The Supreme Court has today (19 October 2016) issued a judgementcriticising the conduct of Dave Hartnett, the former Permanent Secretary in charge of Her Majesty’s Revenue and Customs (HMRC), for remarks he made about Patrick McKenna, founder of the Ingenious Media Group, in an interview in The Times in June 2012.

“Scams for scumbags”

Dave Hartnett, a controversial figure himself, was not named in The Times’ article and was referred to only as a “senior tax official” but he was reported as saying:

“‘He (Patrick McKenna)’s never left my radar. He’s an urbane man, …, he’s a clever guy, he’s made a fortune, he’s a banker, but actually he’s a big risk for us so we would like to recover lots of the tax relief he’s generated for himself and other people. Are we winning? I would say, beginning to. I think we’ll clean up on film schemes over the next few years.’”

The Ingenious Media Group has been a well-known promoter of arrangements involving the film and entertainment industries that were designed to deliver tax savings and deferral mechanisms to participants. A number of these are still being litigated. The Court heard that Dave Hartnett had described such arrangements as “scams for scumbags” although The Times did not choose to report that particular remark.

The main issue for the Court to decide in this case was whether Mr Hartnett had breached taxpayer confidentiality by naming Mr McKenna and discussing his confidential affairs with The Times, and also whether such a breach was justified on a number of grounds.

Off the record…

The Court was unimpressed by argument on Dave Hartnett’s behalf that the breach was justified because he believed that the discussion with The Times’ journalists would help to explain HMRC’s views on film schemes and tax avoidance generally, and might possibly result in him obtaining information on tax avoidance arrangements not previously known to HMRC. Furthermore, the fact that Mr Hartnett had stated at the outset that the interview would be “utterly off the record” did not alter the simple fact that the duty of confidentiality had been breached by disclosure of confidential information to the journalists.

Selective memory?

It is, and clearly should be, alarming if the Permanent Secretary in charge of HMRC is unaware of the nature and extent of his and his department’s duties of confidentiality to taxpayers, especially when. As the Supreme Court pointed out, section 19 of the Commissioners for Revenue and Customs Act 2005 makes it a criminal offence to contravene the rules. However, it appears that Mr Hartnett’s interpretation of his duties in this respect was selective; reference was made by the Court to Mr Hartnett’s appearance before the Public Accounts Committee during which he refused to answer the committee’s questions regarding alleged “sweetheart” deals with major corporations such as Goldman Sachs on the grounds of taxpayer confidentiality. It appears that Mr Hartnett was perfectly able to remember his obligations when it suited him.

Dave Hartnett’s controversial career

Dave Hartnett’s long career with HMRC attracted more than its fair share of controversy. In June 2010, according to a survey by City University, Mr Hartnett was the nation’s “most wined and dined civil servant”. The Telegraph reported that he was entertained 107 times between 2007 and 2009, mostly at breakfasts, lunches and dinners, by some of the UK’s biggest banks, law firms and accountancy firms, including Goldman Sachs, JP Morgan, Ernst & Young, KPMG, PriceWaterhouse Coopers, and Deloitte.

Sweetheart deals

This fact may not be entirely unconnected with the “sweetheart” deals with major companies, particularly Goldman Sachs, for which he was criticised, originally in articles in Private Eye, leading eventually to an uncomfortable inquisition by the Public Accounts Committee, as mentioned in the judgement. Following his retirement as a civil servant in June 2012, he accepted an appointment as a consultant with Deloitte, the accountancy firm which represented some of the very companies with which the so-called “sweetheart deals” were negotiated.

Time to hear from HMRC?

I wonder if we can expect any comment from HMRC on this important case? I think we can almost certainly assume that prosecuting Dave Hartnett under section 19 of the Commissioners for Revenue and Customs Act will not be considered to be in the public interest. Yet confidence in HMRC’s attitude towards its duty of confidentiality to taxpayers is sure to be undermined, not only by the outcome of this case, but by the way that HMRC has sought unsuccessfully to justify Dave Hartnett’s actions.

It is important to all citizens that they can trust implicitly that public bodies will abide by the laws they are entrusted to administer and that they can be expected to be treated with courtesy and respect, neither of which were afforded by Mr Hartnett to Mr McKenna. However, what is most important about this case is not so much Dave Hartnett’s unacceptable indiscretions as what it reveals about the culture and attitudes now prevailing within HMRC, and, unfortunately, within Government in general. At least we can be thankful that the Supreme Court has the good sense to curb its worst excesses.

