Revenue 1: Anti-Avoidance and the Appeals System

Revenue Law
Tutorial 1

1. Impression on the TLRP, in particular ITTOIA 2005?

Constitutional dimension: Art 4 Bill of Rights 1689:

• Taxes should not be levied without the authority of Parliament, reiterated in cases Bowles v Bank of England [1913] and Woolwich Equitable Building Society v IRC [1993].
• There is no common law regarding taxation, the area is purely statute based and cases are mere interpretation.
• Interpretation used to be strictly literal, but judges leaned towards a purposive approach post in the 20th century, as seen in Pepper v Hart [1993]

Pepper v Hart (per Lord Browne-Wilkinson)

• “Statute law consists of the words that Parliament has enacted. It is for the courts to construe those words and it is the court’s duty in doing so to give effect to the intention of Parliament …”
• “… references to Pmt material should be permitted as an aid to the construction of legislation which is ambiguous or obscure or which the literal meaning leads to an absurdity.”

Tax Law Rewrite Project (1996 to 2010)

This was an effort to rewrite and simplify the whole UK tax code, aimed at reducing compliance costs. 5 primary and 1 secondary legislation were rewritten. The result was the abolition of schedules and removal of obscure archaic language.

Commentary

• Beighton (1998): tax law is inevitably complex and dynamic, re-writes results in incoherence.
• Tiley (2010): not all relevant areas of law covered, overall unsatisfactory.
• Salter (2010): questions the relevance of terms in old case law now.
• Ipsos MORI survey (2011): saw no savings in compliance costs. Lawyers and non-lawyers alike agreed that rules should be simplified, not just the representation of them.

Office of Tax Simplification

• Commercial life is complex, the tax code reflects this, but will try to simplify rules for simple affairs.

Freeman (2010) and (Susan Ball 2014) both criticised the idea of ‘principle based legislation’. Ball opined that legislation in greater detail is better than less detail, as the latter would incur unnecessary legal expenses.

2. Is the system of income tax appeals efficient?

Tax Management Act 1970: how taxes are first assessed

Only about 1/3 of taxpayers need to make a ‘tax return’, the rest has their taxes automatically deducted from their wages.

• S8: all potential taxpayers required to make returns (upon notice or not) disclosing all financial transactions.
• S7: need to notify HMRC if not given notice (otherwise penalty under s106 and Sched 55 Finance Act 2009 if not done).

Taxpayers assessed by:

• HMRC, or self-assessment
• Self-assed TPs are given longer to make the returns. This was introduced in the 1990s, to save money for HMRC and reduce the number of tax appeals.
• Tax fraud risk: it is happening anyway, but most self-assessment will be done by accountants who have standards to maintain, so will be honest.
• HMRC may challenge the self-assessment.

Pre 2010 Appeals system.

• Appeals were to general/special commissioners, who were separate judicial tribunals independent of HMRC who heard appeals.
• General commissioners: lay-men assisted by legal clerks.
• Special commissioners: legally qualified, their case law constitutes minor precedents.

2010 Reforms

• Tribunals Courts and Enforcement Act 2007 (and s124 Finance Act 2008)
• Replaces the old tax tribunals and commissioners with a two tier system: the Tax Chamber of the First Tier Tribunal (FTT), and the Finance & Tax Chamber of the Upper Tribunal (UT).
• Existing commissioners and judges transferred into these bodies.
• Reforms also apply to social security appeals.
• “Unified tribunal system, efficiency savings. Tribunals are more expert unlike old system and more independent. As management of commissioners’ appeal handled by HRMC.” (Abdul)

The appeal process

• S31 TMA 1970: an appeal can be brought against conclusions or amendments made by HMRC on tax returns.
• S31A TMA: requires written notice within 30 days (unless authorised by HMRC who has been issued with a reasonable excuse by s49).

HMRC review option

• S49A to s49I: gives taxpayer an option to have a HMRC internal review. This avoids the need for an appeal, and is done by a trained review officer not previously involved with the decision in question.

Appeals then go to the FTT. Procedure and composition of tribunals based on the complexity of cases. A case can be designated “Complex” by the FTT and be transferred to the UT. There will usually be a single judge in the UT.

