England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/02/2011

Mr Justice Kenneth Parker :

Introduction

1. The Claimants (collectively referred to hereafter as "CLAC") challenge by an application for judicial review the decision of the Commissioners for Her Majesty's Revenue and Customs ("HMRC") made on 25 November 2010 and sent to CLAC in a letter dated 30 November 2010 ("the decision") to cease to deal with CLAC as an agent or representative for any taxpayer and to cease to communicate, by any means, with CLAC as tax agents for taxpayers. By letter dated 30 November 2010 HMRC informed the clients of CLAC of the decision.
2. A wide-ranging attack on the lawfulness of the decision narrowed, by the time of the ("rolled up") oral hearing of the application for judicial review, to two grounds, namely, first, an alleged unlawful failure by HMRC to give CLAC the opportunity to make representations before HMRC took the decision and, secondly, an alleged failure to state reasons, or adequate reasons, for the decision.

The Background to Authorised Tax Agents

3. Section 1 of the Taxes Management Act 1970 ("TMA 1970") provides that the Commissioners for Her Majesty's Revenue and Customs shall be responsible for the collection and management of income, corporation and capital gains tax.
4. Under Section 5 of the Commissioners for Revenue and Customs Act 2005 ("CRCA 2005"), the Commissioners are responsible for the collection and management of revenue, defined as including taxes, duties and national insurance contributions.
5. By Section 9 of the CRCA 2005

"(1) The Commissioners may do anything which they think –

(a) necessary or expedient in connection with the exercise of their functions, or

(b) incidental or conducive to the exercise of their functions."

6. HMRC has adopted the practice of dealing with agents on behalf of taxpayers in the exercise of its general statutory powers. There is no specific statutory provision which requires HMRC to deal with agents authorised by taxpayers.
7. HMRC's guidance on agents, posted on its websites, states, inter alia:

i) Tax agents, advisers or accountants must be formally authorised by an individual or business to deal with HMRC on their behalf.

ii) HMRC defines an "agent" as someone who is appointed to discuss, correspond or transact with them about matters they are responsible for.

iii) Once an agent is authorised to act on a client's behalf, HMRC can discuss and exchange the client's personal and financial information with the agent, and send letters, forms or returns relating to their tax affairs.

iv) Agent authorisation will not transfer a client's legal obligations to his agent.

v) Under the heading "How long does the authorisation last?", the guidance states:

"The authorisation will continue until HMRC are told that you or your client has withdrawn it or when your client dies."

8. HMRC has no formal procedure to deal with the termination of an authorised agency for suspected fraud or other serious misconduct.
9. HMRC Business Customer Unit issued a confidential Note to HMRC staff on 30 June 2009 giving guidance on dealing with agents.
10. The Summary of the Note states that it is:

"designed to help HMRC staff identify agent conduct that falls below that which HMRC and the major agent representative bodies would consider appropriate in a professional relationship and sets out the reporting mechanisms to use when issues of this nature arise".

11. The Note identifies four main headings of poor agent behaviour:

i) Suspected repayment fraud or evasion;

ii) Abusive, threatening or discriminatory behaviour;

iii) Technical ability that puts tax at risk;

iv) Agent behaviour, which though legal, give HMRC cause for concern.

12. The Note sets out "general principles and guidance" to apply when HMRC is considering what can be done on a practical level when poor agent behaviour is encountered. Under the heading "Refusal to deal with an agent entirely – is this an option?" the Note states that HMRC should not refuse to deal with an agent completely other than in "the most exceptional and extreme circumstances", in which case legal advice should be sought. Under the heading "What can we tell our customers if we refuse to deal with their appointed agent?" the Note indicates that, generally, disclosure of information regarding an agent's behaviour is prevented by Section 18(1) of CRCA 2005 but

"there are … exemptions within Section 18(2) CRCA 2005 that would enable a necessary, relevant and proportionate disclosure to be made to our customer about the behaviour of their agent."

13. Valuable information about authorised tax agents is contained in the Report of the National Audit Office ("Engaging with Tax Agents") dated 13 October 2010. In Part One the following general information is given under the heading "Tax agents are important intermediaries between the Department and its customers [sc. taxpayers]":

"1.1 HM Revenue & Customs (the Department) estimates that around eight million taxpayers receive help from third parties in completing and filing income tax and corporation tax returns each year. Third parties are responsible for filing around 65 per cent of self-assessed income tax returns, 78 per cent of Corporation Tax returns for small and medium sized enterprises, 33 per cent of end-of-year PAYE returns filed by employers and 43 per cent of VAT returns. There are around 43,000 professional tax agent firms, ranging from international corporations to sole traders representing most of these taxpayers. Others are assisted by the voluntary sector, including unpaid intermediaries who look after the tax affairs of their friends and family. This report covers professional tax agents which we have defined as those authorised and paid to act on another's behalf in their dealings with the Department. The analysis in the report covers self-assessed income tax, PAYE, corporation tax and VAT, although we recognise that tax agents will also assist taxpayers on other taxes.

1.2 Taxpayers may choose to use tax agents for a variety of reasons. Some taxpayers may consider they do not have the knowledge to manage their own tax affairs or want assurance that they are paying the right amount of tax. While others simply want to save time. Some taxpayers need help because their tax affairs are more complex. We estimate that the market for preparing tax returns in the UK is worth around £2.5 billion. Many tax agents also charge their clients for tax advice.

1.3 Tax agents are therefore an important intermediary between the Department and its customers. Most professional tax agents have hundreds of clients, so it is efficient for the Department to engage with these intermediaries to ensure that their customers pay the tax due. Recent research by the Department into tax agents' role in the compliance of small and medium sized enterprises has indicated that good agents have a positive impact, helping their clients get their tax right and reducing errors."

14. It might intuitively be thought that the use of a tax agent would improve the accuracy of tax returns. However, work carried out by the National Audit Office tended to show that tax returns from authorised agents contained a significant level of under-declared liabilities:

"2.6 We analysed the sample of around 5,000 cases where the Department had reviewed tax returns to establish where there were under-declared liabilities. We found that self-assessed income tax returns filed by represented taxpayers appear to be associated with higher levels of under declared tax liabilities than returns filed by non-represented taxpayers. In the sample, covering returns for 2004-05, 37 per cent of self-assessed income tax returns from represented taxpayers had under-declared tax liabilities compared to 26 per cent of returns filed by unrepresented taxpayers. The sample results are statistically significant and we also analysed equivalent data for the previous two years and found that the results were broadly consistent over the three year period. Analysis of the Department's enquiries into corporation tax returns revealed under-declared tax liabilities on 43 per cent of tax returns filed by represented businesses in the sample, compared with 36 per cent for returns filed by unrepresented businesses in the years 2001-04 but owing to a smaller sample size, these results are not statistically significant.

