Our pick of four interesting cases reported since July.
1. Oco: Ramsay applied to PAYE avoidance scheme
In Oco and another v HMRC [2017] UKFTT 589 (1 July 2017), the FTT found that a scheme involving the use of a trust to avoid income tax and NICs on directors’ remunerations failed under the Ramsay doctrine.
Oco had implemented a scheme designed to provide benefits to key employees without incurring income tax (under PAYE) and NICs. The scheme involved setting up an employee benefit trust (EBT), and the subsequent creation of sub-funds for the benefit of particular employees and their families. Benefits were provided mainly by the trustees advancing interest free loans to the employees. The issue was whether these amounts constituted earnings.
The first question was whether at the time or before the payment was made to the EBT, the directors had some form of rights in relation to the sums so that they amounted to earnings capable of being redirected. If the sums were earnings when paid into the EBT, the FTT observed that what the directors chose to invest their earnings in was irrelevant. However, the FTT found that the directors had no legal interest in the sums, which had not been earmarked or allocated.
The second issue was whether the approach in Autoclenz/Antoniades [2011] UKSC 41 and [1990] 1 AC 417 (which concerned bilateral agreements) could be applied to a document which had been unilaterally executed, such as a trust. The FTT found that the approach of searching for the true agreement between the parties did not make sense in the context of a trust. The terms of the trust could therefore not be disregarded and it was not possible to treat the sums as being held in bare trusts at the discretion of each of the directors.
In case the tribunal was wrong in relation to the second issue, it considered the operation of the trust. HMRC argued that the trustee’s behaviour was inconsistent with any intention to exercise an independent discretion. The recitals to the trust deed mentioned that the settlor wished to ‘establish a trust fund for the benefit of its employees and dependants and the employees and dependants of any group company’. In those circumstances, the ‘clear purpose of the trust’ was to provide a means to benefit certain individuals connected through employment or persons connected to such individuals; and it was not unreasonable for the trustee to take account of the views of the settlor and to carry only summary due diligence when considering a request for a loan.
However, on a ‘realistic appraisal of the facts’, applying Ramsay, the tribunal found that the scheme would not serve the purpose intended by the company and its directors, if there was any real question of the trustees acting in a way which was contrary to the directors’ wishes. The amounts received were therefore earnings. Similarly, on a realistic approach, the scheme only made sense if the repayment of the loans could not be demanded.
Why it matters: The appeals were lead appeals and several hundreds of appeals stand behind the lead cases. The scheme was similar to the scheme implemented by the Ranger Football club in RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45 (see Tax Journal, 5 July 2017). In the Rangers case, however, side letters (entered into at the time salaries were agreed) determined the amount to be contributed to the sub-trust and the terms of the trust, whereas no such agreement existed at the time of the payment to the trust in the present case, so that the directors had no entitlement to the monies received by the trust. However, on a ‘realistic appraisal of the facts’, the sub-trusts were money boxes which the directors could assess as they wished. The monies they received were therefore earnings.
2. BPP Holdings: debarring of HMRC
In BPP Holdings v HMRC [2017] UKSC 55 (26 July 2017), the Supreme Court found that the FTT’s decision to debar HMRC from taking further part in proceedings had been justified.
Following a group restructuring, BPP Learning Media supplied books, and another group company, BPP University College supplied education. BPP took the view that there were two separate supplies by separate companies: one standard rated supply of education; and one zero rated supply of books. However, HMRC contended that BPP’s analysis was flawed; or, in the alternative, that the changes made in 2006 represented an abuse. It therefore issued two VAT assessments, against which BPP appealed. BPP made a request for information on 11 November 2013 and, after some correspondence between the parties, it applied to the FTT for an order that HMRC supply the information within 14 days of the order. HMRC offered to supply the information by 31 January 2014 but because it would not agree to the sanction for non-compliance, a hearing was held. Following the hearing, the FTT’s order provided that if HMRC failed to supply the information by the deadline, it could be barred from taking further part in the proceedings.
HMRC did serve a response to BPP’s request on 31 January but BPP applied for an order barring it from the proceedings, on the ground that it had not replied to all of the questions identified in BPP’s request for information. On 24 April 2014, HMRC informed BPP that it was withdrawing the two assessments and therefore conceding two of BPP’s three appeals; however, as it was not withdrawing the decision, the third appeal proceeded. Meanwhile, HMRC supplied a defective disclosure statement and a list of documents some eight days late on 8 May, and did not apply for an extension of time in that connection until four weeks later.
