QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
|R (On the application of)|
|Vital Nut Co. Limited ("Vital Nut")|
|Zerenex Molecular Limited ("Zerenex")|
|(and the Claimants as listed in Appendix 1)||Claimants|
|The Commissioners for Her Majesty's Revenue and Customs||Defendant|
Gemma White QC (instructed by HMRC) for the Defendant
Hearing dates: 18 and 19 May 2016
Crown Copyright ©
Charles J :
The Revenue's decisions to issue the APNs were ultra vires ss. 219, 220 and 223 of the Finance Act 2014
This ground, and the arguments supporting it, were not advanced and the Claimants say did not arise on the facts in Rowe and Walapu.
The decision to issue the APNs was unlawful under section 6 of the Human Rights Act 1998 (the HRA) as in breach of the Claimants' right to property as guaranteed by Article 1 Protocol 1.
The decision to issue the APNs in the circumstances of this case were issued in breach of the principles of natural justice and were otherwise unreasonable and unfair
Ground 2 has two stages. Firstly, it was argued that Article 1 Protocol 1 was engaged and that either (a) I should distinguish the conclusions in Rowe and Walapu that it was not, or (b) I should part company from those decisions on the basis that I was "convinced that they were wrong" (see R v Greater Manchester Coroner ex p Tal  QB 67). The second stage of Ground 2 relates to the legality, necessity and proportionality of issuing the APNs and overlaps with Ground 3. On those issues, it was asserted that both the factual and legal circumstances and the context in these cases is significantly different from those in Rowe and Walapu and so I should distinguish them.
Ground 1 – statutory construction
The most relevant provisions relating to accelerated payment notices
219 Circumstances in which an accelerated payment notice may be given
(1) HMRC may give a notice (an "accelerated payment notice") to a person ("P") if Conditions A to C are met.(2) Condition A is that—(a) a tax enquiry is in progress into a return or claim made by P in relation to a relevant tax, or(b) P has made a tax appeal (by notifying HMRC or otherwise) in relation to a relevant tax but that appeal has not yet been—(i) determined by the tribunal or court to which it is addressed, or(ii) abandoned or otherwise disposed of.(3) Condition B is that the return or claim or, as the case may be, appeal is made on the basis that a particular tax advantage ("the asserted advantage") results from particular arrangements ("the chosen arrangements").(4) Condition C is that one or more of the following requirements are met—(a) -------(b) the chosen arrangements are DOTAS arrangements;(c) ---------(5) "DOTAS arrangements" means—(a) notifiable arrangements to which HMRC has allocated a reference number under section 311 of FA 2004,(b notifiable arrangements implementing a notifiable proposal where HMRC has allocated a reference number under that section to the proposed notifiable arrangements, or(c) arrangements in respect of which the promoter must provide prescribed information under section 312(2) of that Act by reason of the arrangements being substantially the same as notifiable arrangements within paragraph (a) or (b).(6) -------------(7) -------------
220 Content of notice given while a tax enquiry is in progress
(1) This section applies where an accelerated payment notice is given by virtue of section 219(2)(a) (notice given while a tax enquiry is in progress).(2) The notice must—(a) specify the paragraph or paragraphs of section 219(4) by virtue of which the notice is given,(b) specify the payment required to be made under section 223 and the requirements of that section, and(c) explain the effect of sections 222 and 226, and of the amendments made by sections 224 and 225 (so far as relating to the relevant tax in relation to which the accelerated payment notice is given).(3) The payment required to be made under section 223 is an amount equal to the amount which a designated HMRC officer determines, to the best of that officer's information and belief, as the understated tax.(4) "The understated tax" means the additional amount that would be due and payable in respect of tax if—(a) in the case of a notice given by virtue of section 219(4)(a) (cases where a follower notice is given) --------------(b) in the case of a notice given by virtue of section 219(4)(b) (cases where the DOTAS requirements are met), such adjustments were made as are required to counteract what the designated HMRC officer determines, to the best of that officer's information and belief, as the denied advantage;(c) in the case of a notice given by virtue of section 219(4)(c) (cases involving counteraction under the general anti-abuse rule), ---------------------(5) "The denied advantage"—(a) in the case of a notice given by virtue of section 219(4)(a), has the meaning given by section 208(3),(b) in the case of a notice given by virtue of section 219(4)(b), means so much of the asserted advantage as is not a tax advantage which results from the chosen arrangements or otherwise, and(c) in the case of a notice given by virtue of section 219(4)(c), means so much of the asserted advantage as would be counteracted by making the adjustments set out in the GAAR counteraction notice.(6) If a notice is given by reason of two or all of the requirements in section 219(4) being met, the payment specified under subsection (2)(b) is to be determined as if the notice were given by virtue of such one of them as is stated in the notice as being used for this purpose.(7) ------------------
40 Within 90 days of the date of the notice the taxpayer may make written representations to HMRC in relation to the notice under s. 222(2):
(a) objecting to the notice on the grounds that Conditions A, B or C in section 219 was not met,(b) objecting to the amount specified in the notice ---
HMRC must consider any representations made in accordance with s. 222(2) and having done so, must determine whether to confirm or withdraw the notice, and/or determine whether a different amount (or no amount) ought to have been specified, and then confirm, vary or withdraw the notice: s.222(4).
