltd and another) v HMRC [2016] EWHC 1797 (Admin).
Essentially, each challenge to HMRC has foundered on the rocks of the matters listed in the bullet points above. With each failure, the taxpayer has tried desperately to distinguish the subsequent case by flagging up what he hoped were material differences to try and escape the judicial broadsides on the taxpayers’ grounds of challenge.
The lessons learned
There is a consistent judicial thread running through each of the four judicial reviews, starting with Rowe. This is that APNs were not a bolt out of the blue, which retrospectively changed tax law against the established English legal principles of fairness and natural justice.
In essence, APNs achieve a simple and modest rebalancing; namely, that it will be HMRC, rather than the taxpayer, who will hold the tax in dispute pending resolution of the dispute. There is no determination of tax liability with the issue of an APN and, if the taxpayer ultimately wins the dispute, the tax is repaid by HMRC with interest. The absence of a formal right of appeal is counterbalanced by the right to make representations to HMRC before any payment obligation arises, plus ultimately the ability to challenge the APN by way of judicial review. Moreover, article 6 is on established case law not engaged because this is a civil tax matter – and tax is part of the hard core of public law prerogatives entrusted to states which do not give rise to the protection of article 6 (in contrast with criminal matters such as tax penalties, which do engage article 6 under its criminal head). Nor did APNs infringe the right to property in article 1 of protocol 1 in the Human Rights Act 1998.
Looked at in this light, it is not surprising that the four challenges have capsized, even though each challenge after Rowe sought to distinguish itself from that defeat on increasingly detailed grounds.
Rowe set the tone for those that followed. In that case, the taxpayers were defeated on the following contentions:
The APNs (or partner payment notices (PPNs), as these were partners) were issued in breach of natural justice as they were not afforded the opportunity to make representations.
The PPNs were ultra vires, in that a condition for the issue of the PPNs (in FA 2014 Sch 32 para 3(3)) had not been met. Namely, the partnership return was made on the basis that a particular tax advantage resulted from the tax arrangements. This was that for those losses allocated to a partner which were not used by him in the current year but were carried back, the tax advantage arose not from an item in the partnership return itself (which is a precondition for the issue of the PPN), but from a separate claim by the partner himself to carry back the loss relief.
Breach of legitimate expectation arose from the previous postponement of the tax in issue by HMRC.
There was unreasonableness/irrationality in all the circumstances.
There was unlawful interference with property rights under article 1 of the protocol 1 and breach of article 6 of the Human Rights Act 1998.
In contrast, HMRC’s submissions were that the exercise of discretion in issuing PPNs accorded with the language and purpose of the statutory provisions in FA 2014; they did not breach natural justice or legitimate expectations and were not irrational; and that there were no breaches of the Human Rights Act 1998. These submissions were accepted by the court.
Assessed liability v unassessed liability
Given the comprehensive demolition of the taxpayers’ arguments in Rowe, the next challenge in Dr Walapu before Green J sought to rely on what was said to be an important factual distinction from the Rowe case heard by Simler J. In Rowe, HMRC had formally assessed the taxpayers’ liability so that what was at issue was a crystallised tax liability; while in Dr Walapu, the taxpayer had claimed relief against past income but had not yet had this claim formally assessed. Hence, Dr Walapu argued that his APN required payment of an unassessed liability that had not actually accrued, and that this represented an unacceptably draconian power that was incompatible with the Human Rights Act 1998.
Despite this factual distinction, the claim failed, largely on the same legal grounds as those in Rowe. In addition, the taxpayer sought to argue that his scheme was exempt from being notifiable under DOTAS; and so was not susceptible to an APN at all because it was substantially the same as an earlier scheme that had been notified to HMRC. Green J rejected this argument, on the grounds that the earlier scheme was a partnership scheme which had been blocked by ITA 2007 s 113, and the present scheme was a syndicate scheme that was devised specifically to create a sufficient difference to avoid the block on using partnerships. Hence, the two schemes were legally fundamentally different, even if economically and financially they were almost the same. It followed that the scheme used by Dr Walapu had remained notifiable under DOTAS, so that this condition for the issue of the APN had been satisfied.
Ahoy, shipmates
By the time of the next challenge to APNs in Graham, a certain wry humour had set in, at least in the mind of the judge, Sir Kenneth Parker. This may have arisen from the fact that by the time the claim came on for hearing, the judgments in Rowe and Dr Walapu had been given, and these had torpedoed all but one of the grounds of challenge in Graham. This remaining ground involved a play on the transitional provisions for making the schemes in that case notifiable under DOTAS by arguing that, as there had been various partnerships marketed by the promoter concerned, there was therefore, in reality, just one set of DOTAS arrangements governing all the partnerships; and the date for notifying these arrangements had fallen before 1 August 2006, so that they were protected from disclosure under the transitional provision in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations, SI 2006/1543, reg 1. The generic ‘arrangements’ were set out in an information memorandum issued in April 2006 and hence were not notifiable, so that an essential condition for the issue of an APN was absent; namely, that the arrangements were DOTAS arrangements.
Sir Kenneth Parker roundly rejected this submission, holding that the emphasis of DOTAS was on each specific partnership; therefore, in respect of the partnerships concerned in the challenge (Liberty Fund Partnerships 5–8), which were implemented after August 2006, these were in fact individual notifiable arrangements in existence under DOTAS after August 2006 – this being a condition for, and justifying the issue of, the APNs.
The judicial humour arose out of taxpayers’ counsel suggesting that the arrangements for each of the promoter’s partnerships could, for DOTAS purposes, be likened to the spill over of the icy water flowing over the ‘watertight’ doors of the Titanic; and hence there had been just one set of ‘arrangements’ in this case, starting before the critical date of August 2006 and triggering notifiability under the 2006 DOTAS regulations. Somewhat surprised at the heroism of the taxpayers likening their case to the Titanic but warming to the nautical theme, the judge went on to criticise the taxpayers’ counsel’s appeal to consider the ‘reality’ of the situation in a challenge involving highly artificial tax loss schemes, by characterising this plea as a desperate tabula in naufragio, i.e. a plank in a shipwreck used to stop a sailor from drowning.
Rowing against the tide?
The final challenge of the quartet was Vital Nut Co Ltd, heard in May this year with the judgment released in July. With the previous grounds of challenge in Rowe et al lying at the bottom of the ocean, this time the taxpayer argued that the taxpayer had not known what HMRC’s position actually was, because the designated HMRC officer had not actually made a determination, which was a necessary requirement for the issue of an APN. Charles J, however, held that HMRC had not abandoned its primary argument that the claim for corporation tax relief was not valid; and that the taxpayers were, in fact, aware of HMRC’s view, which had been published. Looking at the position in the round, the APN did specify an amount which had been determined to the best of the designated officer’s information and belief. This amount was equal to the asserted amount, which was not a relief from corporation tax resulting from the EFRBS arrangements undertaken by the taxpayer; and so the necessary condition for the issue of the APNs had been made out.
Where will this voyage end?
Despite the shipwrecks to date, there may still be some brave and intrepid taxpayers willing to sail into the dark and foreboding waters of the Administrative Court in order to challenge the validity of their APN. There will always be the jolly matelots of the legal profession keen to be involved in a JR. However, in order to do so successfully they will need to be able to point to some further distinguishing feature of their own case that sets it apart from the grounds deployed in the quartet of failed cases to date and which deserves a reasonable prospect of success. Those who are willing and able to embark on such a voyage, however, would do well to check that they are not sailing in a Stultifera Navis or Ship of Fools.
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