R (on the application of Rowe and Others) v R & C Commissioners; R (on the application of Vital Nut Company Ltd and Others)
| Jurisdiction | England & Wales |
| Judgment Date | 08 December 2017 |
| Neutral Citation | [2017] EWCA Civ 2105 |
| Date | 08 December 2017 |
| Court | Court of Appeal (Civil Division) |
[2017] EWCA Civ 2105
Court of Appeal (Civil Division)
Queen's Bench Division (Administrative Court)
Lady Justice Arden, Lord Justice McCombe and Lady Justice Thirlwall
Jessica Simor QC, David Southern QC and Rebecca Murray (instructed by Pinsent Masons LLP) appeared for the appellants in both appeals
James Eadie QC, Sam Grodzinski QC, Gemma White QC and D avid Yates (instructed by the General Counsel and Solicitor to HMRC) appeared for the respondents
Income tax – Accelerated payment notices (APNs) – Partner payment notices (PPNs) – Judicial review challenging legality of APNs/PPNs – Whether unreasonable, disproportionate or otherwise unfair – Whether ultra vires because applied retrospectively – Whether in breach of principles of natural justice – Whether PPNs in breach of requirement for understated partner tax – Whether exercise of powers involved unlawful interference with taxpayers' human rights – Whether ultra vires because of designated officer requirements – FA 2014, Pt. 4, Ch. 3, Sch. 32 and 33 – European Convention on Human Rights, art. 6 – First Protocol, art 1.
The Court of Appeal dismissed the taxpayers' appeals against High Court decisions ([2015] BTC 27 and [2016] EWHC 1797) dismissing their claims for judicial review challenging the legality of accelerated payment notices (APNs) and partner payment notices (PPNs), which had been issued due to the taxpayers' participation in tax avoidance arrangements.
HMRC had issued the appellants with APNs/PPNs under FA 2014, Pt. 4, Ch. 3 in relation to the appellants participation in tax avoidance schemes. The APNs/PPNs required the appellants to pay disputed tax in advance of a final determination on whether the tax was in fact due.
The appellants made claims to the High Court for judicial review seeking to challenge the legality of the APNs and PPNs. The claims were dismissed in Rowe v R & C Commrs [2015] BTC 27 and R (on the application of Vital Nut Co Ltd) v R & C Commrs [2016] EWHC 1797 respectively.
The appellants appealed to the Court of Appeal, on the grounds that HMRC's decision to issue the APNs/PPNs was:
- unreasonable, disproportionate and otherwise unfair, and based on an erroneous assessment of the statutory purpose (Ground 1: the unreasonableness ground);
- beyond the powers conferred on HMRC by FA 2014 in so far as HMRC sought to apply the provisions of FA 2014 retrospectively to steps taken before that Act came into force (Ground 2: the retrospectivity ground);
- not in accordance with the principles of natural justice (Ground 3: the natural justice ground);
- (Rowe appeal only) in breach of FA 2014 in that there was no understated partner tax as required by FA 2014, s. 228 and Sch. 32, para. 4 because no tax was due and payable in the majority of cases where partners had made carry back claims (Ground 4: no tax due and payable );
- in breach of article 1 of the First Protocol (A1P1) to the European Convention on Human Rights (the Convention) and art. 6 and 7 of the Convention (Ground 5: the Convention ground); and
- (Vital Nut appeal only) in breach of FA 2014 in that the decision to issue APNs was ultra vires because it was not in accordance with FA 2014, s. 219 to 223 (Ground 6: the designated officer ground).
Lady Justice Arden commented that the breadth of the powers contained in the APN/PPN regime called for caution. Noting that in a case such as Mr Rowe's, if the provisions of the FA 2014 were applied without limitation, the result could be that Parliament imposed a disadvantage on citizen A in order to deter citizens B, C, D, E and F from acting in a similar way. That was on the face of it a “remarkable result”. In principle, it was possible for Parliament to impose such an obligation, but the court would expect the legislation to be expressed in clear language if it was to achieve that effect. The issues of statutory interpretation arising on this appeal were applied on that basis.