Rules applicable to a tax appeal

• S55 TMA: Taxpayer may make an application for determination by HMRC of postponement on amount reasonably believed to be overcharged.
• S86 TMA: whenever income tax is paid late (even pursuant to postponement), interest is payable. The reverse is also true for tax returns but at a reduced rate.
• S50(6) TMA: burden of proof on the taxpayer. Haythornwaite & Sons Ltd v Kelly “unless TP can prove overcharge, every assessment shall stand good.”
• Wicker v Fraser(1982): The appeal process is adversarial, not inquisitorial as in judges will not approach the primary facts de novo.
• The taxpayer is entitled to written reasons for a tribunal’s decisions Tribunal Procedure (FTT) rules 2009, TP(UT) rules 2008.

Appeals

• Appeal from FT to UT: s.11 TCEA 2007; either side can appeal on a point of law.
• Appeal from UT to CA: s.13 TCEA 2007; either side can appeal on a point of law.
• Appeal from CA ot SC: s.40 CRA 2005; either side can appeal on a point of law.

Distinction between points of Law and Fact:

• Edwards v Bairstow [1956]: per Lord Radcliffe “Without any misconception of law appearing on the face of the case stated, the facts found may be such that no person acting judicially and properly instructed as to the relevant law could have come to the determination reached (reasonable man test); the court may then intervene, having no option but to assume that some misconception of law is responsible for the decision.”
• Only an error in law if (1) incorrect statement of the law, (2) misinterpretation of the law.
• Thus, reasonable interpretation is upheld as misinterpretation can be seen as a decision based upon fact which cannot overturn a decision.
• Tribunal decisions are important as they determine either way decisions.
• Initially, findings of fact of initial tribunal were absolutely final, but reforms under
• s. 12(4)(b) TCEA 2007 - Upper Tribunal
• s. 14(4)(b) TCEA 2007 - Court of Appeal
• s. 40(5) CRA 2005 - Supreme Court

gives the tribunals power to remake a decisions of fact. Gething (2010) comments that tribunals will be reluctant to do this as appellate tribunal will naturally give due deference to conclusions of fact finding tribunal.

• There is a possibility of overpayment relief if it becomes clear that tax was overpaid, given appeal no longer possible and within 4 year after end of tax period.  S33 TMA 1970 and Sch. 1AB.

Hearings are public, but

• r 32 and 14 Tribunal Procedure (FTT)(TC) Rules 2009: hearings are public, but may direct a private hearing on grounds
• b) protect person’s right ot respect for their private and family life,
• c) maintain the confidentiality of sensitive information, and if it publishes a report it must do so insofar as possible to protect privacy
• r 14 may keep details of case or identity of taxpayer confidential
• TPR (UT) 2008: UT has unrestricted discretion to make them private
• R&C Comrs v Banerjee (No.2) [2009]: Henderson J; Court balances public justice and right to privacy. Only in truly exceptional circumstances can TP be private.

Costs for Tribunals;

• No power to order losing side to pay legal costs for winner.
• TP claims that this is a deterrent for appeal.
• It protects losing party from HMRC costs.
• But Tribunal may order wasted costs under s29 TCEA 2007 (costs arising out of some improper, unreasonable, or negligent act of a representative).

Efficient? Irish Revenue (Submission to the Consultation on the Reform of the Appeal System for Tax Matters by the ORC):

• Independence: appeal system operates under the Ministry of justice, thus independent of HMRC.
• Simple but Adaptable Procedures: four tier of categorisation on complexity of cases saves time by allowing formal steps to be omitted for easy cases.
• Speed: availability of sanctions for abuse of appeal process or ability for Tribunal to strike out for failure to comply with Tribunal rules, saves time for court.
• Transparency and Accoutability: HMRC subject to exact same rules as taxpayer, thus can enhance public confidence in the system. Hearings held in public.

3. Other challenges to HMRC

Commissioner for Revenue and Customs Act 2005

• S5 transfers powers from old Commissioners to HMRC
• S9 allows Cs to do what is necessary or incidental to their functions
• S11 must follow general direction of the treasury.

Background: HMRC publishes many ‘statements of practice’ and ‘revenue interpretations to guide TP, but these are not legally binding. HMRC are obliged to keep TP affairs confidential. May also deduct tax at source by PAYE system.