41 By s. 223 payment of the amount stated in the notice ("the accelerated payment") must be made to HMRC and
"the accelerated payment is to be treated as a payment on account of the understated tax;" s. 223(3)
It must be made before the end of the "payment period". Where no representations are made under s. 222, the payment period is 90 days beginning with the day on which the notice was given. Where representations are made, the payment period is extended to the period of 30 days beginning with the day on which HMRC's determination of the representations are notified, if that is later than the 90 day period: s. 223(5).
42 Under s. 226 if the taxpayer does not pay before the end of the payment period there is an automatic 5% penalty. A further 5% penalty accrues at the end of a further five months and another 5% at 11 months from the end of the payment period.
The objectives of the disclosure rules are to obtain:
• early information about tax arrangements and how they work
• information about who has used them
2.2 The effect of disclosure
On its own the disclosure of a tax arrangement has no effect on the tax position of any person who uses it. However, a disclosed tax arrangement may be rendered ineffective by Parliament, possibly with retrospective effect.
2.3.2 Summary: Income Tax, Corporation Tax and Capital Gains Tax
Under the rules, a tax arrangement may need to be disclosed even if HMRC is already aware of it or it is not considered to be avoidance. A tax arrangement should be disclosed where:
- it will, or might be expected to, enable any person to obtain a tax advantage (see paragraph 6.2)
- that tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement (see paragraph 6.3)
- it is a hallmarked scheme ------------
The policy objective or underlying intention of Parliament
i) advance the issue as to how Parliament achieved that policy objective by the legislation, or
ii) remove the danger of interpreting the words Parliament has used by reference to, or primarily by reference to, that policy objective and so without due attention to their normal meaning in their context.
Indeed, to my mind there is particular danger in a Department that was responsible for putting forward legislation basing its arguments on the policy objective without close attention to the words actually used by Parliament in their context.
2.6 The Government's proposals therefore have the simple objective of changing the presumption of where the tax sits, so that anyone who enters into an avoidance scheme will have to pay over the tax in dispute. -------
4.4 -------- DOTAS provides an objective criterion to apply the measure and, in the majority of cases, is an indicator of avoidance activity. There are no other legislative criteria that could provide the same level of certainty and objectivity
The final criterion is DOTAS, and in this case there was a wider range of views. Let me set out our thinking. First, DOTAS is clear and objective; the scheme has been disclosed and allocated a reference number and the taxpayer has been told about the disclosure and number. That is clear and easy to apply. Secondly, DOTAS is about tax avoidance schemes. I know that there are concerns that some people disclose arrangements just in case they might fall into DOTAS. I am pleased that they do so, and they should carry on doing so. Where there is no extra tax to pay, HMRC will be able to agree that fairly quickly and there will be no accelerated payment. It will, of course, be in the interests of advisers and taxpayers to provide complete information to HMRC as soon as possible.