Arden LJ did not accept that the PPN served on Mr Rowe was beyond the statutory purpose of the FA 2014 regime. Arden LJ rejected the appellants' submission that it was no part of the statutory purpose of FA 2014 that APNs/PPNs should be served on persons, such as the appellants in the Rowe appeals, who had completed their tax avoidance transaction before the legislation was passed, because the aim of the legislation was to disincentivise the use of tax avoidance schemes. The object of the powers was to enable HMRC by exercising them to disincentivise other taxpayers from entering into such schemes and to deter taxpayers from stringing out appeals.
Arden LJ accepted that it would have been an abuse of power for HMRC to use APNs/PPNs instead of properly pursuing enquires because they lacked the resources to do so, but the evidence did not support any argument that this is what had happened.
In the Vital Nut High Court decision Charles J held that before an APN/PPN could be issued the designated officer did not have to reach a positive view that the scheme was ineffective but he had to reach the view that he was not satisfied that the scheme was effective. In Arden LJ's judgment this test was more generous to HMRC than the statutory language permitted, and as she saw it the designated officer had to be positively satisfied on the information that he then had that the scheme was ineffective; it was not enough for the designated officer to take the view that there was a dispute.
In Arden LJ's judgment:
- the circumstances which were likely to constitute exceptional would be varied and case specific;
- it was sufficient that the legislative scheme provided for disclosure to HMRC and an opportunity to make representations;
- it was sufficient that HMRC had formulated their policy to issue APNs and PPNs in every case where the required conditions had been met, apart from in exceptional circumstances;
- the policy could not affect the function of the designated officer, which had to be performed independently of the Policy (which had been held required him to form a view about the effectiveness of the scheme – which HMRC did per the steps summarised by Green J in Walapu v R & C Commrs [2016] BTC 14),
In Arden LJ's judgment the reasoning of Simler J in the Rowe High Court case, that there was nothing to indicate that the legislation was not to apply where enquiries had been instituted or appeals entered before the regime came into force, was impeccable. The presumption of courts that a statute did not have a retrospective effect could be excluded by clear words.
Arden LJ found that: the delay between opening enquiries and the service of APN/PPNs; the fact that the APNs/PPNs were served shortly before the hearing of an appeal; and the fact that they were served in respect of tax avoidance schemes implemented before the FA 2014 came into force did not mean an APN/PPN could not be served.
Arden LJ left open the question of whether the application by HMRC of their usual hardship rules was necessarily sufficient.
Arden LJ found the issuing of the APNs/PPNs was not in breach of natural justice. The duty to act fairly was met by the taxpayer being able to make representations about whether the arrangements were effective for tax purposes.
Mr Rowe submitted that the requirement that an APN/PPN had to state the amount of the understated tax, which had to be “due and payable”, had not been met because HMRC never opened an enquiry into his tax return for the right year due to way he had made his loss relief claim.
Arden LJ found that the real issue was not how the claim was made, but whether the relevant tax became due and payable if HMRC opened an enquiry into the affairs of the partnership alone and reached the conclusion that the claimed losses were not trading losses. In Arden LJ's judgment, when HMRC made an enquiry into partnership return for the loss year, this operated as a deemed enquiry into Mr Rowe's tax return. Therefore HMRC did not need to open any other enquiry into the standalone claim for relief.
Lord Justice McCombe rejected the appellants' argument that that their rights under A1P1 of the Convention (a person's entitlement to the peaceful enjoyment of their possessions) were breached. McCombe LJ had doubts as to whether the High Court judges were correct to decide that A1P1 was not engaged, but it did not matter to the outcome because he agreed with the High Court decisions that the interference with possessions was “provided by law” and was proportionate and therefore the appellants' appeal failed on this issue.
While McCombe LJ found that one could not be confident that the designated officer in the Vital Nut cases reached the required independent view to determine the required payment to be included in the APN, it was highly likely that the same decision would have been reached by the designated officers in these cases, even if the correct test had been applied by him/her in specifying the sum to be paid.
The Court of Appeal accordingly dismissed the appeals.
This judgment has been much anticipated and provides the lead judgment for the issues raised. Although the taxpayers' appeals have been rejected it is interesting that the court left open the question of whether the application by HMRC of their usual hardship rules was adequate.
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