During his fateful meeting with undercover reporters from the Telegraph, the England national football team’s erstwhile manager, Sam Allardyce, made some trenchant criticisms of HMRC, accusing them of being the “most corrupt business in our country”. While I am not at all convinced that “corruption” is quite the mot juste to describe HMRC’s behaviour, does he have a point?

In his own words...

Mr Allardyce - who like many football managers, is not known for mincing his words - was quoted in the Daily Telegraph as saying:

“They [HMRC] fly out tax demands without any real knowledge whether they should or shouldn’t. They just put ‘em out willy-nilly and if you pay them, people s--- themselves and pay them. Then they go to their accountant and say, and if you’ve got a s--- accountant, the account (sic) s---- himself and says, well you must owe them, you had better pay it."

Accelerated Payment Notices

Reading between the lines of Sam Allardyce’s colourful if impassioned language, it seems fairly obvious that what he is referring to is HMRC’s powers to issue Accelerated Payment Notices and Partner Payment Notices - which I will hereafter refer to collectively as APNs. Not only do I recognise from Sam Allardyce’s description the methodology that HMRC employs; the tone of the language used is also familiar from numerous and often similarly expletive-laden conversations with clients on the receiving end of APNs. (Fortunately, I do not recognise the reference to "s--- accountants"...)

"The country's so skint..."

The APN legislation was introduced in the 2014 Finance Act. It would be an understatement to say that the new legislation was controversial. According to HMRC, its purpose was to “change the economics of tax avoidance”. Sam Allardyce’s description of the reasons behind the legislation is rather more blunt and prosaic:

“…because the country’s so skint, they come to government and say we’re skint, government says we’re skint how we gonna get the money. Let’s change the laws and let’s just fly out these demands. If you invested in this tax scheme, where they pay the tax back, for investing in new businesses, or in regeneration zones, do you know what I mean, in current poverty areas. But HMRC, you have to pay it back even if you don’t owe it.”

The fact is that Sam Allardyce’s description contains more than a grain of truth. Finance Act 2014 gave HMRC the right to demand disputed tax from taxpayers who have either participated in a scheme which was notifiable under the Disclosure of Tax Avoidance Schemes regulations (“DOTAS”), had received a Follower Notice (issued if there is a final judicial decision which HMRC thinks applies to the recipient’s tax arrangements) or have entered into arrangements where HMRC has issued a counteraction notice under the General Anti-Abuse Rule.

"Willy-nilly"

On the face of it, none of this justifies Sam Allardyce’s allegation that HMRC are sending out demands “willy-nilly”. However, the fact that an arrangement was disclosed under the DOTAS regulations does not of itself signify that it was “notifiable” as the APN legislation clearly requires. In several cases, arrangements were disclosed to HMRC, even though there was significant doubt that they were notifiable, for the simple reason that the penalty for failing to register a notifiable scheme was up to £1,000,000. This point seems to have been lost on HMRC’s Counter-Avoidance teams who have seemingly issued APNs on the assumption that schemes were “notifiable” simply because they were notified. This is not a mere technicality even if HMRC has characterised it as such; they have been obliged to withdraw APNs for precisely this reason. To that extent, the “willy-nilly” claim does have some validity.

Where now for APNs?

As matters stand, we still do not know whether the APN regime is in fact lawful. Various groups of affected taxpayers have taken the matter to judicial review on the basis that the legislation is technically defective, unreasonable, offends against the principles of natural justice, and infringes the recipients’ human rights, including the right to peaceful enjoyment of their possessions. Judges in the High Court have given these arguments short shrift although the leading case, R on the application of Rowe and others v HMRC, is expected to be heard by the Court of Appeal later this year. Given the evident strength of feeling and the sheer scale of the sums involved, a further trip to the Supreme Court seems almost inevitable. So while it's a very early bath for Sam Allardyce amd his career as England manager, the question of the legality of APNs is unlikely to be answered until we are well into extra time.

Settlements with HMRC: a warning

Although there has been a great deal of litigation regarding tax avoidance arrangements in recent years, many cases have not yet reached the courts. HMRC is keen to settle those cases, preferably without litigation and collect the tax. In last year’s Autumn Statement, the Government announced further 'settlement opportunities' for taxpayers and some settlements have already been reached. However, settling with HMRC could result in some paying far more tax than they may ultimately owe.

