R (on the application of Broomfield and Others) v Revenue and Customs Commissioners

JurisdictionEngland & Wales
CourtQueen's Bench Division (Administrative Court)
JudgeThe Honourable,Mr Justice Lewis
Judgment Date27 July 2018
Neutral Citation[2018] EWHC 1966 (Admin)
Docket NumberCase No: CO/2656/2017

[2018] EWHC 1966 (Admin)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

ADMINISTRATIVE COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

THE HONOURABLE Mr Justice Lewis

Case No: CO/2656/2017

Between:
The Queen on the Application of Aileen Marie Broomfield & Others
Claimants
and
The Commissioners for her Majesty's Revenue and Customs
Defendants

Mr Keith Gordon and Miss Ximena Montes Manzano (instructed by Sharpe Pritchard LLP) for the Claimants

Sir James Eadie QC, Mr Richard VallatQC andMr David Yates (instructed by HMRCSolicitors Office) for the Defendants

Hearing dates: 28 and 29 June 2018

Judgment Approved

Mr Justice Lewis The Honourable

INTRODUCTION

1

This is a claim brought by 342 claimants challenging notices, known as follower notices, and accelerated payment notices (“APN's”) issued by the defendants, Her Majesty's Commissioners for Revenue and Customs, pursuant to Part 4 of the Finance Act 2014 (“the 2014 Act”). A follower notice requires a taxpayer to take corrective action to relinquish a particular tax advantage arising out of that taxpayer's tax arrangements. A taxpayer who fails to take corrective action to relinquish that advantage is liable to a penalty. An APN provides, in effect, that any disputed tax must be paid immediately.

2

In summary, the claimants entered into arrangements whereby they provided services through a partnership based in the Isle of Man to companies in the United Kingdom. The partnership paid part of its profits into trusts established by the claimants in the Isle of Man. Payments were then made by the trust to the claimants who were the beneficiaries under the trust. They claimed that the monies received were exempt from income tax under the United Kingdom-Isle of Man double taxation arrangements. The defendants disagreed and sought to assess the claimants to income tax on the monies. The claimants appealed to the First-tier Tribunal.

3

The First-tier Tribunal had already ruled, in a case involving similar arrangements to the present, that the monies received were income which was subject to income tax. The claimants contend in their appeal to the First-tier Tribunal that that ruling was incorrect and that the monies they received under similar arrangements should be treated as exempt under the relevant double taxation arrangement and so not subject to income tax. They also contend that if the money was income then they were in fact employees and they are to be treated as if income tax had already been deducted and the defendant ought to seek to recover any tax due from their employers.

4

The defendants gave the claimants follower notices as they were of the opinion that there was a judicial ruling relevant to the claimants' tax arrangements which, if applied to the arrangements, would mean that the particular tax advantage did not arise. The claimants contend that, on a proper construction of the relevant statutory provisions, they cannot be given follower notices or APNs in circumstances in which their appeal is brought on two grounds only one of which is dealt with by the judicial ruling on which the defendants rely.

5

The claimants also contend that the follower notices and APNs are invalid as there were breaches of sections 206 and 221 of the 2014 Act as the notices did not correctly state the number of days for the making of representations objecting to the notices or, in the case of follower notices, for taking corrective action. They further contend that the follower notices failed to describe correctly the corrective action that the defendants now say the claimant must take, namely abandoning the argument that the monies received are not income and so are exempt from income taxation under the double taxation arrangements (but not abandoning their other ground of appeal before the tribunal, namely that, if the monies are income, then the claimants are to be treated as if income tax had already been deducted). If the follower notices are invalid, then they say that the APNs are also invalid. Further, three claimants (Mr Bennett, Mr Cary and Mr Cibulskis) claim that they were not given the follower notices by the relevant date and contend that the notices are invalid in their cases for that reason.

6

The defendants initially took the position that the claimants had to abandon all aspects of their appeal before the tribunal. They now contend that the relevant provisions of the 2014 Act permit the giving of a follower notice requiring the claimants to relinquish the claim that the monies are not exempt from income tax and so are not subject to tax under the relevant double taxation arrangements and to abandon that argument in their appeal or be liable for a penalty although they recognise that the claimants may maintain their other ground of appeal without being liable to a penalty. They contend that any errors in relation to the time period for making representations or the taking of corrective action do not render the relevant notices invalid. They contend that the follower notices do in fact accurately describe the corrective action or, in any event, a remedy ought to be refused as a matter of discretion.

