The Queen (on the Application of Marcus Carlton, Roger Hartley and Others) v HM Commissioners for Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Whipple |
| Judgment Date | 30 January 2018 |
| Neutral Citation | [2018] EWHC 130 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: CO/2057/2015 |
| Date | 30 January 2018 |
[2018] EWHC 130 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mrs Justice Whipple
Case No: CO/2057/2015
David Southern QC (instructed by DWF) for the Claimants
David Yates (instructed by HMRC Solicitors' Office) for the Defendant
Hearing dates: 5 and 6 December 2017
Judgment Approved
Introduction
This judicial review is brought by a number of Claimants represented for present purposes by Marcus Carlton and Roger Hartley. The Claimants are members of limited liability partnerships and one limited partnership (the “Partnerships”) which invested in commercial property with a view to taking advantage of business premises renovation allowances (“BPRA”) introduced by Finance Act 2005 (see below for the relevant parts of the statute). The Claimants claimed loss relief associated with their investment in the Partnerships in their personal tax returns. The Commissioners of HM Revenue and Customs (“HMRC”) opened enquiries into the partnership tax returns of two of the Partnerships. HMRC then issued Partner Payment Notices (“PPNs”) to the Claimants under the Accelerated Payments Notices (“APN”) legislation contained in Finance Act 2014, requiring the Claimants to pay a given amount calculated as a percentage based on the losses claimed.
By this judicial review, the Claimants challenge those PPNs. The original challenge advanced a number of grounds which were common to those raised in R (Rowe and Others) v HMRC [2015] EWHC 2293 (Admin), a judicial review brought by a number of taxpayers to challenge the PPN legislation. Permission was granted in Rowe and on 31 July 2015 Simler J refused the application for judicial review in that case. Following Simler J's judgment, the Claimants amended their Grounds for seeking judicial review in this case. Some of the new grounds were said by the Claimants to be specific to their case and not touched by Rowe. On 13 April 2016 Jay J granted permission on two out of six grounds advanced by the Claimants in their Amended Grounds; he adjourned the remaining four grounds pending the appeal to the Court of Appeal in Rowe. The present hearing proceeds in relation to those two grounds only. Jay J granted permission on those two grounds because he accepted they raised issues which were distinct from those raised in Rowe. It follows that the four issues which are common to Rowe are stayed behind the appeal in that case.
The two grounds on which Jay J granted permission are as follows:
i) The Partnerships were commercial in nature and did not constitute tax avoidance. In consequence, the application of the APN legislation to these arrangements is unreasonable and/or an abuse of power (known as “Ground 1”);
ii) HMRC's decision to issue the PPNs was ultra vires because the statutory conditions had not been met on the facts of this case (known as “Ground 3”). (Before me, there was a dispute about the proper ambit of this ground. I shall address that below.)
The grounds on which he adjourned permission were as follows (in summary): that the APN legislation amounts to a breach of natural justice (“Ground 2”), that HMRC had breached the Claimants' legitimate expectations of the tax treatment of the losses sustained by the Partnerships (“Ground 4”), that the decision to issue the PPNs was unreasonable because of a failure to exercise discretion in individual circumstances, alternatively fettering of discretion (“Ground 5”) and that the APN legislation is a breach of article 6, alternatively, article 1 protocol 1 of the European Convention on Human Rights (“Ground 6”).
In the event, the Court of Appeal heard Rowe at the same time as an appeal from the judgment of Charles J in R (Vital Nut) v HMRC [2016] 4 WLR 144. That hearing took place on 18–20 July 2017 and the combined judgment in both cases was handed down on 12 December 2017, shortly after the hearing in this case had concluded and before I had delivered judgment. I invited the parties to make written submissions on Rowe, if they wished to. I received submissions from the Claimants dated 20 December 2017, and responding submissions from HMRC dated 22 December 2017. I will deal with the content of those submissions as appropriate later in this judgment.
Summary
In summary, it is my conclusion that judicial review on the grounds now before me must be refused. The various statutory conditions for the issue of a PPN are fulfilled (Ground 3). There is no other public law reason (such as mistake of precedent fact, abuse of powers, unreasonableness or irrationality) to impugn HMRC's exercise of those powers in this case (Ground 1). In consequence, I conclude that the issue of PPNs to the Claimants in this case was lawful.
