This article was first published in Tax Journal on 11 December 2020 © Reed Elsevier (UK) Ltd 2020.
As in almost all other walks of life, so too in contentious tax, this year will be remembered as the year of COVID-19. But despite a relatively quiet year for the courts and tribunals, and HMRC officers having been temporarily moved from their regular functions in order to support the administration of the coronavirus job retention scheme, there were still landmark events.
Tax disputes in the time of coronavirus
When lockdown began, the courts and tribunals had to adapt to the use of video conferencing for hearings. The media initially questioned the ability of the tax chamber to deal with its caseload, prompting the chamber president to take the unusual step of issuing a statement in response. In this, Judge Sinfield noted that the number of outstanding cases at the end of March 2020 was less than the number outstanding at the end of the previous quarter and was lower than the figure for all of the last six years except 2018. Virtual hearings do, however, tend to result in longer hearings. The tribunal later reported that, anecdotally, remote hearings can take up to 50% longer than face to-face hearings.
In some cases, however, the need for postponements or extensions was inevitable. Following an initial 28 day stay of all First-tier Tribunal proceedings, all standard and complex proceedings received by the tribunal before 24 March 2020 were temporarily stayed until 30 June 2020, and existing time limits in such cases extended. The effect of the initial stay was the subject of dispute in Ritblat v HMRC [2020] UKFTT 453 (TC), with Judge Sinfield himself holding that it applied to the time limit for HMRC to comply with a direction to issue a closure notice given before the stay was made.
HMRC also updated its guidance on tax appeals and penalties in light of the pandemic. This broadly confirmed that, from 1 February 2020, HMRC will allow an additional three months for making an appeal against a decision or penalty. HMRC will also consider COVID-19 to be a reasonable excuse for failing to comply with certain tax obligations on time (such as payments or filing dates). Indeed, HMRC itself has been more proactive than usual in proposing extensions to time limits, including (unsurprisingly given COVID-19 resource constraints) lengthy ones for the conduct of statutory reviews.
Informal HMRC investigations
In JJ Management LLP v HMRC [2020] EWCA Civ 784, the Court of Appeal confirmed what most thought already: that HMRC is entitled to conduct informal investigations into a taxpayer’s affairs outside the normal statutory framework for enquiries. However, even where HMRC engages with the taxpayer as part of an informal investigation, it must still give a valid notice of enquiry under the relevant statutory provisions if it wishes to issue a closure notice. The decision in Credit Suisse Securities (Europe) Ltd v HMRC [2020] UKFTT 86 (TC), concerning the bank payroll tax, serves as a useful reminder of this. According to the tribunal, whilst there is no ‘magic formula’ set out in the legislation, the relevant communication must clearly state that HMRC is intending to open an enquiry into the return, something HMRC failed to do in that case.
HMRC settlements and clearances
Much has been written about HMRC v IGE USA Investments Ltd [2020] EWHC 2121 (Ch). The case concerns HMRC seeking to depart from a settlement agreement with the GE group on the application of the now-repealed arbitrage rules to certain financing transactions. For now, the court has addressed only preliminary applications by the parties; the main hearing is yet to come. But two things strike us as particularly noteworthy. This first is HMRC’s claim that certain of the representations in reaching the settlement were made fraudulently. But the second, bigger picture point is the seemingly growing trend of HMRC seeking to resile from settlements it has entered into, or clearances it has given, on the grounds of non (or inadequate) disclosure of material facts. The taxpayer’s unsuccessful application for judicial review of HMRC’s decision to depart from a clearance it had given in R (On the Application Of) Boulting v HMRC [2020] EWHC 2207 (Admin) is another such example.
Legal professional privilege
HMRC requests for disclosure of privileged documents, and challenges to claims of privilege, continue. The department appears increasingly confident in its operation of the regulations for resolution of disputes as to privilege, in SI 2009/1916. Though HMRC’s motivation for these requests and challenges is clear, privilege remains (in the words of the House of Lords in Morgan Grenfell [2002] UKHL 21) a fundamental human right. This tension is yet to be resolved.
Two non-tax cases in the Court of Appeal have helped set or confirm boundaries in the underlying law. Civil Aviation Authority v Queen (oao Jet2.com Ltd) [2020] EWCA Civ 25, is the first judgment of the appellate courts to grapple with what it calls ‘multi-addressee communications’: where (for example) legal, tax and business people communicate in a single email chain, which of those emails is subject to legal advice privilege? Pleasingly, its judgment is wholly consistent with the practical approach we believe is most commonly taken in privilege reviews.
In Sports Direct v Financial Reporting Council [2020] EWCA Civ 177, the Court of Appeal was asked to rule that, where a serious HMRC challenge was expected, pre-transaction tax advice could fall within ‘litigation privilege’, which is much more all-encompassing than ‘legal advice privilege’. It refused, for the simple reason that the dominant purpose of the advice was not any future litigation but achieving compliance with the relevant tax laws.
