Shiner and Another v Revenue and Customs Commissioners

JurisdictionEngland & Wales
JudgeLord Justice Sales,Lord Justice Patten
Judgment Date23 January 2018
Neutral Citation[2018] EWCA Civ 31
CourtCourt of Appeal (Civil Division)
Docket NumberCase No: A3/2016/0188
Date23 January 2018
Between:
(1) Ian Shiner
(2) David Sheinman
Appellants
and
The Commissioners for HM Revenue & Customs
Respondents

[2018] EWCA Civ 31

Before:

Lord Justice Patten

and

Lord Justice Sales

Case No: A3/2016/0188

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE UPPER TRIBUNAL

(TAX & CHANCERY CHAMBER)

Mann J.

[2015] UKUT 596 (TCC)

Royal Courts of Justice

Strand, London, WC2A 2LL

Mr Conrad McDonnell (instructed by Howard Kennedy LLP) for the Appellants

Mr James Rivett (instructed by General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

Hearing dates: 6 and 7 December 2017

Judgment Approved

Lord Justice Patten
1

The appellants are the shareholders and directors of Mark Oliver Homes Yorkshire Limited (“MOH”) which is a residential property developer specialising in the construction of affordable homes. The appellants have at all material times been resident in the UK for tax purposes and have been beneficially entitled to the income which they received from MOH. But, on the advice of PriceWaterhouse-Coopers LLP, they used a tax avoidance scheme which was designed to take advantage of the provisions of the 1955 UK — Isle of Man Double Taxation Treaty (“the DTT”). The charging provisions in Chapter 2 Part 2 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) take effect subject to any arrangements entered into by the UK to alleviate double taxation: see Taxation (International and Other Provisions) Act 2010 s.3 (formerly the Income and Corporation Taxes Act 1988 (“ ICTA 1988”) s.788(6)).

2

Paragraph 3(2) of the DTT exempts the industrial or commercial profits of an Isle of Man (“IOM”) enterprise from UK tax unless it is engaged in trade or business in the UK through a permanent establishment here. An IOM enterprise is defined as including a commercial undertaking carried on by an IOM resident which can be any IOM tax resident including any body of persons whether corporate or non corporate. Person includes a partnership: see Padmore v Inland Revenue Commissioners [1989] STC 493.

3

In April 2005 Mr Shiner set up the Ian Shiner 2005 Settlement in the IOM by transferring to Armourdale Limited (an IOM resident company) as trustee the sum of £10 as the initial trust capital. Mr Shiner as well as being the settlor was also entitled to an interest in possession under the trust. At the same time Mr Sheinman established the David Sheinman 2005 Settlement using Parleybrook Limited as the IOM trustee with £10 as the initial trust capital. He too retained an interest in possession under the trust.

4

Following the establishment of the two IOM trusts, the trustees formed the Redwood Partnership (“Redwood”) which then borrowed £1.28m in order to acquire a development site in the UK from another UK company (Merchant Property Developments Limited) of which the appellants were also directors. The site was developed using MOH as the contractor and the profits from the sale of the houses and other properties were distributed by Redwood to the trustees as partners and then paid to the appellants as trust income.

5

The appellants submitted tax returns for each of the years of assessment 2005/6, 2006/7 and 2007/8 claiming an exemption from income tax based on the combined effect of paragraph 3(2) of the DTT and ICTA 1988 s.788. The effect of the DTT had already been restricted by s.858 ITTOIA which prevented partners in foreign partnerships from claiming exemption from income tax on their share of the partnership income if they were UK residents. Although HMRC have always contended that s.858 in its unamended form was sufficient to remove the benefit of the DTT from the appellants in this case, the point was, they say, put beyond doubt by s.858(4) which was introduced by s.58 of the Finance Act 2008 (“ FA 2008”) and by s.58(4) was deemed always to have had effect. The amendment contained in the new s.858(4) treated as members of a foreign partnership under s.858 “any person entitled to a share of the income of the firm”. This would therefore include the appellants even though they were not partners as such in Redwood during the relevant years of assessment.