2.7 In 2004-05 the average under-declared self-assessed income tax liability detected by an enquiry into represented taxpayers was just under £900 compared to around £350 for unrepresented taxpayers. There was, however, little difference between the average value of under-declared tax liabilities on corporation tax returns from represented and unrepresented taxpayers, at around £3,450 for represented taxpayers and £3,360 for unrepresented taxpayers. We also analysed under-declared liabilities as a percentage of total self-assessed income tax or corporation tax liability due, net of tax taken at source. The analysis indicates that tax returns from represented taxpayers do have substantial levels of under-declarations even when the size of the total liabilities are taken into account, but that the level of under-declared liabilities on returns from unrepresented taxpayers is greater still."

The Factual Background

15. Mr Denis Lunn is the sole proprietor of Christopher Lunn & Company and sole director of Christopher Lunn & Company Ltd. He qualified as an Associate of the Institute of Chartered Accountants of England & Wales in April 1970. His membership lapsed in 1995 and he was made bankrupt in 1995 by Customs & Excise. He was discharged from bankruptcy on 13 October 1998. He is not a qualified accountant and he is not registered with any professional regulatory body.
16. Since 1996/7, when self-assessment was introduced, CLAC has increased its clientele from 867 clients to over 7,000 (although some clients may in effect be double counted if they own a limited company).
17. In 2008-2009 the local tax inspectorate or "local compliance" began to express serious concerns about a significant number of tax returns submitted by CLAC on behalf of clients and, more generally, about the level of skill and care employed by CLAC in its dealings with HMRC as an authorised agent. The nature of these concerns can be illustrated by the following extracts from correspondence from the local compliance officer to CLAC:

"… I also alluded to the surprisingly frequent assertions that turnover appeared to be represented either totally or substantially by "work in progress"^[1] and that expenditure being claimed as a deduction was seemingly unvouched and affected by duality of purposes restrictions. There were other matters too I felt would benefit from discussion at a meeting. As an illustration I can advise you that I have initiated a general profile of the SA [self assessment] Returns filed by your practice's clients and was concerned to learn of the very substantial number of Self Employment Supplementary Pages that produce 3 line accounts reflecting net trading losses being relieved against other income. Moreover within this number there is a seemingly significant proportion of cases allegedly trading yet returning no turnover at all but against which not insubstantial expenditure has been claimed. Given that those cases where formal enquiries have been initiated to date have been repeatedly shown to be inconsistent, with expenditure needing frequently to be disallowed, I trust you will understand that prima facie HMRC must consider the Exchequer at risk in this regard…" (Letter of 13 August 2008)

"… during that meeting on 21 November 2008 I alluded to the apparent frequency with which HMRC's compliance officers had to comment upon the calibre of your clients' record-keeping. From those cases I have seen myself I too have been compelled to conclude that your clients' record-keeping generally appears to fall short of their statutory obligations…

… Risks have been identified by an initial number of compliance checks into the Returns you have submitted on behalf of your clients and it has become clear that those risks appear across your client base. As a result of direct engagement with you your firm was given the opportunity to discuss and address the issues that have given rise to HMRC concerns and subsequently given the chance to put things right without the need for formal HMRC compliance checks. This option, I believe, would have the minimum disruption to your business and to your clients … one approach that could be taken, thereby alleviating the present heavy resource commitments for both parties, is for you to consider commissioning an independent report assessing the extent and causes of the risks perceived by HMRC to exist. In the meantime I would urge you please to consider the further meeting I have proposed. I shall be more than happy to arrange for a professionally qualified Revenue Accountant, and possibly subject specialists, to be present should you feel this would be helpful." (Letter of 26 March 2009)

18. In these proceedings HMRC put great weight on a letter of 3 April 2009 from local compliance to CLAC, which I, therefore, set out substantially in full:

"Turning to your letter dated 30 March 2009, you will recall that when we met in Salford on 21 November 2008 I went to some lengths to explain the background to my involvement in your affairs, and the basis for my concerns over the work of Christopher Lunn & Company. I illustrated to you that your clients' record-keeping appeared generally to be very poor, well short of the statutory requirement in this respect, and suggested to you that perhaps your clients were not being guided appropriately. I highlighted the fact that revenue expenditure appeared to be too frequently estimated and unsupported by documentation and seemingly not always "wholly and exclusively" incurred for the purposes of the trade, as required by Section 74(1)(b) ICTA 1988. Myself and Karen Diver both then remarked that "work in progress" principles appeared to be being misrepresented, to such an extent that it was my worry that perhaps work in progress was being introduced merely to bring about an air of legitimacy to the profit and loss account. Indeed, doubts were expressed about the very existence of a trade in some circumstances. Finally, I drew your attention to the frequently unacceptable tone and language adopted in some of your correspondence.

I went on to explain that I had formed these opinions following reviews of your work I had carried out from time to time, primarily during my previous role as a manager of several enquiry teams. Asked how many cases of yours I might have become acquainted with I suggested approximately ten or so. You argued that this number was perhaps not representative of your firm's work and asked for details of those cases. A precise record of each and every review I conducted has not been formally maintained, but I have managed to compile a list of some of the cases I have seen:

[List of 10 taxpayers]

By the time we had met on 21 November 2008, following your earlier refusals to meet and discuss the above issues, I had initiated a programme of additional compliance checks. This was partly to gauge whether my initial concerns were sufficiently well founded, although definite risks had been identified. For the most part those checks are still ongoing. I have, however, sought feedback from the managers of those officers undertaking the checks. The preliminary results are alarming. Not only have my initial concerns been confirmed, they have been heightened. Indeed, not only am I content that the shortcomings with your work, outlined above, are representative, I am now of the belief that the risks to this Department exist right across your client base.

