Rowe and Others v Revenue & Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Simler DBE |
| Judgment Date | 31 July 2015 |
| Neutral Citation | [2015] EWHC 2293 (Admin) |
| Docket Number | Case No: CO/5901/2014 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 31 July 2015 |
[2015] EWHC 2293 (ADMIN)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mrs Justice Simler DBE
Case No: CO/5901/2014
Mr David Southern QC, Ms Jessica SimorQC andMs Rebecca Murray(instructed by Pinsent Masons LLP) for the Claimant
Mr James Eadie QC, Mr Sam GrodzinskiQC andMr David Yates ( instructed by HMRC Solicitors Office) for the Defendant
Hearing dates: 14,15,16,17 July 2015
INTRODUCTION
These claims for judicial review seek to challenge the legality of partner payment notices ("PPNs") given by the Commissioners for Her Majesty's Revenue and Customs ("HMRC") to the claimants in exercise of new powers under the Finance Act 2014 (" FA 2014").
The grounds for the claims have changed over time, and some arguments are no longer pursued. In particular, the claimants were at pains to make clear (whatever is said in the Grounds and Skeleton Arguments) that there is and can be no challenge to the provisions themselves which are contained in primary legislation (save in one narrow, potential respect). Rather, they say, the challenge is and can only be to the exercise of powers under the legislation in this case. They no longer say that PPNs can never be lawfully issued. Nevertheless HMRC contend that some of their arguments come close to challenging the efficacy of the legislation itself, and are in substance, an attack on the primary legislation contained in FA 2014 itself.
In broad summary the claimants contend that the notices issued in their cases are unlawful and of no effect because:
(a) They were issued in breach of the principles of natural justice because they were never afforded the opportunity to make representations as to why in all the circumstances, they should not have been issued. In particular, they had no opportunity to explain why the sums demanded under the notices are not due and owing; and that it was not reasonable to require payment prior to resolution of the parallel appeals on the underlying substantive tax dispute.
(b) The notices are ultra vires because Condition B is not satisfied. The amounts claimed do not result from the chosen arrangements since they do not result directly from an increase or reduction of an item in the partnership return. Further, absent legitimate enquiries, no tax will ever become "due and payable" within the meaning of FA 2014.
(c) The notices were given in breach of the claimants' legitimate expectation that they would not have to pay any tax in dispute until after the 'First-tier Tax Tribunal ("FTT") had decided all relevant issues, HMRC having not exercised the right to postpone repayment.
(d) The decision to give notices was unreasonable/irrational in all the circumstances of their cases.
(e) The exercise of powers under the legislation involves an unlawful interference with property rights under 'Article 1 of the First Protocol (the right to protection of property) ("A1P1") and in breach of Article 6 of the Convention for the Protection of Human Rights' involving the retrospective imposition of a payment obligation the claimants could not have predicted when they joined the partnerships referred to below.
HMRC's case in summary is that the exercise of discretion in issuing PPNs to the claimants was in accordance with the express language and purpose of FA 2014, and did not breach natural justice or their legitimate expectations. The decisions to give PPNs were not unreasonable or irrational and nor was there any breach of such Convention rights as they assert are engaged.
There are now 154 claimants in total, with two claimants identified as lead cases, Nigel Rowe and Alec David Worrall. All are or were members of Ingenious Media Plc schemes (members of one or more of three partnerships: Ingenious Film Partners ("IFP"); Ingenious Film Partners 2 LLP ("IFP2") and Ingenious Games LLP ("IGames")). None of the LLPs was structured so as to take advantage of the statutory reliefs which Parliament expressly established for film acquisition and production expenditure in sections 138 and 140 of the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA 2005"). Rather, the LLPs were set up to carry on a trade of producing films and it was intended that under generally accepted accountancy principles, each LLP would have large losses in its first year of trading given that expenditure on film production is all up-front. Those losses would, for tax purposes, be allocated to the individual partners who could obtain sideways loss relief by offsetting the losses against other income and gains in the year of the loss or carry back the loss to the earlier year, or both, thereby reducing their liability to income tax that would otherwise have been payable.