Preliminary issue: Claimants' application to exclude certain evidence
Shortly in advance of the hearing, on 27 November 2017 the Claimants issued an application to exclude the Statement of Case in the appeal which is proceeding in the First Tier Tribunal in parallel with this judicial review (I will explain the background to and scope of the FTT appeal below). HMRC's witness, Ms Kate Nash, had appended HMRC's Statement of Case to her second witness statement as part of the evidence relied on by HMRC in support of their defence of this claim.
I heard the Claimants' application at the start of the hearing and dismissed it. I said I would give reasons in my decision. At the same time, I acceded to the Claimants' request that if I was to see HMRC's Statement of Case, I should see the Claimants' Reply to that document as well (and indeed the Further and Better Particulars of the Statement of Case provided by HMRC in response to that Reply).
I dismissed the Claimants' application because I wished to see the FTT pleadings. I thought they were likely to be relevant to the issues in this case. Specifically, I wished to understand the issues to be litigated in the FTT so that I could be sure that I was not trespassing on the FTT's jurisdiction, to ensure that the arguments advanced before me were consistent with the matters pleaded in the tribunal by each party, and to understand the context in which this judicial review fell to be determined. As it turned out, the FTT pleadings were indeed important documents. They were particularly material in the resolution of the Claimants' case on “circular financing”, see below.
Substantive Challenge
It is logical to look at Ground 3 before considering Ground 1, which is in effect at “catch-all”. Before turning to the parties' submissions, I set out the relevant legal provisions and the background facts.
Relevant Legislation
Three areas of legislation are relevant to this challenge: in chronological order, they are, the “DOTAS” legislation which relates to disclosure of tax avoidance schemes (first introduced in 2004 and substantially amended in 2006), the BPRA legislation (introduced in 2005), and the APN legislation (introduced in 2014). It is logical to start with the APN legislation because that legislation empowers HMRC to issue PPNs which are the subject of the present challenge.
APN Legislation
This legislation was introduced by the Finance Act 2014 (“ FA 2014”). The reasons for the introduction of this legislation are well known. They were examined in Rowe and I gratefully adopt Simler J's description of the background (see [11]–[30]), and that of the Court of Appeal (see [6]–[7]), per Arden LJ). Chapter 2 of FA 2014 makes provision for “follower notices” which can be issued to a taxpayer where HMRC consider that a judicial ruling in another case is relevant to the particular arrangements of the notified taxpayer; in other words, and colloquially, that the taxpayer's particular arrangements “follow” a case which has already established the precedent against the taxpayer. The notified taxpayer is required to take corrective action, and is liable to a penalty of up to 50% of the tax at stake if he or she chooses to continue to dispute the tax in light of the follower notice. Chapter 3 of FA 2014 makes provision for APNs. The effect of an APN is to require the person notified to pay the tax in dispute immediately, so that it is held by HMRC pending the course of litigation to determine the tax liability of the underlying arrangements. Schedule 32 of FA 2014 makes special provision for APNs in the context of partnerships. These are known as partner payment notices, or PPNs. PPNs are a sub-category of APNs, directed specifically at partners who have participated in partnerships to which the legislation applies. A specific mechanism for notifying partners is required because those partners will be taxed as individuals, even though the transactions will have been undertaken by the partnership. The individual partners must file a self-assessment return which includes a self-assessment of the amount of income and capital gains payable after taking account of any relief (s 9(1) Taxes Management Act 1970, “ TMA”). The partnerships must also file a return, including a partnership statement which sets out the income or loss sustained by the partnership and the income or loss attributable to each partner, for the relevant period ( s 12AB(1) TMA).
Paragraph 3 of Schedule 32 provides as follows:
“3 Circumstances in which partner payment notices may be given
(1) Where a partnership return has been made in respect of a partnership, HMRC may give a notice (a “partner payment notice”) to each relevant partner of the partnership if Conditions A to C are met.
(2) Condition A is that—
(a) a tax enquiry is in progress in relation to...
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