You have declined to meet again when it had been my intention to use some of these latest compliance checks as case studies. I am therefore providing you here with a small sample of the findings as further evidence for my concerns.

[Case 1]

Income totalling over £7,000 omitted from the SA Return. This income was identifiable from bank statements you would have analysed.

Telephone expenses over-claimed.

Other expenditure claimed without "supporting documentation" (Section 12B TMA 1970).

Unsupported assertions that a receipt of £65,100 came to your client from a "non-domiciled distant relative".

Supporting documentation supplied as evidence of an alleged business trip to New York in fact relates to an apparent holiday in Palma.

A suggestion that some expenditure incurred during trading is in fact no more than "pre-trading" costs.

[Case 2]

Six months into the check no supporting documentation has been provided at all.

Income From Property omitted from the SA Return despite bank statements being clearly annotated "Rent". Apparently rents have been omitted from earlier SA Returns too.

The possibility of an undisclosed Capital Gain.

[Case 3]

Losses being claimed from a venture Mr X has no connection with – apparently a fact that has been explained to you on a number of occasions.

[Case 4]

Income understated.

Poor records and very little supporting documentation.

Apparently a quote from Christopher Lunn & Company to the client to the effect that "£260 for use of house as office is significantly less than the normal £10 a week we get away with…". (my emphasis)

[Case 5]

Over £3,400 of expenditure without supporting documentation.

An invoice from Christopher Lunn & Company for £980 yet £1,280 claimed in the Return.

[Case 6]

Over £1,700 unvouched expenditure.

These few examples are by no means unrepresentative ones; I am given to understand that material shortcomings are being unearthed in the overwhelming majority of those compliance checks being undertaken in Salford, York and Scarborough.

Returning once again to that meeting on 21 November 2008, I put forward the suggestion to you that, in light of the perceived inaccuracies with many of your clients' Returns, you consider re-visiting the ones already filed with a view to amending, if appropriate. This was a sincere and well-intentioned gesture, thereby avoiding the need for more HMRC formal interventions. As I said in my letter to you dated 26 March 2009, it is an option that has been put to other tax agents most of whom were keen to take up. Consequently, there were resource savings for the agents, their clients and HMRC and, perhaps more importantly, there was minimal reputational damage to the agent. Additionally, there were perhaps substantial Section 95, and possibly Section 99 and Section 12B(5), TMA 1970 penalty savings that formal compliance checks would potentially provoke. I am disappointed to learn that you have interpreted the suggestion as being a threat, and even "blackmail", both accusations which I vehemently and emphatically refute.

Ultimately, you have elected not to adopt the suggestion of a re-review of your client's Returns. You have similarly rejected offers to meet again for the purposes of plotting a mutually acceptable way forward. You are also apparently unattracted to the proposition of commissioning an independent assessment of your work, or make use of HMRC expertise on offer. I am therefore left with no alternative to proceeding with a further extension of the current inquiry programme. Moreover, that programme will continue until HMRC believes the Exchequer is no longer at risk and that reasonable care and accuracy is being applied to your pre-Return/claim processes. You will of course receive copies of the Section 9A TMA 1970 and Paragraph 24, Schedule 18 FA 1998 Notices as they are issued."

19. In October 2009 the Criminal Investigation Unit of HMRC began a criminal investigation of CLAC. That unit came to a provisional view that CLAC was responsible for a "systematic attack on the ITSA [income tax self assessment] system" and that materially false statements and documents had been provided in the course of the investigation. HMRC therefore believed that CLAC had not simply been negligent and unprofessional in its dealings with HMRC but that there were reasonable grounds for concluding that CLAC had systematically committed fraud in such dealings. In early June 2010 HMRC applied to Leeds Crown Court and the Central Criminal Court for search warrants pursuant to Schedule 1 of the Police and Criminal Evidence Act ("PACE"). The Court issued warrants, being satisfied that there were reasonable grounds for believing that an indictable offence, or offences, had been committed. The warrants were executed at several premises of CLAC.
20. On 22 June 2010 Mr Lunn and his son, Jonathan Lunn, were arrested on suspicion of cheating the public revenue contrary to common law, false accounting and offences contrary to the Fraud Act 2006 and were interviewed under caution in the presence of a solicitor. The disclosure statement recited that it was believed that the suspects had fabricated clients' business expense claims, made materially false statements and provided materially false documents to HM Revenue and Customs in the course of civil investigations into their clients' tax affairs and understated the profitability of the CLAC enterprises.
21. A list of the questions put to Mr Lunn was put in evidence in this application. Certain questions related to specific tax accounts of CLAC clients. At question 169 there appears to be an implicit allegation that for one client, SM, the tax accounts showed an accountancy and book keeping charge of £1,280 when the actual charge was £464.13. Questions 213-222, concerning a client, RJ, imply that the amount of accountancy fees in the tax accounts for 2000-2005, namely £6,600, was incorrect and that the correct amount was £987. Questions 227-238, concerning another client, JB, imply that a false amount for the accountancy fee was entered on the tax accounts and that, on investigation, a false document was created and backdated with a view to concealing the initial alleged fraud. Questions 240-251, concerning a fourth client, RG, imply that materially false statements about client meetings were knowingly made to HMRC, and that income and allowable expenses were misrepresented.
22. Mr Lunn and his son were not obliged to answer these, or any other, questions put to them, and with very limited exception they chose not to do so.
23. On 9 July 2010 HMRC wrote to clients of CLAC informing them that HMRC's Criminal Investigation Group had carried out a search of the business premises of CLAC and had taken away a number of documents which they were now examining for evidence in the investigation. The letter continued:

"Your tax returns

Because of the criminal investigation, we may have to carry out a check of your tax returns. Once the officers from our Criminal Investigation Group have finished examining the documents they took away, we will write to you to let you know whether we will be checking your returns"

24. On 20 August 2010 HMRC wrote again to CLAC clients stating that HMRC were still examining documents taken away during the search operation, and that they could not tell "whether we will be checking any of your tax returns". On 17 September 2010 HMRC wrote a third letter to CLAC clients stating that tax returns submitted to HMRC might not be correct for a number of reasons. Such reasons included excessive claims to expenditure relating to travel and subsistence, use of home as office, work in progress, accountancy fees and other expenditure claims such as research, books and journals. HMRC was also concerned about omissions or understatements of income/gains, private expenditure claimed as a business expense, retrospective apportionment of income and expenses between limited company/partnership/sole trader and false declarations to HMRC of self-employed status. The letter concluded:

"In due course I will be checking your Tax Returns. If you now think your Returns may be incorrect, or any of the reasons outlined above may apply, you should write to me or call on the above telephone number quoting the reference "Edgewood".