THE FACTS

The Arrangements

7

The claim for judicial review was argued by reference to the facts of Ms Aileen Broomfield's case as her circumstances are said to be typical of the arrangements made by all 342 claimants. In broad terms, Ms Broomfield established a trust in the Isle of Man of which she was the beneficiary. The trustee was resident in the Isle of Man. The trustee became a partner in a partnership also based in the Isle of Man. Ms Broomfield entered into a contract with the partnership to provide services and was paid an annual fee of, at least initially, £15,000. She was not a member of the partnership.

8

The partnership itself also entered into a contract with a recruitment company to supply the services provided by Ms Broomfield to other companies. By a series of contracts, Ms Broomfield's services were provided over time to different companies in the United Kingdom. Monies paid by those companies were ultimately paid to the partnership. At least some of the partnership's profits were paid into the trust fund of which Ms Broomfield was the beneficiary. Payments were made from that trust fund to Ms Broomfield. The scheme was intended to operate in a way that the fee of £15,000 would be subject to income tax and national insurance contributions but that the payments from the trust to Ms Broomfield would be exempt from income tax under the terms of the UK-Isle of Man double taxation arrangements.

9

Ms Broomfield completed annual tax returns for the tax years 2001/2002 to 2007/2008 inclusive. The return for the 2001/2002 tax year recorded as foreign income (the payments from the Isle of Man trust) a sum of £22,450. The tax return claimed an exemption in relation to that sum on the basis that income tax was not payable under the terms of the double taxation treaty between the United Kingdom and the Isle of Man. The claim for exemption included within the tax return was expressed in these words:

“Profits of IOM Trust

Claim for exemption under Article 3 of the UK-IOM DTA”.

10

Similar returns were made in subsequent years. In 2002/2003, for example, profits of £100,966.64 were shown and again a claim for exemption from income tax under the double taxation arrangements was made.

The Changes in the Law

11

Earlier court decisions had established that partnership income was exempt from income tax under the double taxation arrangements. Legislation was enacted to alter that position and to provide that partnership income was not exempt. However, trusts were structured in such a way that the individual recipients of payments from trusts were not partners and so it was contended that the payments to these individuals were not partnership income and remained exempt from income tax. In 2008, the Finance Act 2008 (“the 2008 Act”) was enacted to counteract this argument. It did so by providing that a “member of a firm” included any person entitled to a share of the income of the firm. On this basis beneficiaries under the trust who were entitled to a share of the profits from the partnership were treated as members of the firm and payments from the trust would be treated as the partnership income of the beneficiary. That income would not be exempt from income tax under the double taxation arrangements. A claim for judicial review, alleging that the legislation contravened Article 1 of the First Protocol to the European Convention on Human Rights as it involved retrospective taxation, was unsuccessful: see R (Huitson) v Revenue and Customs Commissioners [2011] EWCA Civ 893, [2012] Q.B. 489.

The Ruling of the First-tier Tribunal in Huitson

12

The claimant in that case then appealed to the First-tier Tribunal against the assessment in his case, contending that, on a proper interpretation, the relevant statutory provision (now section 858 of the 2008 Act) did not in fact apply to the payments from the trust. The sole issue was whether the profits of the partnership constituted “income” within the meaning of section 858(4) of the 2008 Act. The First-tier Tribunal held that the share of a profit of a partnership, in the context of a beneficiary's entitlement to trust income comprising the trust's share of the profits of a partnership of which it was a partner, was income and so liable to tax: see Huitson v Revenue and Customs Commissioners [2015] UKFTT 448 (TC) especially at paragraphs 88 to 90.

13

Mr Huitson was granted permission to appeal against that ruling. However, he failed to enter the relevant notice of appeal and, on 21 January 2017, that ruling became final and not subject to any further appeal.

The Appeals in the Present Case

14

In 2004, the defendants served notices of enquiry on Ms Broomfield enquiring into her tax returns...

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9 cases
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    ...[2018] EWHC 1271 (Admin) at paragraphs 54 to 61. An analysis of the operation of the provisions is contained in R (Broomfield) v Commissioners of Customs and Excise [2018] EWHC 1966 (Admin). The Statutory Provisions Governing Follower Notices 24 Chapter 2 of Part 4 of the 2014 Act sets out ......
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