In July 2014, the FTT granted BPP’s application and made a debarring order. The UT allowed HMRC’s appeal and the court of appeal subsequently restored the FTT’s order.
The issue was whether the FTT had been entitled to make the debarring order. The Supreme Court rejected the contention that the FTT’s decision was vitiated because it relied on Mitchell [2014] 1 WLR 795, which had been cut down by Denton [2014] 1 WLR 3926. It observed that the FTT had not relied on a detailed analysis of Mitchell; and that in Denton, the Court of Appeal had described the approached in Mitchell as ‘remaining substantially sound’.
Why it matters: The Supreme Court observed that the FTT had been faced with ‘a binary question, involving two unpalatable choices’: making the debarring order, which was ‘draconian’; or not making the order, which ‘to use the vernacular, would have meant that HMRC effectively would have got away with it’. It added: ‘There may be force in the notion that the tribunal rules should provide for the possibility of more nuanced sanctions, such as a fine or even the imposition of some procedural advantage. Experience suggests that such ideas, while attractive in theory, can often be difficult to formulate or to apply satisfactorily in practice, so I mention the point with some diffidence.’ HMRC’s handling of the case was highly unsatisfactory and it did not ‘get away with it’. This case may be a useful reference where HMRC is unreasonably dilatory. Commenting on the judgment,
Lee Squires and Fiona Bantock (Hogan Lovells) said: ‘This case shows that HMRC will not get preferential treatment when it comes to procedural requirements. It also highlights the importance of complying with directions, and that case management decisions of the FTT are hard to overturn. Finally, it is worth noting Lord Neuberger’s criticism of the stark “binary” choice of sanctions currently on offer, and the suggestion that more nuanced options should be introduced.’ (‘VAT briefing for August’, Tax Journal, 4 August 2017).
3. Glencore: judicial review of charging notice
In Glencore Energy UK v HMRC [2017] EWHC 1476 (29 June 2017), the High Court found that judicial review was not an available remedy to contest the validity of a charging notice issued under FA 2015 s 95.
HMRC had issued a charging notice imposing a charge for diverted profits and Glencore sought judicial review of the notice.
The High Court first observed that judicial review is a remedy of last resort, which should only be granted in exceptional circumstances if an alternative remedy exists. Such an alternative existed in this case under FA 2015 s 101; a statutory remedy involving a review and an appeal to the FTT. The court added that tribunals do not have a judicial jurisdiction but that does not strip them of the duty to resolve disputes which have a public law element, if that falls within the proper ambit of their statutory jurisdiction.
Glencore contended that the review process was neither judicial nor independent but the court found that it was capable of amounting to an alternative remedy. It had been created by Parliament as a form of mandatory mediation following a fixed timetable and, although it was not impartial, HMRC was under a duty to act in good faith. There was ample case law accepting non-judicial alternatives as effective alternative remedies (see De Smith’s Judicial Review (7th ed.) at paras 16–21).
The court also dismissed the argument that s 101 only concerned the quantum of the tax but not the actual liability, as ‘it would make no sense’ if the taxpayer was forced to go into the review without being able to argue that no tax was payable at all. Furthermore, it was intended that a failed review would lead to an appeal and it was accepted that the FTT would have jurisdiction on both liability and quantum. Finally, it would have been illogical for the taxpayer to have to wait for the review period to end before being able to appeal on liability.
The court then considered each of the grounds for judicial review put forward by Glencore and found that each of them fell within the jurisdiction of the FTT. First, Glencore contended that the FTT had wrongly applied the statutory test, as it had only had ‘reasons to believe’ that the tests for diverted profits tax were met, instead of ‘considering’ that this was the case. The court thought that to argue that the review process would not suffice to contemplate the distinction put forward by Glencore ‘elevated to Olympian heights form over substance’. Similarly, HMRC’s alleged failure to consider representations and to give reasons could be remedied as part of the review process.
The court also rejected the submission that there would be some overriding public benefit in the points of law being determined by the High Court. In this case, the public law points were too intertwined with factual issues to make them of wide significance and they were not in any event of such broad significance as to warrant granting permission for judicial review.
In a related decision ([2017] EWHC 1587), the High Court also found that it had no power to grant permission to appeal its decision to refuse permission to apply for judicial review under CPR 52.8 (which applies specifically to such circumstances), so that the only course open to Glencore was to apply to the Court of Appeal.