If you believe there may be irregularities with your Tax Returns and you do not use this opportunity to make a full disclosure to HMRC by 30 November 2010, any irregularities in your Tax Returns that are subsequently identified will be dealt with either by criminal or civil procedures open to HMRC depending on the nature of those irregularities.

Copies of any papers held on your behalf by Christopher Lunn and Company should be available for you to access from 24 October 2010. Please contact Christopher Lunn and Company." (On 22 November 2010 this deadline was extended for a second time to 28 February 2011).

25. On 28 June 2010 CLAC had requested from HMRC a copy of the information grounding the issue of the search warrants. On 9 August 2010 HMRC declined this request, which led on 5 November 2010 to a claim for judicial review (yet to be determined).
26. By 18 November 2010 367 CLAC clients had telephoned HMRC; 93 had made voluntary disclosures and 61 had changed tax adviser.
27. On 13 October 2010 there was a high level meeting within HMRC to discuss a proposal to seek the authority of the Commissioners to refuse to deal with CLAC. Those attending included the Deputy Director Criminal Investigations, the Commissioners' advisory Accountant and a representative from the Solicitor's Office. That group considered that a blanket decision to refuse to deal with CLAC was not "seen as appropriate". There was

"…no evidence available to show that CLAC has continued with its fraudulent behaviour past the Criminal Investigation search operation."

However, given the body of evidence pointing to fraud across the CLAC client base, a refusal to deal with CLAC in respect of client returns and accounts submitted to HMRC on or before the date of the search operation, that is, 22 June 2010, was "viewed as reasonable, relevant and proportionate." It was acknowledged such a decision

"...contains risk to both Revenue and Public protection post June 2010. However returns and accounts submitted to HMRC by CLAC after 22 June 2010 will be monitored by local compliance for accuracy. Criminal Investigation will also discuss with CPS applying for a Section 62 Notice requiring CLAC to provide details of clients' returns and accounts submitted." (Quotations are from the submission, referred to below, of 18 November 2010 that reported the outcome of the group meeting).

28. An important submission dated 18 November 2010, prepared by Frank Savage, Criminal Investigator, Leeds, was sent to two Commissioners, Michael Eland and Dave Hartnett, for consideration. At the front of the submission was the following:

"We therefore advise that HMRC should formally notify CLAC that we will not deal with CLAC in respect of client returns and accounts submitted by CLAC to HMRC on or before Criminal Investigation's search operation on 22 June 2010.

We consider it impractical and unhelpful for HMRC to conduct civil enquiries involving CLAC and criminal action against CLAC in parallel in respect of the period prior to 22 June 2010. Additionally, it is considered that any direct civil contact with CLAC will necessitate a Criminal Investigation presence and interviews under caution."

29. The submission set out the areas of concern and examined in some detail, with supporting documentation, alleged specific fraudulent conduct by CLAC in respect of inflated accountancy fees, backdated companies, backdating self employment and partnerships, and false claims for self employment. On its face the submission is a formidable document.
30. Mr Eland, one of the two Commissioners responsible for taking the challenged decision, fairly summarised the thrust of the submission in his witness statement filed in these proceedings:

"33. The picture painted was of a compelling body of evidence of fictitious fraudulent accounting, expected to affect most if not all of CLAC's client base, with strong indications that CLAC were instigating the fraudulent activity. We considered that both the scale of under-declaration, and the evidence of deliberate fraud, put this case into a different and more serious category to other cases in which HMRC have identified errors or inaccuracies in completing returns.

34. Paragraph 13 of the Submission stated:

"The full extent of the fraud is emerging on a daily basis. In respect of 225 ITSA enquiries, years 2004-2007 data relied on by RIS indicates average settlements of £2362 in HMRC's favour. This understates the full extent of the fraudulent claims because most cases would have been settled on a compromise basis to avoid litigation costs. Taking this average figure and applying it to an ITSA client base of say 6000 as at 2009/10 produces a projected loss of £14.1m. If we add to this an estimate for CT abuse of say £5m and then scale back the resultant £19.1m to 1996/97 the overall loss to HMRC becomes £117m plus interest (and penalties)."

In our view, that would constitute a serious "attack" on the Treasury. CLAC were also forecasting a substantial expansion of their client base which would multiply the risk of further tax fraud."

31. Taking account of the submission, the two responsible Commissioners decided to terminate CLAC's status as an authorised agent. Mr Eland explained in his statement why the decision was taken. The explanation should be set out in full:

"35. In the light of the strong evidence of fraudulent tax agent activity by CLAC, we concluded that our duty to collect and manage revenue effectively required us to take action now, and not to allow the status quo to continue. We did not consider that we could await the outcome of any criminal proceedings before making a decision because that would result in unacceptable delay.

36. The Commissioners' legal advice is, of course, subject to legal professional privilege. But we were particularly aware of the need for our decision to be both proportionate and reasonable, in the knowledge that the Claimants' ECHR rights might be engaged, but also that the interests of CLAC clients were involved and might well differ from CLAC's interests.

37 We, as Commissioners were particularly conscious of HMRC responsibilities to clients of CLAC, who faced a difficult position.

38. First, given CLAC's business methods based on widespread fictitious tax reporting, there appeared to be a substantial risk that CLAC would continue to submit fraudulent Returns on behalf of its clients, thereby exposing clients to the risk of further investigations, penalties and compliance costs.

39. Secondly, CLAC clients faced early deadlines. The time limit for submission of paper Returns for individuals for the tax year ended 5^th April 2010 had already passed. For companies with a financial year ending 31^st March 2010 the most probable filing date was 31^st March 2011. The time limit for submission of electronic Returns for individuals was 31 January 2011.

40. Thirdly, HMRC Local Compliance had already offered CLAC clients a disclosure opportunity (Letter of 17^th September 2010) till 30 November 2010. That had so far elicited 367 telephone calls/letters including 93 specific disclosures. Local Compliance were extending the disclosure deadline until 28 February 2011, due to discovering the addresses of further CLAC clients, to whom LC had not previously written.