Settlements with HMRC frequently take the form of binding legal contracts. This means that, even if judicial interpretation of the relevant tax law changes after the contract is signed, the settlement’s terms remain in force, unless the parties agree to vary them or a Court orders otherwise – and there is no guarantee that either of those things would happen.

The De Silva Judicial Review

Next year, the Supreme Court will hear an appeal in a judicial review case, The Queen (on the application of De Silva and another) v Commissioners of Revenue and Customs [2016] EWCA Civ 40. This is one of three cases involving members of the Cotter Solutions Action Group, the others being The Queen (on the application of) Derry v Revenue and Custom [2015] UKUT 416 (TCC) and Dr Walapu v HMRC [2016] EWHC 658. Although the claimants in De Silva were users of the “Liberty” tax avoidance scheme marketed by Mercury Tax Group, the outcome of the case could mean that taxpayers who made carry-back claims would retain the benefit of those claims, even if the scheme or arrangement has been successfully challenged by HMRC. It is those taxpayers who are most likely to be contemplating settlements with HMRC now, possibly to their ultimate detriment.

The relevance of the Cotter case

The point at issue in De Silva is a technical one, namely whether HMRC has enquired correctly into stand-alone claims – i.e. claims not included in a return. HMRC argues in De Silva that an enquiry into a return under section 9A TMA 1970 extends to any claim included in that return, and where there is a claim for a partnership loss, any reduction to the partnership losses as a consequence of an enquiry at partnership level flows through to the individual partners’ returns. This is probably an interpretation that most advisers would have accepted until recently. However, the claimants rely on what they consider to be a clear statement of the law in another Supreme Court case, Cotter v HMRC [2013] STC 2480. The Supreme Court found that a stand-alone claim is not included in a return for a year just because its details are entered on the return form. The De Silva claimants argue that this means that an enquiry under section 9A TMA 1970 is not a valid enquiry into a stand-alone claim. In Cotter, HMRC’s power to enquire into a claim under Schedule 1A TMA 1970 worked to its advantage as it meant that they could collect the disputed tax immediately whereas if it was the subject of a section 9A enquiry, it could not be collected until that enquiry was concluded. However, the claimants in De Silva seek to use Cotter to argue that, as HMRC did not make timely enquiries under Schedule 1A TMA 1970, their stand-alone claims are final and conclusive, even though the Liberty losses were disallowed at partnership level. HMRC argues that the Cotter decision is relevant only to the particular facts of that case and that the scheme of partnership enquiries is such that any amendment to a partnership return must flow through to each partner’s return. The Supreme Court will decide the matter next year.

Proceed with caution...

HMRC does not seem to admit the possibility that they will lose in De Silva and they are certainly not bringing this important case to the attention of those taxpayers they are “inviting” to settle. Individuals whose tax affairs could be affected by the outcome of De Silva would be wise to resist any temptation to enter into settlements with HMRC unless and until HMRC accept that they can be revisited in the event that the claimants win in De Silva. Otherwise, they may find themselves tied into agreements that require them to pay more tax than may be legally due or having to take HMRC to court to have the agreement varied or set aside, with outcomes that are by no means certain.

This article appeared in the October 2016 issue of Accountancy Age magazine.

"Fair share of tax" - does this mean anything at all to HMRC?

If ever there was a topic nearly as hot as immigration in the minds of the general public, it is the question of who does and who does not pay their fair share of tax. What actually constitutes a fair share of tax is very difficult to define. However, the public does seem to think it knows who does not pay their fair share of tax: Google, Facebook, Amazon and Starbucks, for example, and maybe Sir Philip Green too?

In any tax system, fairness is a very difficult concept to pin down. Should partnerships be taxed more heavily than limited companies, for example? And if so, why? Should employees pay more than the self-employed? Should some industries and asset classes attract effective subsidy through the tax system while others do not? The fact is that Governments routinely exercise choices about how much tax should be exacted in various circumstances whether we agree with them or not, and in many cases, it appears that expediency is a bigger factor in the equation than fairness.

It is not my intention to attempt to answer such thorny questions in this article. Instead, I am going to focus on what HMRC seems to think is the fair share of tax it expects individuals and businesses to pay. In examining this issue, I will not dwell on HMRC’s words, framed as they all too frequently are in standard Civil Service doublespeak, but on two of their recent actions through the Courts and Tribunals involving real people, not theoretical circumstances. You may be surprised by what HMRC considers to be “fair”.