Vestey v IRC (No.s 1 and 2) [1980]: tax liabilities cannot, in general, be set aside by the Revenue unless it is within administrative common sense to do so.

Judicial Review of HMRC

• Re Preston [1985]:
• Judicial proceedings can be brought against HMRC
• But only if there is no alternative remedy, i.e. appeal process
• HRMC can be forced to abide by a previous presentation to TP if going back on it would be so unfair as to amount to an abuse of power.
• R v Her Majesty’s Treasury, ex p Smedley [1985]: TP has standing to question the lawfulness of raising of taxes, or how they are to be spent.
• R v IRC ex p National Federation [1982]: traditionally no standing to challenge HMRC decision towards another TP.
• R (UK Uncut Legal Action ltd) v R&C Comrs [2012]: but courts now take a more relaxed approach. Campaign group allowed to question HMRC levy on Goldman Sachs.
• R v AG (ex pImperial Chemical Industries plc): standing if HMRC treatment of business rivals impacts own business.

HMRC advice binding, but only if TP acted in transparency and good faith.

• Re Preston: public pronouncements binding,
• R v IRC, ex p MFK Underwriting Agents Ltd: but where TP seeks advice, this is only binding where (1) TP makes full disclosure of transaction, (2) TP receives an assurance, (3) TP made clear intended use of guidance, (4) guidance clear and unqualified.
• R v IRC ex P Matix-Securities Ltd [1994]: confirmed MFK. Other factors were: (1) TP knew, or ought to have known that more senior level guidance needed, (2) TP imposes unreasonable deadline for advice, (3) mistaken advice was corrected before irrevocable reliance.

HMRC can be bound by conduct creating an understanding.

• R v IRC ex P Unilever plc (1996): distinguishes MFK, here HMRC conduct conveys an understanding to a TP, and would be an abuse of power to go back on it. L Bingham states that: “categories of unfairness are not closed, precedent is a guide not a cage.”

HMRC advice/practice only binding if it was clear.

• R (Davies v R&C) Cmrs [2011]: must be clear, clearly specifying criteria by reference to which claims can be based upon before it is binding. Must be clear to ‘ordinarily sophisticated taxpayer’ not taking into account legal advice taken.

Withdrawal of Advice.

• R (Cameron) v R&C Comrs [2012]: binding until guidance revoked by reasonable notice. Revocation needs to be published in the same manner advice was given.

Extra-statutory consessions:

• R (Wilkinson) v IRC [2005]: no power to do so. Tax advantage for widows held not to apply to widowers even if to prevent gender discrimination.

HMRC restricted tort duties:

• Neil Martin Ltd v R&C Comrs [2007]: Liability in tort?
• No for breach of HMRC’s functions.
• No for breach of duty of care
• No for breach of administrative errors
• Only where HMRC would be vicariously liable for a staff member who went beyond an administrative error.

Back-tax and forward tax agreements

• IRC v Nuttall [1996]: contractual agreement to accept a sum in lieu of TP’s actual tax liability, but only for sound reasons. E.g. investigating exact liability too onerous.
• Fayed v Advocate General for Scotland (2004): cannot accept sum now for future TP tax liability.

4. Significance of classifying receipts/expenditures as income or capital

At moment of receipt:

• Bird v IRC [1989]: it is necessary for Revenue to elect between raising a charge. i.e. to avoid double taxation

At moment of expenditure – deductions:

• Pool v Guardian Investment Trust Co [1922]: Tree and fruit analogy. Capital ➔ tree or land; Income ➔ fruit or crop.
• Hudson’s Bay Co Ltd v Stevens (1909): sale of capital assets means profits are capital gains.
• Coutaulds InvestmentsLtd v Fleming: capital gains equivalent to ‘accretion to the tree’ as opposed to a fruit of it.
• Mackenzie v Arnold: fruit of a person’s labour is income, here novelist sold copyright
• Withers v Nethersole: but not after business has ceased ➔ capital income

5. Distinguishing fixed and capital receipts

Statute:

• Income Tax (Earnings and Pensions) Act 2003
• Income Tax  (Trading and Other Income) Act 2005
• Income Tax Act 2007
• Taxation of Chargeable Gains Act 1992

But caselaw provides a more detailed distinctions

• Heather v P-E Consulting Group Ltd: CA acknowledges that there are many difficult borderline cases. Where uncertainty arises lawyers and accountant needs to make a decision using existing precedent or the nearest they can find. Then, by custom, practice or law a clear border will be established

Accountancy practice

• Odeon Associated Theatres Ltd v Jones: courts will follow established principles of sound commercial accounting unless statute provides otherwise. Where there is lack of/conflicting evidence the courts must decide. There is no definition to go by because commerce is complex.