41. Fourthly, CLAC clients were facing great uncertainties over what was best for them to do, in the face of conflicting advice. Tab 29a [of the submission] referred to a CLAC client, "reassured by an accountant at Christopher Lunn that all their practices are above board" then being told "I have nothing to be reassured about" ("Cowboy" and "mess") with the prospect of very expensive fees to re-work 6 years' accounts. The discussion at Tabs 29b and 29c pointed to the difficulties of giving (or obtaining) advice in such a situation. Tab 29d referred to "conflicting advice". CLAC were refusing to admit that their advice (even on retrospective use of entities and apportionment of income and expenses, which were clearly totally unacceptable in tax terms) was wrong, with reference to (possibly apocryphal) "documentation from solicitors to prove [sic] it." CLAC clients faced disputed liability for very large extra professional costs occasioned by CLAC's work.

42. These problems extend to some extent to HMRC. HMRC is constrained in responding to communications from the accountancy profession generally relating to courses of action open to CLAC clients in the same way that those accountancy professionals are clearly constrained by the surrounding circumstances. Callers to the HMRC disclosure telephone number are also seeking guidance on how to act (which HMRC is not in a position to give).

43. In the circumstances, our view as Commissioners was that it was particularly important that HMRC should not add to the uncertainty facing CLAC's clients, and that HMRC should therefore be as forthcoming with information as possible. This was particularly the case if there were any danger of ambiguity. Option C could be read as implying that HMRC regarded the post-22 June 2010 situation as a "new situation" in which CLAC would be regarded no differently from the "ordinary" tax agent. That would put CLAC's clients in a false position, where they might allege that any decision (or its absence) was influenced by what HMRC had said. If HMRC did not disclose that it held strong evidence of criminal activity by CLAC, it might have a damaging effect on HMRC's reputation, and lead to accusations it had failed in its responsibilities to taxpayers. It was noted that, while the uncertain position continued, CLAC clients would be incurring extra accountancy fees, and suffering other disadvantages compared with ordinary taxpayers.

44. We were also concerned about a situation in which there would be concurrent civil and criminal enquiries. Because of the ongoing criminal investigation, criminal investigators would have to be present at any interviews with CLAC clients conducted by Local Compliance (who deal with civil enforcement procedures). The interviews would have to be conducted formally and recorded. If a CLAC representative was present at the interview, he would have to be cautioned. That might well result in a 'no comment' interview, as had occurred when Mr Lunn and his son were arrested in June 2010. Where CLAC continued to act as a taxpayer's representative, CLAC would most probably seek to protect their own role in preparation of tax materials rather than make disclosures and elucidate issues of concern to HMRC in individual tax returns. This could be contrary to the interests of their clients, who would benefit from resolving issues with HMRC, to avoid civil proceedings.

45. Given the strength of the evidence, and flagrant nature, of tax fraud, our view as Commissioners was that a level of potential culpability had been shown at which it was impractical and uncommercial to draw fine lines between different time periods, and that in consequence the issue presenting itself for decision was whether HMRC should refuse to deal with CLAC as agent, for the entire future.

46. Although we did not think it appropriate to apply a formal burden and standard of proof, as we were making an administrative decision, the evidence presented to us was in my view compelling. It was also proportionate and reasonable to balance the interests of CLAC, and its clients.

47. Having given careful consideration to all relevant factors, we decided that HMRC should refuse to deal with CLAC as tax agent for other taxpayers."

32. In respect of the decision to allow CLAC to make representations, but only after the decision was taken and communicated to CLAC, Mr Eland stated:

"55. In our view, there were legitimate reasons for us to make the decision at our meeting in November, because of the imminent deadline for filing tax returns on 31 January and the need to notify CLAC's clients in sufficient time to enable them to make alternative arrangements, as I have explained in detail above. If, at our meeting on 25 November, we had decided to defer our decision for 28 days to enable CLAC to make representations, we would not have been in a position to make a final decision until January. This would have been too late for CLAC's clients to make alternative arrangements for filing their tax returns by 31 January. However, if we allowed CLAC's clients to continue to use CLAC as their representative, we faced a real risk that, yet again, fraudulent tax returns would be filed by CLAC, in January 2011, causing further losses to the Exchequer."

The First Issue: CLAC's right to make representations before the decision to terminate was taken

33. Mr Fisher QC, who appeared on behalf of CLAC, and Ms Lang QC, who appeared on behalf of HMRC, were in broad agreement as to the applicable legal principles on this issue:

i) It has been established law for almost 150 years that in principle the right to be heard rule governed the conduct of every decision-maker invested with authority to adjudicate upon matters involving important civil consequences to individuals. The principle is applied with particular vigour where the sanction imposed would deprive a person of his livelihood or where there was a charge of disreputable conduct. (See De Smith's Judicial Review, 6th edition, 2007 and supplement, paragraph 6-016, pages 324 to 325).

ii) The question usually is what is considered to be procedurally fair in all the circumstances of the particular case. Lord Hodson said in Ridge v Baldwin [1964] AC 40 at page 132:

"One of the difficulties felt in applying principles of natural justice is that there is a certain vagueness in the term, and, as Tucker LJ said in Russell v Duke of Norfolk [1949] 1 All E.R. 109: "There are … no words which are of universal application to every kind of inquiry and every kind of domestic tribunal. The requirements of natural justice must depend on the circumstances of the case, the nature of the inquiry, the rules under which the tribunal is acting, the subject-matter under consideration and so forth." If it be said that this makes natural justice so vague as to be inapplicable, I would not agree. No one, I think, disputes that three features of natural justice stand out – (1) the right to be heard by an unbiased tribunal; (2) the right to have notice of charges of misconduct; (3) the right to be heard in answer to those charges."

iii) Procedural fairness generally requires that persons liable to be directly affected by proposed administrative actions or decisions should be given adequate notice of what is proposed, so that they may make representations on their own behalf and effectively prepare to answer the case they have to meet. (See De Smith's Judicial Review, 6^th edition, 2007 and supplement, paragraph 7-043, pages 379 to 380).

iv) "Individuals should not be taken unfairly by surprise. In disciplinary and analogous situations, there will often be a further reason why adequate prior notice should be given to the party to be charged – to give him the opportunity of offering to resign or (for example) surrender his licence rather than face the prospect of formal condemnation. The duty to notify also includes the duty to take into consideration any representation made in response to the notification". (See De Smith's Judicial Review, 6^th edition, 2007 and supplement, paragraph 7-044 to 7-045, pages 380 to 381).

v) As a matter of general principle, where prejudicial allegations are to be made against a person, he must be notified of the particulars of them so that he can prepare his answers. (See De Smith's Judicial Review, 6^th edition, 2007 and supplement, paragraph 7-057, pages 389 to 391).

vi) Circumstances may arise where it is sufficient to provide a summary of the material which is to be placed before the decision-maker. (See R v Secretary of Sate for Home Department ex parte Harry [1998] 1 WLR 1737 at page 1748).