What HMRC apparently considers to be “fair”.

Take the recent case of Mr & Mrs De Merwe. Mr De Merwe and his wife entered into a trust arrangement in March 2006 at a time when Mr De Merwe was not domiciled in the UK but was aware that he would become deemed domiciled for Inheritance Tax (IHT) purposes in the following tax year and his share in the house would then be subject to IHT in the future if he took no action. Unfortunately, Mr De Merwe was unaware that the tax law regarding such arrangements had been changed just a few days earlier and as a consequence of the transfer, he became immediately liable to IHT at 20% of the value transferred and would be subject to a further 6% on each 10 year anniversary . He became aware of his mistake some time later and went to the High Court to seek to have the transfer set aside, as he was perfectly entitled to do.

However, HMRC got wind of this and decided to pursue the tax, mistake or not. They applied to be joined as a defendant in the proceedings, arguing on arcane technical grounds that they should have their pound of flesh, irrespective of how much it cost the De Merwes and despite the fact that no funds were realised in the transaction which would enable them to pay any of the tax charged.  Thankfully, good sense prevailed and the High Court granted the relief requested.

Another recent case involved a barrister, Mr Ignatius Fessal, who specialises in Criminal law. Mr Fessal has a particular interest in human rights issues and this case involved one of those rights recognised in the Human Rights Act 1998, namely the right to peaceful enjoyment of his possessions.  Like other barristers, Mr Fessal had accounted for his professional practice income on the cash basis until the law was changed and required him to have accounts prepared on a true and fair basis, subject to transitional provisions. After an HMRC enquiry, it was discovered that Mr Fessal had paid too little tax for 2006/7 and 2008/9 but had paid too much for 2005/6 and 2007/8. To cut a long story short, HMRC demanded the underpayments but refused to repay the overpayments. Mr Fessal argued that this meant that he was now paying tax on the same profits twice.  HMRC remained unmoved and even applied to have Mr Fessal’s appeal struck out on the grounds that it had no merit. However, the Tribunal judges refused HMRC’s application and went on to uphold Mr Fessal’s appeal.

Double standards?

It might be thought that these cases are somehow exceptional. Unfortunately, this is not the case, and they reveal double standards on HMRC’s part which are rather disturbing.

The first double standard concerns HMRC’s interpretation of the law which is anything but fair and even-handed. When HMRC deals with tax avoidance or, to put it another way, tax planning that achieves a result they do not like, they routinely argue before the Tribunals and the Courts that the law should be interpreted “purposively”; in other words if the plain meaning of the relevant legislation yield a result that is disappointing to HMRC, then that meaning should be set aside if it appears to defeat the “evident intention of Parliament”. Now nobody who actually reads Hansard (an unfortunate occupational hazard for tax advisers) or, even more disheartening, reports of the proceedings of the Public Accounts Committee, could possibly believe that MPs have much understanding at all of the tax legislation Parliament passes; far less do we get the impression that Parliament has any “evident intention”. The “evident intention of Parliament” is little more than a convenient fiction created by the judiciary to defeat tax planning which conforms to the letter of the law but produces a beneficial result for the taxpayer rather than for the Exchequer.

Now some might even say that “fairness” goes out of the window and rightly so where tax avoidance is concerned. Yet neither of the cases mentioned above concern tax avoidance as most people would understand it and in both, HMRC argued for a result that would have unfairly impacted on the taxpayers. And these cases are just the tip of a veritable iceberg of evidence that suggests that HMRC has an alarming tendency to abandon all thoughts of “fairness” when the letter of the law works in its favour, however unjustly it might impact on the unfortunate taxpayer.

The second double standard relates to the different ways it treats individuals and SMEs compared to its relationship with multinational companies. The whole culture of HMRC seems to have changed in recent years when it deals with ordinary taxpayers and the missionary zeal it now shows in attacking marketed tax avoidance appears to be leaking into areas where it does not properly belong. This does not seem to affect relationships with the multinationals, which are much cosier. Those taxpayers that HMRC leaves waiting endlessly on the phone will have their own thoughts on the subject of fairness when they learn that HMRC’s customer relationship managers are on first name terms with their counterparts in big business. Compare and contrast, for example, the treatment of café owner, Icilda Newell who almost faced bankruptcy after being asked to pay £500,000 of tax she didn’t owe with that of HSBC, Goldman Sachs, Vodafone and Glaxo Smithkline by former HMRC Permanent Secretary, Dave Hartnett. While the public sees multinational groups paying their fair share of tax as the preferred method of shoring up the country’s finances in times of austerity, it seems that HMRC has other ideas.