Restitution for tax paid under a mistake of law
Weighing in at 122 pages, there is much to digest in the Supreme Court’s latest judgment in the long-running Franked Investment Income Group Litigation [2020] UKSC 47. For present purposes, it is suffice to note in very broad terms the outcome. Limitation Act 1980 s 32(1)(c), which defers the limitation period for claims for restitution of money paid under a mistake, has been a mainstay of the EU group litigations for the past 19 years. New High Court claims of this sort are now largely blocked by legislation, but significant sums are still at stake. The Supreme Court confirmed by a 4-3 majority that it should still apply where there is a mistake of law (and not just a mistake of fact). But, departing from the House of Lords (as it then was) decision in Deutsche Morgan Grenfell [2006] UKHL 49, the court ruled unanimously that time begins to run not once there is an authoritative judicial decision on the point but at the earlier stage when the claimant discovers or could with reasonable diligence have discovered that they have a worthwhile claim. The court left the application of that test to the facts of the case for the High Court. However, for many taxpayers this is likely to be fatal to their High Court claims.
VAT on contractual early termination payments
In Revenue & Customs Brief 12/2020 and related updates to its guidance, HMRC changed its practice regarding the VAT treatment of payments by customers to suppliers under the terms of a contract on its early termination (regardless of how such payments are described). This follows the CJEU judgments in Meo (Case C-295/17) and Vodafone Portugal (Case C-43/19). Such contractual early termination payments may for the first time be subject to VAT in the UK, depending on the nature of the supply being made under the contract. The brief explicitly says that the new position is to be applied retrospectively. It is understood that aspects of the brief are being reconsidered. If that retrospectivity is not removed, taxpayers that relied on the prior position may think of legitimate expectation and judicial review.
Substantive issues
Despite COVID-19, the courts and tribunals have ruled on a number of issues which appear regularly in HMRC challenges. Inevitably the ones we have chosen to highlight below are just a small cross-section.
In BlackRock Holdco 5 LLC v HMRC [2020] UKFTT 443 (TC), the FTT considered the loan relationships unallowable purpose rule in CTA 2009 s 441. It follows last year’s decision in Oxford Instruments UK 2013 Ltd v HMRC [2019] UKFTT 254 (TC). Crucially, unlike the loan in ‘step 8’ in Oxford Instruments, the evidence showed that the borrower in BlackRock would have entered into the loans in question even if there had been no tax advantage in doing so. Further, the tax advantage purpose did not increase the debits it sought to claim. Applying the just and reasonable apportionment required by s 441(3), the tribunal therefore concluded that none of the relevant debits should be apportioned to the taxpayer’s tax avoidance main purpose so as to be disallowed.
The tribunal’s approach to the question of ‘unconscious purpose’ was more concerning for taxpayers, however. The tribunal appeared to conclude that, because obtaining a tax advantage in the form of the deduction was an inevitable consequence of the borrowing, which was not merely incidental, it was therefore a main purpose of loan. As others have noted already, this begs the question of when obtaining a tax advantage will ever not be an (unconscious) unallowable purpose of a taxpayer’s borrowings.
2020 also saw at least two significant decisions on the interaction of UK domestic law with double tax treaties. The Supreme Court’s decision in Fowler v HMRC [2020] UKSC 22, concerning a deep sea diver, addressed the interaction of deeming provisions in UK domestic tax law with treaties. ITTOIA 2005 s 15(2) provided that the performance of the taxpayer’s duties of employment were to be treated for income tax purposes as the carrying on of a trade in the UK. The question was whether this deeming altered which provision of the UK/South Africa double tax treaty would apply, from article 14 (for employment income) to article 7 (for business profits). The Supreme Court held that it did not. Nothing in the treaty required articles 7 and 14 to be applied to the fictional, deemed world created by the UK legislation.
In Irish Bank Resolution Corporation Ltd v HMRC [2020] EWCA Civ 1128 the relevant domestic law provisions provided that, in calculating the taxable profits attributable to the UK permanent establishment of a non-UK resident company, certain assumptions as to the permanent establishment’s dealing as a separate enterprise, its credit rating and its equity and loan capital were to be made. The Court of Appeal rejected the taxpayer’s argument that this was precluded by the 1976 UK/Ireland double tax treaty. Lord Justice Patten delivered the leading judgment. He concluded that the 2008 OECD model commentary was admissible as an aid to the construction of 1976 Treaty, and ‘It would only be inadmissible if the new material made substantive changes which are inconsistent with the commentaries in existence at the time of the 1976 Convention’. He also concluded that the UK’s domestic approach was not admissible. In a short further judgment, Singh LJ, with whom Rose LJ agreed, also expressed the view that what is now TIOPA 2010 s 6(1) has the status of a ‘constitutional’ statute to which the doctrine of implied repeal would not apply, as the European Communities Act 1972 was held to have in Miller [2017] UKSC 5. This clarifies that a provision in a treaty given effect to under that section overrides a contrary later provision in primary legislation, unless the primary legislation expressly provides otherwise.
Authored by Rupert Shiers and Adam Parry