Why it matters: The High Court accepted that Parliament had been ‘singularly inconsistent’ in its choice of language to describe the scope of the jurisdictions of specialist tribunals and that the scope of the relevant statutory language was not always clear or unambiguous. In this case, it thought that the grounds for judicial review had been ‘carefully crafted in public law garb’ but they concealed the real dispute between the parties and ‘a determination of those public law issues would almost certainly leave the true issues unresolved’.
Rupert Shiers (Hogan Lovells) commented: ‘The case has excited some public lawyers, perhaps with good reason. But this piece is just about the court’s reaction to Glencore’s concerns: the same concerns that many other taxpayers have raised. The reaction looks clear: to challenge a charging notice, in almost every case you will have to follow the FA 2015 process.’ (‘Stick to the process’, Tax Journal, 26 July 2017).
4. Warren: withdrawal from appeal & liability for costs
In F Warren v HMRC [2017] UKFTT 521 (26 June 2017), the FTT found that an appellant, in a complex case, who had withdrawn his appeal to comply with a follower notice (FA 2014 s 204), was liable for costs.
Mr Warren was a member of the MCashback Software 6 LLP and he had been substituted as the appellant in place of the LLP in its appeal against HMRC. HMRC subsequently issued a partnership follower notice to the LLP, following the Supreme Court’s decision in Tower MCashback [2011] UKSC 19. The corrective action required by the notice included the withdrawal of the appeal. Mr Warren was then faced with a dilemma; if he pursued his appeal, he risked penalties. He withdrew his appeal and HMRC applied for costs.
The case had been categorised as complex and Mr Warren contended that he had not had the opportunity to opt out as he had been substituted as the appellant in place of the LLP. The FTT observed, however, that when the tribunal substitutes an appellant, it is free to give any appropriate direction. No direction had been given as to costs, so the case remained a complex case in which the appellant had not opted out.
The tribunal also found that the merits of the appeal were not affected by FA 2014. If a penalty had been imposed, Mr Warren could have appealed against it and he may have been able to justify not taking the corrective action required by the follower notice.
Finally, the tribunal found that Mr Warren’s liability included costs incurred before his substitution as appellant, as any other result would be unfair to HMRC.
Why it matters: The FTT observed: ‘In the course of litigation many things can happen which might alter the view a party takes as to the desirability of continuing the litigation. That does not mean that a party withdrawing an appeal should be able to avoid the cost consequences of doing so.’
Our pick of four interesting cases reported since July.
1. Oco: Ramsay applied to PAYE avoidance scheme
In Oco and another v HMRC [2017] UKFTT 589 (1 July 2017), the FTT found that a scheme involving the use of a trust to avoid income tax and NICs on directors’ remunerations failed under the Ramsay doctrine.
Oco had implemented a scheme designed to provide benefits to key employees without incurring income tax (under PAYE) and NICs. The scheme involved setting up an employee benefit trust (EBT), and the subsequent creation of sub-funds for the benefit of particular employees and their families. Benefits were provided mainly by the trustees advancing interest free loans to the employees. The issue was whether these amounts constituted earnings.
The first question was whether at the time or before the payment was made to the EBT, the directors had some form of rights in relation to the sums so that they amounted to earnings capable of being redirected. If the sums were earnings when paid into the EBT, the FTT observed that what the directors chose to invest their earnings in was irrelevant. However, the FTT found that the directors had no legal interest in the sums, which had not been earmarked or allocated.
The second issue was whether the approach in Autoclenz/Antoniades [2011] UKSC 41 and [1990] 1 AC 417 (which concerned bilateral agreements) could be applied to a document which had been unilaterally executed, such as a trust. The FTT found that the approach of searching for the true agreement between the parties did not make sense in the context of a trust. The terms of the trust could therefore not be disregarded and it was not possible to treat the sums as being held in bare trusts at the discretion of each of the directors.
In case the tribunal was wrong in relation to the second issue, it considered the operation of the trust. HMRC argued that the trustee’s behaviour was inconsistent with any intention to exercise an independent discretion. The recitals to the trust deed mentioned that the settlor wished to ‘establish a trust fund for the benefit of its employees and dependants and the employees and dependants of any group company’. In those circumstances, the ‘clear purpose of the trust’ was to provide a means to benefit certain individuals connected through employment or persons connected to such individuals; and it was not unreasonable for the trustee to take account of the views of the settlor and to carry only summary due diligence when considering a request for a loan.
However, on a ‘realistic appraisal of the facts’, applying Ramsay, the tribunal found that the scheme would not serve the purpose intended by the company and its directors, if there was any real question of the trustees acting in a way which was contrary to the directors’ wishes. The amounts received were therefore earnings. Similarly, on a realistic approach, the scheme only made sense if the repayment of the loans could not be demanded.