The substantive tax dispute in relation to those LLPs (namely whether the schemes were effective to achieve the result contended for) is currently being litigated in the FTT in three lead appeals brought by the managing partners of IFP2, IGames and a third LLP, Inside Track Productions LLP on behalf of a wider group of Ingenious LLPs. The appeals are against closure notices issued by HMRC following enquiries into the partnership tax returns of the Ingenious artnerships. The closure notices concluded HMRC's enquiries, reflecting HMRC's conclusions that the arrangements did not achieve the tax result contended for and that the LLPs did not have relievable losses that could be allocated to individual partners to set-off against their income and gains in the relevant years. The hearing of those appeals commenced in the FTT in November 2014 but is still continuing. I am not concerned with and have formed no view of the underlying merits of the substantive tax dispute. I have little doubt that the appeals raise questions of complexity and accept that there are arguments to be made on both sides.
Mr Nigel Rowe was a member of IFP. He explains that he had to retire early (age 43) on health grounds. He was aware of the tax incentive of putting money into the LLPs. He states that this was critical to his decision to become a partner, since film production is a high risk enterprise. He states that he was aware that the Labour government encouraged investment in the British film industry and believed that his involvement would contribute to generating employment and tax revenues in excess of the original relief granted.
So far as concerns the PPN in his case:
(a) In the tax year 2004/2005 Mr Rowe contributed £750,000 to IFP (made up of a cash sum of £270,000 and a full recourse loan of £480,000).
(b) He made a claim for relief for tax in respect of his share of partnership losses for 2004/2005 (£675,370) on a carry back basis to set off against income and gains in the year ending 5 April 2002.
(c) HMRC did not open an enquiry into that claim and in June 2005 HMRC made a tax repayment of £270,148 to Mr Rowe. Thereafter, Mr Rowe was aware of discussions between HMRC and the Ingenious partnerships about the trade losses, but had no direct discussions himself. He says his expectation was that the relief agreed was final.
(d) By letter dated 17 October 2014, HMRC gave Mr Rowe advance warning that they would be issuing a PPN in respect of his IFP loss claim in the following 2 to 4 weeks (referred to below as a "precursor letter"). The letter explained the effect of the PPN and identified the tax avoidance scheme the partnership had used by reference to its scheme reference number. Under a heading "Problems Paying" it invited Mr Rowe to contact HMRC straightaway if he thought he might have problems paying. The letter also invited him to let HMRC know if there was anything in his health or personal circumstances that might make it difficult for him to deal with the matter. He did not respond to that offer.
(e) By letter dated 14 November 2014, HMRC enclosed a PPN in the sum of £270,147.60 together with a computation explaining how that amount had been calculated. The letter stated that payment was due on 17 February 2015, unless representations under FA 2014 Schedule 32, paragraph 5 were received before that date, in which case (unless withdrawn) the sum would become payable 30 days after the date on which HMRC notified their decision in respect of such representations.
(f) Mr Rowe states that payment of the PPN will cause him hardship because he "did not plan [his] finances on the basis that HMRC could require the whole sum upfront and retrospectively, several years later. Instead, I had an expectation that HMRC could only recover any disputed tax loss following a decision in their favour on all the relevant issues from an independent court or tribunal. In particular I have had to sell shares … and keep the cash available in case it is needed to pay the PPN … The sum in question is enormous as my gross income is in the region of £125,000 which ….does not allow me to save the sort of sum demanded by the PPN."
Mr Alec David Worrall was a member of IFP2 and IGames. He explains his business activity in the film and media industry. He states that he joined the partnership because of his knowledge of and business interest in the film industry. He too was aware of the Labour government's policy of promoting investment in the British film industry by offering tax incentives to do so. He would not have put money into the partnerships without the tax incentives. He states that he regarded this as a business venture, not as a tax-saving exercise.
In his case
(a) In 2005/2006 he contributed £267,638 to IFP2 and IGames: IFP2...
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