6. Distinction between fixed and circulating capital assets

Smith & Son v Moore: no clear distinction, but refers to Adam Smith definitions

• Fixed capital: owner turns to profit by keeping it (capital)
• Circulating capital: profit by parting with it (income

HMRC BIM33015: display stock is circulating capital

Golden Horse Shoe v Thurgood: must take into account nature of trade. Gives examples between manufacturer use of land, machinery, as opposed to dealers of the two.

Comr of Taxes v Nchanga Consolidated Copper Mines: there are different tests for difficult cases. A distinction must nevertheless be made.

7. Lorry, fixed or capital?

Depends on nature (Golden Horse Shoe).

8. T owns a factory making widgets.  He sells half of his machinery for £50,000.  The same day, he uses £40,000 to purchase new machinery, and the remaining £10,000 to buy raw materials.  Explain whether this £50,000 should be classified as income or capital.

Machinery sold produces a capital receipt, T is a factory making widgets (tree & fruit analogy (Pool v Guardian), any profits made will be capital gains (Hudson’s Bay v Stevens). Nature of the trade needs to be looked at, T is not a machinery dealer (Coutaulds v Fleming).

9. T1 is a professional painter.  She sells one of her paintings for £100,000.  T1 then dies, and by her will leaves another of his paintings to T2.  T2 sells that painting for £500.  When these two paintings are sold, are the receipts income or capital?

First painting is fruits of T1’s labour, thus an income receipt (Mackenzie v Arnold), but classification would be pivotal on whether T1 has ceased business at the time of sale (Withers v Nethersole). Second painting was acquired by will, thus not of T2’s labour, a capital receipt.

10. Is tax avoidance a problem?  If so, is the law dealing with it in the right way?

Tax avoidance is distinguished from tax evasion

• Flesch (1968): tax avoidance is lawful as it minimises tax exposure without resorting to fraud, deception or concealment as opposed to tax evasion.
• Wheatcroft (1955): sets out characteristics of tax avoidance
• Avoids tax
• Entered into (whether in artificial or unusual form) for that purpose
• Lawful
• Not a transaction legislature intended to encourage

HMRC estimates that £3bn a year lost to tax avoidance.

Traditional approach of the courts:

IRC v Westminster (Duke of): Duke of Westminster covenanted to pay employees weekly sums in place of monthly wages to claim tax reductions. Crown argued that courts need to look at ‘substance of the case’. The HL was unanimous on general principle but not on fact.

General principle: wording of tax statute should be applied as it is, not as it would have been had the payer not taken steps to avoid tax.

• L. Atkin: you must not go beyond legal effect of agreements made … construed with ordinary rules … (although dissents on fact)
• L. Tomlin: rejects the doctrine that the Court my ignore legal position and regard what is called the ‘substance’. Legal transactions cannot be ignore simply because they pay less tax.
• L. Macmillan: a ‘technical’ question
• L. Wright: no room for ‘subtance’

But realised the courts should disregard ‘shams’

• Snook v London: legal documents intended by them to give the appearance of legal rights/obligations different to actual rights/obligations.

Traditional approach of govt: promulgate TAARs to prevent each new scheme one by one.

New approach of HL:

Ramsay (WT) v IRC: L. Wilberforce: where the TP has bought a scheme to cancel out or negate gains to avoid tax, and his fiscal position is precisely the same after operations, the court may in fact treat these transactions as a nullity: not producing gain nor loss (reference to Rawlings). (circular scheme)

IRC v Burmah Oil: confirms Ramsay, strikes down a scheme where there was a pre-ordained series of transactions with no commercial purpose other than avoid tax.  (circular)

Furniss v Dawson: formulation of new approach (linear scheme)

• A pre-ordained series of transactions/one single composite transaction
• Steps inserted with no commercial effect but avoid tax
• If above two exist, court to look at end result and apply relevant tax rules.

