The UK Uncut Legal Action application for judicial review, which was dismissed by the Administrative Court (Nicol J) on 16 May, generated huge public interest – both as a groundbreaking action and because it has exposed some of the inner workings and deliberations of HMRC at the highest level.
The result itself was not a surprise, but it has highlighted the fact that HMRC has tied itself up in knots, in large part due to the litigation and settlement strategy (LSS) and the impact it has had on the approach to settlement of disputes. This whole subject now needs to be reviewed in its entirety to give HMRC more flexibility in how it conducts settlements, but with robust governance by way of oversight from an independent body.
In late 2010, a settlement was agreed between HMRC and Goldman Sachs (GS). This encompassed a number of long running disputes, one of which related to liability to NIC resulting from arrangements with certain employees. A related issue was whether GS was required to pay interest if it agreed to pay the NIC. Agreement was reached on all of the other outstanding disputes; on this one, GS would pay the NIC but HMRC would forgive the interest.
But, on reviewing the settlement, HMRC’s High Risk Corporate Programme Board refused to approve the forgiving of interest. GS became ‘agitated’ as a result, threatening legal action and to withdraw from the code of conduct for banks. Two HMRC commissioners – including Dave Hartnett (DH) then permanent secretary for tax, who had been involved in the original agreement – subsequently approved the settlement. In 2011, details of the settlement were ‘leaked’ and became the subject of much controversy, including a hearing of the Public Accounts Committee. UK Uncut then brought judicial review proceedings challenging HMRC’s decision to settle in light of the circumstances.
A central feature of the case was a memorandum from DH written in the eye of the storm with GS. DH referred to the risk of ‘major embarrassment’ to the Chancellor, HMRC, specifically the LBS, and to DH personally and his correspondent. This appears to have been because DH had understood there was a ‘significant weakness’ in HMRC’s technical position on the interest, and this had been a factor in his conceding it as part of the settlement. In fact, there was no such weakness.
UK Uncut argued that the risk of professional embarrassment to senior HMRC officers was not a relevant factor in exercising their discretion. In their witness statement, DH and the other officers concerned specifically denied that this had been a relevant factor. Cross-examination of witnesses in judicial review cases is extremely rare and, perhaps crucially, UK Uncut did not apply to have them cross-examined on this point. In his judgment, Nicol J hints that had such an application been made he might have allowed cross-examination. But, as this had not happened, he took the denials of DH and the others at face value.
Fundamental to the judgment was the review of this particular settlement (and others) undertaken in the intervening period by Sir Andrew Park. Sir Andrew had concluded that this settlement did not infringe LSS because the NIC and the interest were understood to be separate issues – each of an ‘all or nothing’ nature – on the basis that HMRC believed (as it turned out, mistakenly) there was an impediment to its ability to collect the interest. Nicol J agreed with Sir Andrew’s analysis. He also stated that this particular situation was outside the parameters of LSS, which was designed to cover a ‘usual negotiation situation’. Unfortunately, this meant that he did not have to decide on the relevance of LSS, despite HMRC’s own submission that LSS ‘provided general principles rather than bright line rules’ and that it was not appropriate to consider LSS ‘like a statute’.
A central theme of the campaigns waged by organisations such as UK Uncut, supported by parts of the media and endorsed by the PAC, has been that HMRC should not be concluding settlements with large businesses or wealthy taxpayers. This is simply absurd and misses the fundamental point that the parameters of tax law are, in places, inevitably unclear. For all the government’s talk of a ‘competitive tax system’ with the lowest corporation tax rate, an inflexible system which presumes any dispute in favour of the highest amount of tax will make the UK deeply uncompetitive.
What UK Uncut has uncovered is that the LSS leads to uncertainty and mistakes even at the highest levels. HMRC should have – as it had before 2007 – the flexibility to conclude settlements in line with its powers of care and management. These powers should be overseen by a panel of truly independent scrutinisers – preferably judges, like Sir Andrew Park, who have experience of deciding appeals and are acutely aware of the uncertainties of litigation, which is where all disputes end up if they cannot be settled. That is as impractical a situation as it is unattractive. To say – as Nicol J did – that this was ‘not a glorious episode in the history of the Revenue’ is a masterful understatement. The present system is unsatisfactory and has been shown to be flawed. To that extent, UK Uncut has done us all a favour.
Read the judgment in R (oao UK Uncut Legal Action Ltd) v HMRC [2013] EWHC 1283 (Admin)