I have been very disappointed by the assertions made in a number of letters in my postbag. They claim that HMRC will have almost unfettered power to demand what they described as arbitrary sums of tax. That objection is misconceived. Taxpayers and their advisers need to work with HMRC to get to the right figure of disputed tax, but where that cooperation is not forthcoming, HMRC will have to take the decision. I know that robust governance is being put in place by HMRC requiring scrutiny at senior levels. HMRC takes its responsibility very seriously in this regard. I am also aware that this measure may be seen as penalising those who disclose against those who do not. Let me be clear: we will take robust action against those who choose not to disclose when they should. Our new measures against high-risk promoters, which we will come to shortly, will be part of tackling that behaviour, and in the summer we will consult on further improvements to DOTAS. -----
I shall make two points in response to my Hon. Friend. The first is one that I made a moment ago: disclosure under DOTAS does not necessarily mean that someone will be affected by the accelerated payments regime. HMRC will look at the particular scheme and assess whether it is effective. There may well be circumstances in which HMRC will look at a particular scheme and say, "A DOTAS disclosure has been made, but as far as we can see this scheme is entirely consistent with the law. It is effective and there is no tax under dispute, so no accelerated payment will need to be made." If there is no tax under dispute there is no accelerated payment. ----------------------
The construction of the legislation
what the designated HMRC officer determines, to the best of that officer's information and belief, to be so much of the asserted advantage (the claimed relief from corporation tax) as is not a relief from tax (corporation tax) which results from the chosen arrangements (the EFRBS).
i) The tax advantage will be based on a view of the interpretation and application, and so the effect, of the relevant taxation legislation to the disclosed and accepted facts of the case.
ii) The Revenue can be expected to hold a view on what the relevant legislation means and on whether or not it has sufficient information to apply that interpretation of the legislation to the facts of a given case.
iii) Significant problems faced by the Revenue were difficulties in obtaining information about and unravelling complicated schemes that the Revenue considered, on its interpretation of the taxation legislation, would or may be unlikely to achieve the claimed tax advantage when the facts had been established.
iv) As expressed, the policy objective refers to a presumption and so something that will not always apply.
v) As expressed, the policy objective refers to a dispute and so at least to something that is not accepted by the Revenue as a matter of fact or law.
vi) The policy objective, and the legislation that introduces APNs, covers a range of schemes and situations.
Ground 1 application to the facts of these cases
i) the Revenue's concerns relating to the application of Chapter 3 Part 4 of the Finance Act 2014 in a wider context, and
ii) the Revenue's wish to guard against a probability or likelihood test being introduced under the description of an "efficacy" test that would hamper or undermine the application, and so the achievement of the policy objective, of the APN regime. In contrast to a concern to establish that the Revenue is not under any obligation to, or would not, or did not wish to form a view on the underlying points of statutory interpretation that were engaged by any claim to a tax advantage.
EFRBS and the rival arguments on the application of the relevant taxation legislation
i) Spotlight 6: Employer-Financed Retirement Benefits Scheme, published by the Revenue on 6 August 2010,
ii) the amendment to s. 1292(5) of Corporation Tax Act 2009 by the Finance Act 2011, and
iii) the offer letters sent out by the Revenue in November 2013 in respect of EFRBS entered into before 6 April 2011 together with their enclosures
that, for the reasons explained in Spotlight 6 and the frequently asked questions annexed to the offer letters sent out in November 2013, the position of the Revenue is (and for many years has been ) as stated in those letters that the Revenue "strongly believe" that EFRBS entered into before 6 April 2011 did not enable the companies who set them up to claim relief from corporation tax for employer contributions paid to the EFRBS as "qualifying benefits" defined by s. 1292(5) of the Corporation Tax Act 2009.
i) the Claimants to claim relief from corporation tax for their employer contributions on the basis that they were "qualifying benefits" as defined, and
ii) would not give rise to income tax and NICs until benefits were paid to individuals by the EFRBS.
i) the existence of arguments relating to the inter-relationship between a claim for relief from corporation tax and an employment income charge being incurred, and so
ii) the relevance of whether an employer contribution to an EFRBS gave rise to an employment income charge (or per Spotlight 6 could do so).
As appears below, these issues re-emerge in the context of limitation and the settlement offers that have been made by the Revenue.
Why has this short point of statutory construction not been litigated and resolved?
The limitation problem
Although you can choose to appeal to the Tribunals Service I suggest that you do not do so at this time. This is because HMRC is already seeking to litigate a number of such schemes. These cases used similar arrangements to your company, and whilst a decision in any particular case may not be definitive, it will at least inform all parties concerned in other cases of the wisdom of a legal challenge through the Tribunals.
Choosing not to take your appeal to the Tribunals Service while similar cases are litigated will not affect your rights as set out in HMRC 1. Either party can still pursue an appeal hearing at any time it feels necessary. HMRC would start the process by offering you a review and you could start the process by asking us for a review or notifying your appeal to the Tribunals Service. Until such time I would, of course, keep you informed of any progress.
