Fayed v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 29 June 2004 |
| Date | 29 June 2004 |
| Docket Number | No 58 |
| Court | Court of Session (Inner House - First Division) |
FIRST DIVISION
Lord Justice-Clerk (Gill)
Administrative law - Judicial review - Taxation - Forward tax agreement - Whether ultra vires - Whether discretion to abide by ultra vires agreement - Whether termination of agreement an abuse of power - Legitimate expectation - Inland Revenue Regulation Act 1890 (cap 21), secs 1(1), (2), 13(1), 39 - Taxes Management Act 1970 (cap 9), sec 1(1) - European Convention on Human Rights, First Protocol, Art 1
Taxation - Forward tax agreement - Whether ultra vires - Inland Revenue Regulation Act 1890 (cap 21), secs 1(1), (2), 13(1), 39 - Taxes Management Act 1970 (cap 9), sec 1(1) - European Convention on Human Rights, First Protocol, Art 1
Section 1(1) of the Inland Revenue Regulation Act 1890 provides for the appointment of commissioners for the collection and management of inland revenue. Section 1(2) of that Act provides that the commissioners shall have all necessary powers for carrying into execution every Act of Parliament relating to inland revenue. Section 13(1) of that Act provides that the commissioners shall collect and cause to be collected every part of inland revenue, and all money under their care and management. Section 39 of that Act defines 'inland revenue' as meaning 'the revenue of the United Kingdom collected or imposed as stamp duties, taxes, and placed under the care and management of the commissioners, and any part thereof'. Section 1(1) of the Taxes Management Act 1970 imports this definition in relation to income tax, corporation tax and capital gains tax, which are put under the care and management of the commissioners.
Article 1 of the First Protocol to the European Convention on Human Rights provides: 'Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.'
The petitioners were brothers. The first petitioner was a UK taxpayer and was regarded by the respondents for tax purposes as being resident and ordinarily resident in the United Kingdom. Until at least 5 April 2000 he was regarded by the respondents as not being domiciled in the United Kingdom. He was accordingly chargeable to income tax and to capital gains tax on UK source income and capital gains in the normal way. He was chargeable to income tax and capital gains tax on foreign source income and capital gains on the remittance basis. The second and third petitioners were regarded by the respondents for tax purposes as being neither resident nor ordinarily resident nor domiciled in the United Kingdom, and therefore had only potential liabilities in respect of UK source income and gains. Individuals chargeable to income tax and capital gains tax on foreign source income and capital gains may avoid a charge to tax on foreign remittances by putting in place appropriate arrangements. Since at least the early 1980s the respondents had dealt with the problem of foreign remittances in several cases by entering into forward tax agreements whereby the individual agreed to pay specified annual sums in respect of specified future years of assessment. These sums were accepted by the respondents in lieu of any income tax and capital gains tax for which the individual might be liable by reason of his having received foreign remittances in the United Kingdom. In 1985 the parties entered into a forward tax agreement which was acted on in the years up to and including 1990/91. In 1990 the parties entered into another forward tax agreement in respect of the tax years 1991/92 to 1996/97 inclusive, and all payments specified in that agreement were made. By letters dated 22 and 28 April 1997 the parties entered into a further forward tax agreement in respect of the tax years 1997/98 to 2002/03. The 1997 agreement was a continuation of the 1990 agreement, with indexation of the 1985 and 1990 figures to take account of inflation. The 1997 agreement also contained several new provisions, including provisions that the family members would be treated as not domiciled in the United Kingdom for the period of the agreement. The petitioners duly paid the contractual sums for the years 1997/98 and 1998/99. A number of matters led the respondents to consider that they did not have a complete picture of the first petitioner's financial affairs, and that the 1997 agreement should be terminated if that was possible. The petitioners forwarded a cheque representing the payment due under the 1997 agreement for the year 1999/2000. On 7 March 2000 the respondents returned the cheque and advised that the 1997 agreement had been 'suspended'. By two letters dated 2 June 2000 the respondents advised the petitioners that the 1997 agreement wasultra vires, and that they would require to complete tax returns for the years from 6 April 2000 onwards. As at 2 June 2000 there were eight other forward tax agreements in existence. The petitioners sought judicial review of the decision not to abide by the 1997 agreement. The Lord Ordinary dismissed the petition holding, inter alia, that forward tax agreements were ultra vires. The petitioners reclaimed.
The petitioners argued that forward tax agreements were incidental to the respondents' powers of care and management of inland revenue and were not ultra vires. They argued that the 1997 agreement was not ultra vires because it was an implied term that the agreement would come to an end if one of the petitioners acquired a domicile in the United Kingdom, and even if no such term were implied the agreement would be frustrated by the acquisition of such a domicile. They argued that the decision to terminate the agreement was so unfair as to amount to an abuse of power because it was clear that the respondents had been determined to withdraw from the agreement, other tax payers with forward tax agreements were treated differently, the petitioners had not been allowed a period of time to adjust their affairs to the new legal position, and they had arranged their affairs in reliance upon the agreement. They argued that they had had a legitimate expectation that the respondents would abide by the terms of the agreement, and there had been a breach of that legitimate expectation which had amounted to an abuse of power. They argued that the decisions of 2 June 2000 infringed their rights under Art 1 to the First Protocol to the European Convention on Human Rights, but that there was no infringement of their rights until the respondents refused to accept annual returns made in terms of the agreement, which they did after the coming into force of the Human Rights Act 1998.
The respondents argued that they did not have the power to fix the quantum of tax on transactions which had not yet occurred and of which they had no knowledge, and so forward tax agreements were ultra vires. They argued that the 1997 agreement was ultra vires because the sum fixed was truly random, there was no mechanism for termination or review of the agreement on a material change of circumstances, and it committed the respondents to a basis of taxation which would be contrary to the law if the first petitioner acquired a domicile in the United Kingdom. They argued that once they realised that the agreement was ultra vires they had no option but to hold themselves no longer bound by it. They argued that there had been good reasons to be concerned about the first petitioner's tax affairs, that other forward tax agreements had been brought to an end, and that it was premature to conclude that the petitioners had suffered or would suffer prejudice which would make the setting aside of the invalid agreement an abuse of power. They argued that a taxpayer could have no legitimate expectation that he would be entitled to an ultra vires relaxation of a statutory requirement. They argued that they were pursuing a legitimate aim in departing from the agreement since there was a need to tax individuals fairly.
Held that: (1) the respondents had no power to enter into a forward tax agreement, and the fact that the sum which the respondents contracted to receive was not based on any current information but had merely been updated from the figure which had been used in the agreement in 1985 served only to underline the conclusion that the agreement could not be regarded as facilitating the discharge by the respondents of their duty to collect what was due (paras 72-79); (2) the terms of the 1997 agreement were such as to render it ultra vires (paras 80-82); (3) a statutory authority that has entered into a contract which was ex hypothesi outwith its powers, and later, during the currency of the agreement, acquires knowledge that it had no power to enter into the contract, cannot be said to have a discretion to continue to comply with its terms until the stipulated expiry date, and the petitioners had failed to establish that there was unfairness on the part of the respondents amounting to an abuse of power (paras 99-106); (4) there can be no legitimate expectation that a public body will continue to implement an agreement when it has no power to do so (paras 118,119); (5) the effect of the decisions of 2 June 2000 was that the petitioners lost the benefit of the agreement with immediate effect and could not rely on Convention rights. On the assumption that the Human Rights Act 1998 did apply, the rescinding of the agreement was an interference with the petitioners' rights, at least in the sense of their legitimate expectation, but in rescinding the agreement the respondents were pursuing a legitimate aim, and such...
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