Inserted steps may be disregarded, and if necessary reconstructed to negative the effects of tax avoidance scheme. Facts: TP formed investment company, sold shares of business to IC, then IC shares to buyers. Because the IC still exists, court reconstructed transaction as direct disposal of shares to buyers, consideration being monies paid to IC with consent of TP.

Craven v White: confirms Furniss, re-iterates steps steps for ‘linear transactions’ in particular:

• Consider whether all dealings under scrutiny forms part of a single transaction
• Any steps with no commercial purpose?
• Discard any found
• Identify end result and tax it

Reformulation of the new approach (2011):

Tower MCashback v R&C Comrs (HL): applied new approach but rejected Furniss formulation as too rigid. Emphasising that new approach about interpreting individual statute.

• L. Walker JSC “in the context of a pre-ordained transaction … the court is concerned to t the facts, realistically viewed, against the statutory text, purposively construed.

Tiley (2011) on Tower MCashback: this is abstract and high level reasoning. Although new approach has correct constitutional basis, it does not challenge existing caselaw and creates uncertainty, but this is not necessarily a bad thing.

Note abandoned approaches:

• Ensign Tankers v Stokes: tax mitigation is not avoidance, TP underwent real detriment to qualify for tax exemptions, no clear definition
• IRC v Fitzwilliam: new approach only applied if reconstruction was realistic or intellectually possible, no clear definition
• MacNiven v Westmoreland: new approach only applied to statute wording that Parliament intended to have ‘commercial meaning’. But this abandoned in Barclays Mercantile Business Finance LTd v Mawson [2004] for lack of realism in drawing the line.

Overall, caselaw is uncertain and Tower MCashback seems to be the final formulation. Lord Walker JSC comments that jurists will not like the fact that clarity in Ensign and Barclays Mercantile wa overruled.

Unpredictability: disagreement between Law Lords:

• L. Oliver (1993): Parliament did not intend the new approach, this is judicial activism to obtain more benefits then Pmt provisions intend to confer.
• L. Templeman (2001): strongly supports new approach and accuses new generation of Law Lords of weakening it.
• David Wilde (2005): not the role of courts to tax people

Constitutional question

Craven v White : HL emphasised that new approach is a principle of statutory interpretation, not a moral rule.

McGrath v McDermott: this would be a breach of separation of powers.

Fitzwilliam: but this is a rule of statutory application, not statutory construction (whatever that means)

Statutory reform

DOTAS (Disclosure of Tax Avoidance Schemes) system:

• 4 SI’s issued on Finance Act 2007.
• R (Prudentia) v Special Comrs of Income Tax [2013]: disclosure obligation applied to all except professional privilege of tax advice from lawyers (as opposed to accountants), here burden shifts to TP.

GAAR (General anti-abuse rules):

• Finance Act 2013 Part 5 and sched 43:
• Reasonable tax planning is not affected
• An additional rule, HMRC may still challenge tax arrangements falling outside GAAR
• Sets out general anti-abuse rule, defines ‘abuse’ and ‘tax advantage’ and sets out counteracting measures.
• No direct penalties, scheme simply struck down and TP pays tax owed.
• But may be a penalty to take reasonable care in making tax return

Evaluation of GAAR

• HMRC guidance (2013): meant for deterrence
• Lethaby (2012): but difficult for tax consultants and TP to draw the line between reasonable tax planning and abuse.
• Freeman (2013): strongest advocate, but complains lack of clarity
• Law Society (2015): uncertainty inconsistent with Rule of Law
• Public Accounts Committee (2013): HMRC is under-resourced compared to large accountancy firms.
• Gammie (2013): avoidance a natural result of poorly designed tax system, instead there should be reform.
• David Cameron (2013): UK has spent hundreds of millions combating tax avoidance, but perpetrators will just move elsewhere.
• Starbucks (2013): threatened to withdraw £100m worth of investments in response o political attacks on alleged tax avoidance.

Finance At 2014:

• Part 5 – naming and shaming of scheme promoters with a history of misconduct
• New investigation powers against promoters.
• Part 4 – disputed tax under avoidance schemes now payable up-front.