6

Relying in part on the retrospective effect of s.58, HMRC wrote to a number of taxpayers including the appellants in August 2008 and have subsequently on 28 June 2012 issued closure notices under s.28 TMA 1970 amending the appellants' self-assessment tax returns for the three years of assessment in question. The appellants have lodged appeals against the closure notices raising a number of challenges to the amended assessments. These include an argument that s.58 FA 2008 and, in particular, its retrospective effect contravened Article 56 of the EC Treaty (now Article 63 of the Treaty on the Functioning of the European Union (“TFEU”)) which prohibits “all restrictions on the movement of capital between Member States and between Member States and third countries”. It is common ground for the purposes of this appeal that the IOM is a third country: see Routier v HMRC [2017] EWCA Civ 1584.

7

Although the Article 56 point is now taken as part of the taxpayers' grounds of appeal against the closure notices, it formed the basis of what Mr Rivett for HMRC described as a pre-emptive strike which the taxpayers launched on 17 November 2008 soon after receiving HMRC's August 2008 letter. This took the form of an application seeking permission to apply for judicial review of HMRC's decision (as it was characterised) to apply the retrospective effect of s.58 to the three relevant years of assessment. They sought a declaration that to the extent that it applies to income received or earned before 12 March 2008, s.858 ITTOIA as amended was incompatible with Article 56. A point was also taken about the incompatibility of these provisions with the appellants' rights under Article 1 of the First Protocol to the Convention but that argument has been disposed of against the interests of the taxpayers by the subsequent decision of this court in R (Huitson) v HMRC [2011] EWCA Civ 893 and can be ignored for the purposes of this appeal.

8

Permission to bring the claim for judicial review was refused by Stanley Burnton LJ on 3 June 2009 but then granted by the Court of Appeal after an oral hearing on 25 May 2010. The claim for judicial review was retained in the Court of Appeal and eventually heard in November 2010 as a substantive application and not as an appeal. On 25 July 2011 ( [2011] EWCA Civ 892) the Court of Appeal dismissed the claim. Mummery LJ (for reasons which I will return to in more detail later) held that there had been no movement of capital sufficient to engage Article 56 because the payment of the £10 (which was the only movement of capital relied upon in each case) had nothing to do with the funding of Redwood and was put into a trust for each appellant and not into the partnership which was a distinct and separate entity. It did not become a movement of capital under Article 56 merely because the IOM trustees became partners in Redwood.

9

On 7 February 2012 the Supreme Court refused permission to appeal.

10

On the basis of the Court of Appeal's decision, HMRC applied to the First-tier Tribunal for an order striking out the appeals against the closure notices so far as they relied on a breach of Article 56 EC. They contended that the point was res judicata as between the appellants and HMRC or alternatively an abuse of process because the taxpayers were seeking to re-litigate a point that had already been decided against them. It was also said that the appeals on this issue had no reasonable prospect of success because the First-tier Tribunal was bound by the principle of stare decisis to follow the Court of Appeal's decision on the Article 56 point.

11

The First-tier Tribunal decided that the matter was not res judicata on the basis of issue estoppel because the Crown was a party to the claim for judicial review but it struck out the Article 56 case as an abuse of process and because it was bound to follow the Court of Appeal's decision on the point. The Upper Tribunal rejected stare decisis as a proper basis for the strike out order. It said that it was not possible to be sure at an interlocutory stage that the facts under consideration in the tax appeals would not be materially different. There is no cross-appeal by HMRC against this part of the decision. But the Upper Tribunal upheld the decision of the First-tier Tribunal that for the taxpayer to rely once again on the Article 56 arguments would amount to an abuse of process.

12

The Upper Tribunal rejected the argument that the differences between an application for judicial review and a statutory tax appeal prevented the reconsideration of the Article 56 point from amounting to an abuse of process. It decided that the First-tier Tribunal did have power to strike out an appeal on these grounds and it rejected Mr McDonnell's submission that the decision of the Court of Appeal was either one made per incuriam or at least could no longer stand in the light of subsequent decisions of the CJEU as to what type of restrictions would be prohibited by what is now Article 63. The taxpayers now appeal with the permission of the Upper Tribunal. Although Mr McDonnell has not in any sense abandoned his arguments about the application of the doctrine of abuse of process to tax appeals and the power of the First-tier Tribunal to strike out on that basis, at the forefront of his arguments he now relies on the recent decision of the CJEU in Case C-628/15The Trustees of the BT Pension Scheme v HMRC as confirming that the decision of the Court of Appeal proceeded on a wrong and far too narrow basis and that this alone justifies the First-tier Tribunal in the application of what must be a broad, merits-based approach to allow the matter to be reconsidered as part of the tax appeals.

Jurisdiction to strike out

...

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