34. Ms Lang relied in particular upon a passage from the speech of Lord Mustill in R v Secretary of State for the Home Department ex parte Doody [1994] IAC 531 at 560D, in which he expressly stated that the duty to act fairly may be met by according the person affected the right to make representations after the decision had been taken:

"What does fairness require in the present case? My Lords, I think it unnecessary to refer by name or to quote from, any of the often-cited authorities in which the courts have explained what is essentially an intuitive judgment. They are far too well known. From them, I derive that (1) where an Act of Parliament confers an administrative power there is a presumption that it will be exercised in a manner which is fair in all the circumstances. (2) The standards of fairness are not immutable. They may change with the passage of time, both in the general and in their application to decisions of a particular type. (3) The principles of fairness are not to be applied by rote identically in every situation. What fairness demands is dependent on the context of the decision, and this is to be taken into account in all its aspects. (4) An essential feature of this context is the statute which creates the discretion, as regards both its language and the shape of the legal and administrative system within which the decision is taken (5) Fairness will very often require that a person who may be adversely affected by the decision will have an opportunity to make representations on his own behalf either before the decision is taken with a view to producing a favourable result; or after it is taken, with a view to procuring its modification; or both. (6) Since the person affected usually cannot make worthwhile representations without knowing what factors may weigh against his interests fairness will very often require that he is informed of the gist of the case which he has to answer."

35. Ms Lang also drew attention to a further paragraph in Lord Mustill's speech at 561A:

"It is not enough … to persuade the court that some procedure other than the one adopted by the decision-maker would be better or more fair. Rather, they must show that the procedure is actually unfair. The court must constantly bear in mind that it is to the decision-maker, not the court, that Parliament has entrusted not only the making of the decision, but also the choice as to how the decision is made."