The future?

Can we expect this to change in the future? It seems not. In its latestDepartmental Plan, HMRC states that its three main priorities for 2015-2020 are to:

Maximise revenues due and bear down on avoidance and evasion
Transform tax and payments for our customers
Design and deliver a professional, efficient and engaged organisation

Maximising revenues due (not merely being more efficient in collecting tax but getting people to accept higher tax liabilities without any change in the law) is not only a very different objective to ensuring that individuals and businesses pay their fair share of tax, but is arguably diametrically opposed to it. This is an extremely worrying development for any taxpayer facing an enquiry or investigation into their affairs. HMRC is no longer seeking a fair result but the one that secures them the most tax. Clearly, and disappointingly, fairness is not one of HMRC’s priorities, however much the tax-paying public might want it to be.

It will therefore be more important than ever that HMRC enquiries and investigations are handled robustly and tenaciously, by tax advisers who fully understand not just the technical issues but HMRC’s new focus on collecting as much tax as possible from individuals and SMEs. Otherwise, you or your business could end up paying considerably more than your fair share of tax.

Follower notice penalty assessment? What can be done?

One of the most invidious aspects of the follower notice regime is the way that a follower notice penalty of up to 50% of the denied tax advantage is charged if the recipient of a follower notice fails to take “corrective action” by the specified deadline. Taxpayers who have received a follower notice in the past but have not taken the “corrective action” required by the follower notice (or have taken it after the deadline has passed) will receive from HMRC a notice headed: Follower Notice Penalty Assessment: Penalty for not taking corrective action in response to a follower notice.

The follower notice legislation gives no right of appeal against the follower notice itself. It is possible to make representations to HMRC within 90 days of the issue of the follower notice, and if those representations are accepted, HMRC will withdraw the notice. If it transpires that the notice was defective in detail but correct in principle, HMRC will almost certainly issue another notice. If HMRC refuses to withdraw the notice, that decision can only be challenged by judicial review within strict time limits.
However, Section 214 Finance Act 2014 does provide a right of appeal against a follower notice penalty assessment and I recommend that this should be exercised in nearly all cases.

The particular grounds of appeal against a follower notice penalty assessment are set out in section 214(3) Finance Act 2014 and include the following:
   (a)     that Condition A (open enquiry, appeal etc), B (a particular tax advantage results from particular arrangements)  or D (no follower notice has previously been issued in relation to the same tax advantage for the same period) in section 204 was not met in relation to the follower notice,
   (b)     that the judicial ruling specified in the notice is not one which is relevant to the chosen arrangements,
   (c)     that the notice was not given within the period specified in subsection (6) of that section, or
   (d)     that it was reasonable in all the circumstances for [the taxpayer] not to have taken the necessary corrective action in respect of the denied advantage.

The calculation of follower notice penalties is complex so it is entirely possible that a follower notice penalty assessment may contain errors or be capable of being disputed for other reasons.
There may be circumstances which could support the argument that section 214(3)(d) applies so that it was “reasonable in all the circumstances for the taxpayer not to have taken the corrective action”. Taking corrective action involves giving up the right to pursue the claim, which might have been one which had a more than negligible prospect of success at the Tribunal. The judicial decision upon which the follower notice was based might not be directly relevant in the recipient’s circumstances, or other factors might have come into play: for example, there might have been carry-back claims which were arguably final (and therefore not capable of being withdrawn as the corrective action requires) on the authority of the Supreme Court’s decision in Cotter because HMRC had not enquired correctly into the claim (this is the subject of the De Silva case which is still making its way through the Courts). In any event, it seems that what was “reasonable in all the circumstances” must be determined by reference to the circumstances at the time corrective action had been required by the follower notice, and not with the benefit of hindsight.

While the recipient of an accelerated payment notice which has accompanied a follower notice is not entitled to defer payment of any associated Accelerated Payment Notice, the exercise of the right of appeal against the follower notice penalty assessment will allow payment of the penalty to be deferred until the charge is confirmed by a Tribunal or conceded by the recipient.

Appeals should be made promptly as there is a 30 day time limit, although late appeals can be made if a reasonable excuse for lateness can be demonstrated. If you need urgent advice regarding a follower notice penalty assessment you might have received, please contact me and I will be pleased to assist.