Your cooperation in this matter would be appreciated and do not hesitate to telephone the above extension if you require any further clarification or information on this matter. I also recommend that you discuss this with your agent and the promoter of the scheme in the first instance.
i) the relief claimed from corporation tax would be available, and
ii) no PAYE and NICs would be paid on the contributions (earnings) because they were time barred.
The double payment problem
The alleged inconsistency
The Revenue's position on the effectiveness of the relevant arrangements and so whether they are or are not satisfied that the relief claimed is lawfully available and the Claimants' awareness of the Revenue's position
i) their ability to claim relief from corporation tax, and further or alternatively
ii) their liabilities or potential liabilities to income tax and NICs in respect of payments under the arrangements (the EFRBS) they have entered into
have no foundation.
i) these Claimants entered into marketed schemes with the benefit of advice and in the knowledge that they were based on a view of the promoters of the schemes, who relied on advice, that the arrangements (the EFRBS) enabled the Claimants to claim relief from corporation tax and only gave rise to income tax and NICs when a benefit to which the Income Tax (Earnings and Pensions) Act 2003 applied, and as a result thereof,
ii) with or without the benefit of advice these Claimants are aware of (or certainly ought to be aware of) the Revenue's well publicised position that is also set out in offer letters, and
iii) the inconsistency of approach that they assert does not support the proposition they seek to establish.
i) the Revenue's view and primary argument on the information the Claimants have provided is that their claims to relief from corporation tax are not valid, and that
ii) this position is based on the interpretation of the relevant taxation legislation
is found in what seem to be standard paragraphs in the evidence sworn by directors of the Claimants in support of the claims of their companies where (taking Vital Nut as the example) it is said:
At all times, and on the basis of advice from OneE, I believe that Vital Nut was entitled to the CT deduction and this was a tax efficient way to create and manage a portfolio of long-term investments for future retirement benefits for employees of the company. I never thought that doing so could amount to some sort of unacceptable tax avoidance. ---------
Despite the stark difference between the settlement offered and the current extreme financial demands being made by HMRC, I chose not to accept this settlement opportunity because I have been advised that the correct view in law is that contributions into the EFRBS are not "earnings" subject to PAYE and NICS and further that Vital Nut was correct in deducting contributions to its EFRBS from profits for the purposes of assessing its corporation tax liability. --------------------
These assertions make it clear, as one would expect, that these Claimants entered into their EFRBS on advice from promoters and others and that they have had the benefit of continuing advice relating to the effectiveness of the arrangements they entered into to achieve a deduction for corporation tax purposes whilst not incurring a charge to PAYE and NICs. I do not accept that these Claimants are not aware of the published views of the Revenue, or of the "ins and outs" of the potential arguments of fact and law relating to the claimed relief from corporation tax without incurring a charge to PAYE and NICs and so of the possibility that it might be argued that the win / win situation for taxpayers described in paragraph 64 above exists.
i) A dispute exists between the Revenue and the promoters of EFRBS and so taxpayers (including these Claimants) on the interpretation of the relevant taxation legislation in particular as to what are "qualifying benefits" as defined prior to the prospective amendment in 2011.
ii) That dispute relates to the underlying legal basis for their claims to relief from corporation tax.
iii) This general point applies to the Claimants and in particular to the facts that they have disclosed to the Revenue about their EFRBS.
iv) The arguments relating to whether employer contributions are qualifying benefits are linked to the question whether they give rise to an employment income charge and these arguments found the possibility of the win / win position for taxpayers described in paragraph 64 above.
v) The assessments issued by the Revenue for PAYE and NICs are, as the Revenue asserts, protective and do not show that the Revenue has not made up its mind or has changed its mind on the interpretation of the underlying taxation legislation.
vi) The Revenue's expressed view and position is that it strongly believes that the interpretation of the relevant taxation legislation that is relied on by the Claimants to claim relief from corporation tax for employer contributions is not correct and so their claims for relief are disputed.
The designated officer
i) the published view of the Revenue that the Claimants' underlying argument of statutory construction is not correct, or at least is not accepted as being correct, and
ii) the present intention of the Revenue to argue the point.
i) the system put in place by the Revenue and applied in these cases has the consequence that this is what both (a) the person presenting the case details and relevant calculation to the designated officer for authorisation, and (b) the designated officer in authorising the calculation of the amount to be included in each of the APNs, have done in these cases, and so
ii) the Notice Requirement (see paragraph 29 above) has been met.
Conclusion on Ground 1