36. Despite Ms Lang's forceful submissions, I have reached the conclusion that, in principle, fairness in this case required that CLAC should have been given the opportunity to make representations before the challenged decision was made and was communicated to it, for the following reasons.
37. First, the status of authorised tax agent enables the tax adviser to deal directly with HMRC on behalf of the client taxpayer and is a valuable status for a tax adviser. The client can leave the task of explanation to, and possible negotiation with, HMRC in the hands of a professional adviser who ordinarily is expected both to be expert and experienced in revenue matters and also trusted by HMRC to be competent, reliable and honest. Many taxpayers would be likely to feel that they were at an inequality of arms in seeking to deal directly with HMRC. Ms Lang submitted that a tax adviser, even if he or she did not have the status of authorised tax agent, could win and retain clients by offering no more than the service of assisting in the preparation of tax accounts and of advising the client how to deal with any subsequent HMRC enquiries. It seems to me, however, that any adviser offering such a limited service, and not being able to deal directly with HMRC, would be likely to be at a very substantial competitive disadvantage, and would, other things being equal, find it more difficult to win and retain clients. Certainly no evidence was put forward to show that tax advisers, not being authorised agents, had achieved a significant share of the relevant market referred to at paragraph 13 above.
38. Secondly, CLAC, as HMRC recognised, had been long established as an authorised tax agent and had built up a large clientele, particularly in the media business. Termination of CLAC's authority as a tax agent was very likely to cause many existing clients to switch to other tax advisers and to make it hard for CLAC to acquire new clients. Once it was known, as it would almost certainly become known, that CLAC's authorised tax agency had been terminated because HMRC believed that it had reasonable grounds for concluding that CLAC had engaged in systematic tax fraud across its client base, the detrimental effect on CLAC's business would inevitably be exacerbated. Even if CLAC at some future date was successful in regaining the status of authorised tax agent, the fact that this status had been terminated for suspected systematic fraud was likely to damage its long term reputation for competence, probity and reliability, and thus its ability to rebuild its business as a tax adviser.
39. Thirdly, in my view, the real reasons why HMRC was minded to terminate CLAC's authority as a tax agent, which were clearly set out in considerable detail in Mr Savage's submission of 18 November 2010 and in Mr Eland's witness statement filed in these proceedings, had not been adequately brought home to CLAC before the decision to terminate was taken. It is in this context that I have purposively described the events leading to the termination at some length earlier in this judgment. From that narrative it can be seen that CLAC, through the correspondence with local compliance, was well aware of HMRC's very real concerns regarding CLAC's standards of care and competence in its dealings with HMRC, and that HMRC believed that CLAC was not taking adequate steps to seek to address those concerns. The issue and execution of search warrants under the PACE in June 2010 alerted, or should have alerted, CLAC to the fact that HMRC believed that there were reasonable grounds for concluding that CLAC had committed serious criminal offences. However, for reasons that might well be found justifiable, HMRC was not prepared to disclose the precise basis upon which the warrants had been issued, so that CLAC did not know what specific criminal allegations were being made against it.
40. It is correct that certain questions put at the PACE interviews (see paragraph 21 above) identified three specific cases of alleged inflated accountancy fees and one specific case of alleged misrepresentation of income and allowable expenses. However, HMRC intended to terminate CLAC's status as an authorised tax agent not because CLAC had, in HMRC's opinion, on one or two occasions knowingly inflated accountancy fees in client's tax accounts and on one occasion knowingly misrepresented a client's income and allowable expenses. HMRC intended to terminate CLAC's agency status because it believed that these fraudulent practices were systematic across CLAC's client base. Furthermore, HMRC believed that CLAC had engaged in other systematic fraud, most notably, in respect of allegedly dishonest backdating of limited companies (see paragraph 29 above for a comprehensive list). The questions asked in the PACE interviews did not, therefore, disclose the full nature and extent of the reasons why, some months later, HMRC decided to terminate CLAC's tax agency authority. The full nature and extent of those reasons became apparent only when Mr Savage's submission of 18 November 2010 and Mr Eland's witness statement were disclosed in these proceedings.
41. Ms Lang QC submitted that fairness did not require HMRC to allow CLAC to make representations before HMRC took the decision to terminate, because CLAC was unlikely to avail itself of the opportunity to make "meaningful" representations. Mr Lunn and his son had chosen not to answer pertinent questions in the PACE interviews of 22 June 2010, and how likely was it, she asked rhetorically, that CLAC would have said anything useful about specific allegations of fraudulent conduct in response to an invitation to do so in November 2010?
42. However, it seems to me that CLAC should nonetheless have been given the opportunity that was denied it, for two reasons. First, CLAC, together with its advisers, should have been allowed to consider whether it wished to set out a reasonably detailed response to the serious allegations that were being advanced against it, notwithstanding that by doing so it might be giving advance disclosure of its defence case if criminal proceedings were ultimately brought. It does not seem to me that the result of such consideration was a foregone conclusion, especially as CLAC would no doubt have been advised that a failure to descend into any detailed response to the serious allegations made against it would well make termination of its authorised agency more probable, with the likely detrimental consequences to CLAC's business that I have mentioned earlier.
43. Secondly – and this was the point primarily relied upon by Mr Fisher QC – CLAC could reasonably have been expected, if it had been given the opportunity, to contend that termination of its status as tax agent was disproportionate: there was at least one less severe and more proportionate measure, namely, that mentioned in Mr Savage's submission of 18 November 2010, which had found favour with the high level group of HMRC officials at its meeting on 13 October 2010. I fully understand why Mr Eland and his fellow Commissioner rejected that more limited recommendation. However, in fairness to CLAC, I believe that, even if it was not prepared to descend into any detailed response to the allegations made against it, CLAC should have been given the opportunity to represent to HMRC that measures short of termination were sufficient to protect the legitimate interests of CLAC's clients and of the revenue.
44. It is recognised that the right to be heard before an adverse decision is made may be excluded if the matter is sufficiently urgent (see De Smith's Judicial Review paragraph 8-019 at page 43, where the authors observe that "In general, whether the need for urgent action outweighs the importance of notifying or consulting an affected third party depends on an assessment of the circumstances of each case on which opinions can differ")
45. Urgency is relied on in this case because taxpayers needed to file (on line) tax returns by 31 January 2011 at the latest. By way of background it appears that by 30 November 2010 or shortly thereafter CLAC would already have done a substantial amount of work in the preparation of the relevant year's tax returns for a considerable number of its clients. At the same time CLAC's clients had to decide what voluntary disclosure, if any, they should make to HMRC within the final deadline of 28 February 2011, if they had not already done so. I think that it was inevitable in these circumstances that, notwithstanding the termination of CLAC as a tax agent, a significant number of CLAC clients would have been likely to retain the services of CLAC to assist in the preparation of final tax accounts and in the task of identifying what, if any, voluntary disclosure should be made.
46. Mr Fisher QC submitted that by the time CLAC clients were notified, in early December 2010, of the HMRC decision to terminate CLAC's tax agency, even those clients who wished, in the light of the termination, to acquire the services of another authorised tax agent, would not have had sufficient time to do so, particularly with the Christmas and New Year holiday period imminent. There was an issue as to how long it would have taken for a taxpayer to have a different authorised tax agent recognised by HMRC's systems. Further evidence was filed by HMRC on that issue, and it is clear from the witness statement of Paul Harrison, an officer of HMRC assigned to the Business Customer Unit, that, on a conservative estimate, the online authorisation process would take about a week to complete and a paper application would take about two weeks to complete. On any view the timetable, particularly at that time of year, was extremely tight, and I accept that even those CLAC clients who wished to acquire the services of a new authorised tax agent, or tax adviser, for the purpose of finalising and filing their tax returns by 31 January 2011 would have been faced with formidable problems. Faute de mieux many would be likely to remain with CLAC or, if they had sufficient confidence, to take on the task for themselves. However, I also accept Ms Lang's submission that a number of them would have been able to find a substitute authorised tax agent or other tax adviser, notwithstanding the tight timetable.
47. It is then necessary to consider carefully what the position would have been if, as Mr Fisher submitted should properly have happened, HMRC had on 30 November 2010 sent to CLAC a "minded to terminate" decision letter, setting out the basis upon which HMRC proposed to terminate CLAC's tax agency status, and allowing CLAC a period of, for example, 28 days in which to respond. In my view, HMRC would have been fully entitled at the same time to inform CLAC clients that HMRC had told CLAC that HMRC was minded to terminate CLAC's authorised tax agency, that HMRC anticipated that it would take a final decision in early January 2011, and that, if the decision was adverse, HMRC would forthwith from the date of termination not deal with CLAC on behalf of taxpayers.
48. HMRC would also have been entitled to explain to CLAC clients the broad basis upon which it was, subject to any representations, minded to terminate CLAC's authorised agency status, namely, that HMRC believed that CLAC had systematically engaged in improper and unacceptable practices as an authorised agent. Such a communication would have alerted CLAC clients to the risks to which they were exposed in continuing to retain the services of CLAC as tax advisers, and would have given CLAC clients an opportunity to look elsewhere.
49. I accept that on that alternative scenario it is possible that some CLAC clients who would have looked for a new authorised agent or tax adviser and who could, despite the tight timetable, have found a substitute, if faced with a HMRC letter informing them that CLAC's status had been terminated, would, if faced instead with a letter saying that HMRC was "minded to terminate" CLAC's tax agency, have continued to employ CLAC. Some would no doubt optimistically have thought that the storm would blow over, particularly if, as could have been expected, they had been reassured by CLAC that HMRC's suspicions were not well grounded, and some might have thought that in any event, given the time of year and inconvenience of trying to find a new tax adviser, it was preferable to stay with CLAC. Of course, in the event that HMRC did terminate CLAC's agency in early January 2011, the timetable would have been even tighter, and such CLAC clients would have found themselves in extreme difficulties in the new year, and HMRC would have been receiving tax returns from CLAC, or that CLAC had in substance prepared, to a greater extent than would otherwise have been the case.
50. In these circumstances it is not altogether easy to balance, on the one hand, CLAC's putative right to a fair hearing before the decision to terminate was taken, and, on the other, the need for urgency adequately to protect the interests of taxpayers who were CLAC clients and the interests of HMRC in ensuring that tax was properly accounted for. However, as I have set out earlier, CLAC had a strong claim to be allowed to make representations before a final decision was made. Against that, in the circumstances that prevailed at the end of 2010, it was very uncertain how many CLAC clients would have fallen within the relevant category that I have identified above and it is quite possible that it would have been a relatively small number. As to the interests of HMRC, three points need to be made. First, it was again very uncertain to what extent the number of CLAC filed or prepared tax accounts would have increased on the alternative scenario, and it is quite possible that the increase would have been relatively modest. Secondly, HMRC had itself substantially contributed to the tight timetable at the end of November 2010: it is clear from the narrative of events that by the end of September 2010, at the latest, HMRC had sufficient information concerning CLAC to have issued a "minded to terminate" decision. If that course had been followed, the difficulties referred to above would have been significantly alleviated. It seems to me that if a decision maker, exceptionally, invokes urgency as a ground for dispensing with the requirements of a fair hearing, it is relevant to take into account the extent to which the decision maker has itself contributed to the urgency of the situation. Thirdly, as recognised by the high level group that met in October 2010 (see paragraph 27 above), any tax accounts filed by CLAC before 31 January 2011 or any tax accounts that HMRC believed CLAC had assisted in preparing, would in any event be scrutinised carefully by HMRC. Any potential marginal increase in risk to the revenue would, therefore, in any event be reduced, albeit with an additional administrative burden.
51. Taking account of the foregoing matters I have concluded that CLAC was entitled to have the opportunity to make representations before any decision to terminate was taken, and that in the particular circumstances of this case the alleged need for urgency did not justify the course in fact taken by HMRC.
52. For completeness I should also mention that Mr Fisher relied upon a legitimate expectation to found a right to make representations before the decision was taken. He referred to De Smith's Judicial Review 6^th edition, 2007 and supplement, paragraph 12-019, page 617, and the well known authorities of Inland Revenue Commissioners ex parte MFK Underwriting Agents Ltd [1990] IWCR 1545 at page 1569 G-H and R v Inland Revenue Commissioners ex parte Unilever Plc [1996] STC 681.
53. Ms Lang submitted that a legitimate expectation that a public body will follow a particular procedure may arise where (a) there is a well-established practice of such a procedure or (b) a specific promise of representation has been made to that effect, referring to Council for Civil Service Union & Ors v Minister for the Civil Service [1985] AC 374, by Lord Diplock at 408 F-G.
54. The difficulty for CLAC on this point is that there was no established practice in relation to making decisions to terminate an authorised tax agency. Nor was there any promise given by HMRC as to what practice it might follow in making such a decision. Therefore, CLAC had no expectation, based on either established practice or a promise, that HMRC would follow any particular procedure. I, therefore, reject the submission that CLAC had any legitimate expectation that it would be allowed to make representations before termination of its status as tax agent.