Why it matters: The appeals were lead appeals and several hundreds of appeals stand behind the lead cases. The scheme was similar to the scheme implemented by the Ranger Football club in RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45 (see Tax Journal, 5 July 2017). In the Rangers case, however, side letters (entered into at the time salaries were agreed) determined the amount to be contributed to the sub-trust and the terms of the trust, whereas no such agreement existed at the time of the payment to the trust in the present case, so that the directors had no entitlement to the monies received by the trust. However, on a ‘realistic appraisal of the facts’, the sub-trusts were money boxes which the directors could assess as they wished. The monies they received were therefore earnings.
2. BPP Holdings: debarring of HMRC
In BPP Holdings v HMRC [2017] UKSC 55 (26 July 2017), the Supreme Court found that the FTT’s decision to debar HMRC from taking further part in proceedings had been justified.
Following a group restructuring, BPP Learning Media supplied books, and another group company, BPP University College supplied education. BPP took the view that there were two separate supplies by separate companies: one standard rated supply of education; and one zero rated supply of books. However, HMRC contended that BPP’s analysis was flawed; or, in the alternative, that the changes made in 2006 represented an abuse. It therefore issued two VAT assessments, against which BPP appealed. BPP made a request for information on 11 November 2013 and, after some correspondence between the parties, it applied to the FTT for an order that HMRC supply the information within 14 days of the order. HMRC offered to supply the information by 31 January 2014 but because it would not agree to the sanction for non-compliance, a hearing was held. Following the hearing, the FTT’s order provided that if HMRC failed to supply the information by the deadline, it could be barred from taking further part in the proceedings.
HMRC did serve a response to BPP’s request on 31 January but BPP applied for an order barring it from the proceedings, on the ground that it had not replied to all of the questions identified in BPP’s request for information. On 24 April 2014, HMRC informed BPP that it was withdrawing the two assessments and therefore conceding two of BPP’s three appeals; however, as it was not withdrawing the decision, the third appeal proceeded. Meanwhile, HMRC supplied a defective disclosure statement and a list of documents some eight days late on 8 May, and did not apply for an extension of time in that connection until four weeks later.
In July 2014, the FTT granted BPP’s application and made a debarring order. The UT allowed HMRC’s appeal and the court of appeal subsequently restored the FTT’s order.
The issue was whether the FTT had been entitled to make the debarring order. The Supreme Court rejected the contention that the FTT’s decision was vitiated because it relied on Mitchell [2014] 1 WLR 795, which had been cut down by Denton [2014] 1 WLR 3926. It observed that the FTT had not relied on a detailed analysis of Mitchell; and that in Denton, the Court of Appeal had described the approached in Mitchell as ‘remaining substantially sound’.
Why it matters: The Supreme Court observed that the FTT had been faced with ‘a binary question, involving two unpalatable choices’: making the debarring order, which was ‘draconian’; or not making the order, which ‘to use the vernacular, would have meant that HMRC effectively would have got away with it’. It added: ‘There may be force in the notion that the tribunal rules should provide for the possibility of more nuanced sanctions, such as a fine or even the imposition of some procedural advantage. Experience suggests that such ideas, while attractive in theory, can often be difficult to formulate or to apply satisfactorily in practice, so I mention the point with some diffidence.’ HMRC’s handling of the case was highly unsatisfactory and it did not ‘get away with it’. This case may be a useful reference where HMRC is unreasonably dilatory. Commenting on the judgment,
Lee Squires and Fiona Bantock (Hogan Lovells) said: ‘This case shows that HMRC will not get preferential treatment when it comes to procedural requirements. It also highlights the importance of complying with directions, and that case management decisions of the FTT are hard to overturn. Finally, it is worth noting Lord Neuberger’s criticism of the stark “binary” choice of sanctions currently on offer, and the suggestion that more nuanced options should be introduced.’ (‘VAT briefing for August’, Tax Journal, 4 August 2017).
3. Glencore: judicial review of charging notice
In Glencore Energy UK v HMRC [2017] EWHC 1476 (29 June 2017), the High Court found that judicial review was not an available remedy to contest the validity of a charging notice issued under FA 2015 s 95.
HMRC had issued a charging notice imposing a charge for diverted profits and Glencore sought judicial review of the notice.
The High Court first observed that judicial review is a remedy of last resort, which should only be granted in exceptional circumstances if an alternative remedy exists. Such an alternative existed in this case under FA 2015 s 101; a statutory remedy involving a review and an appeal to the FTT. The court added that tribunals do not have a judicial jurisdiction but that does not strip them of the duty to resolve disputes which have a public law element, if that falls within the proper ambit of their statutory jurisdiction.
Glencore contended that the review process was neither judicial nor independent but the court found that it was capable of amounting to an alternative remedy. It had been created by Parliament as a form of mandatory mediation following a fixed timetable and, although it was not impartial, HMRC was under a duty to act in good faith. There was ample case law accepting non-judicial alternatives as effective alternative remedies (see De Smith’s Judicial Review (7th ed.) at paras 16–21).
The court also dismissed the argument that s 101 only concerned the quantum of the tax but not the actual liability, as ‘it would make no sense’ if the taxpayer was forced to go into the review without being able to argue that no tax was payable at all. Furthermore, it was intended that a failed review would lead to an appeal and it was accepted that the FTT would have jurisdiction on both liability and quantum. Finally, it would have been illogical for the taxpayer to have to wait for the review period to end before being able to appeal on liability.
The court then considered each of the grounds for judicial review put forward by Glencore and found that each of them fell within the jurisdiction of the FTT. First, Glencore contended that the FTT had wrongly applied the statutory test, as it had only had ‘reasons to believe’ that the tests for diverted profits tax were met, instead of ‘considering’ that this was the case. The court thought that to argue that the review process would not suffice to contemplate the distinction put forward by Glencore ‘elevated to Olympian heights form over substance’. Similarly, HMRC’s alleged failure to consider representations and to give reasons could be remedied as part of the review process.
The court also rejected the submission that there would be some overriding public benefit in the points of law being determined by the High Court. In this case, the public law points were too intertwined with factual issues to make them of wide significance and they were not in any event of such broad significance as to warrant granting permission for judicial review.
In a related decision ([2017] EWHC 1587), the High Court also found that it had no power to grant permission to appeal its decision to refuse permission to apply for judicial review under CPR 52.8 (which applies specifically to such circumstances), so that the only course open to Glencore was to apply to the Court of Appeal.
Why it matters: The High Court accepted that Parliament had been ‘singularly inconsistent’ in its choice of language to describe the scope of the jurisdictions of specialist tribunals and that the scope of the relevant statutory language was not always clear or unambiguous. In this case, it thought that the grounds for judicial review had been ‘carefully crafted in public law garb’ but they concealed the real dispute between the parties and ‘a determination of those public law issues would almost certainly leave the true issues unresolved’.
Rupert Shiers (Hogan Lovells) commented: ‘The case has excited some public lawyers, perhaps with good reason. But this piece is just about the court’s reaction to Glencore’s concerns: the same concerns that many other taxpayers have raised. The reaction looks clear: to challenge a charging notice, in almost every case you will have to follow the FA 2015 process.’ (‘Stick to the process’, Tax Journal, 26 July 2017).
4. Warren: withdrawal from appeal & liability for costs
In F Warren v HMRC [2017] UKFTT 521 (26 June 2017), the FTT found that an appellant, in a complex case, who had withdrawn his appeal to comply with a follower notice (FA 2014 s 204), was liable for costs.
Mr Warren was a member of the MCashback Software 6 LLP and he had been substituted as the appellant in place of the LLP in its appeal against HMRC. HMRC subsequently issued a partnership follower notice to the LLP, following the Supreme Court’s decision in Tower MCashback [2011] UKSC 19. The corrective action required by the notice included the withdrawal of the appeal. Mr Warren was then faced with a dilemma; if he pursued his appeal, he risked penalties. He withdrew his appeal and HMRC applied for costs.
The case had been categorised as complex and Mr Warren contended that he had not had the opportunity to opt out as he had been substituted as the appellant in place of the LLP. The FTT observed, however, that when the tribunal substitutes an appellant, it is free to give any appropriate direction. No direction had been given as to costs, so the case remained a complex case in which the appellant had not opted out.
The tribunal also found that the merits of the appeal were not affected by FA 2014. If a penalty had been imposed, Mr Warren could have appealed against it and he may have been able to justify not taking the corrective action required by the follower notice.
Finally, the tribunal found that Mr Warren’s liability included costs incurred before his substitution as appellant, as any other result would be unfair to HMRC.
Why it matters: The FTT observed: ‘In the course of litigation many things can happen which might alter the view a party takes as to the desirability of continuing the litigation. That does not mean that a party withdrawing an appeal should be able to avoid the cost consequences of doing so.’