Second Issue: failure to give reasons

55. There is no general duty to give reasons for its decisions. However, the courts have recognised many circumstances in which procedural fairness requires that reasons should be afforded to a person affected by an adverse decision (See De Smith's Judicial Review, 6^th edition, 2007 and supplement, paragraph 7-091, pages 412-413).
56. The general position was explained by Sedley J (as he then was) in R v Higher Education Funding Council ex parte Institute of Dental Surgery [1994] IWLR 242 at page 257:

"In the light of such factors each case will come to rest between two poles, or possibly at one of them: the decision which cries out for reasons, and the decision for which reasons are entirely inapposite. Somewhere between the two poles comes the dividing line separating those cases in which the balance of factors calls for reasons from those where it does not. At present there is no sure indication of where the division comes. Asked to give an example of the kind of decision in which in the light of his submissions fairness will not require reasons to be given, Mr Pannick was unable or unwilling, at least without further reflection, to commit himself. No doubt the common law will develop, as the common law does, case by case. It is not entirely satisfactory that this should be so, not least because experience suggests that in the absence of a prior principle irreconcilable or inconsistent decisions will emerge. But from the tenor of the decisions principles will come, and if the common law's pragmatism has a virtue it is that these principles are likely to be robust. At present, however, this court cannot go beyond the proposition that, there being no general obligation to give reasons, there will be decisions for which fairness does not demand reasons. It follows that in appraising each case, the present included, too catholic an approach will amount to generalising what is still a particular obligation; though we are not prepared to accept Mr Beloff's contention that it is any longer an exceptional one."

57. In my view, this was a case where fairness required that reasons should be given to explain the termination of CLAC's authorised tax agency. I have already set out at paragraphs 37 and 38 above why an adverse decision would in the present context be likely to have serious consequences for an authorised agent. Furthermore, the decision was motivated by HMRC's conviction that CLAC had committed systematic fraud on the revenue, and it was right that CLAC should know that its probity and integrity were in issue.
58. I have also explained earlier that there was a very considerable gap between the terms of the decision and the reasons for termination articulated in the submission of 18 November 2010 and in Mr Eland's witness statement. The decision did not seek to particularise any allegations of fraud, but the submission and evidence recited chapter and verse. I do not say that the decision should necessarily have been as detailed and comprehensive as the material now disclosed, but the reasons should have enabled CLAC both to understand the nature of the case against and, if it chose, to respond to the allegations. In my view, the very broad statement in the decision was not adequate for these purposes.
59. However, through these proceedings CLAC now has a full explanation why the decision was taken. No useful purpose would, therefore, be served by quashing the decision on the ground alone that adequate reasons were not given for the decision, and, in the exercise of discretion, I would not grant that remedy.
60. Nonetheless, for the reasons stated earlier in the judgment, CLAC succeeds on the first issue. Permission is granted to bring the application for judicial review, and the claim is allowed. The proper order is that the challenged decision should be quashed on account of the unlawful procedural failure, and that the matter should be remitted to the Commissioners for reconsideration in the light of the terms of this judgment.

Note 1   At the hearing it was explained that the inspector suspected that the alleged “work in progress” was a phantom entry and that no trading was taking place.    [Back]