QUEEN'S BENCH DIVISION
Fetter Lane, London, EC4A 1NL
B e f o r e :
| THE QUEEN
on the application of:
(1) PHOENIX LIFE HOLDINGS LIMITED
(2) PHOENIX LIFE ASSURANCE LIMITED
(3) PEARL GROUP MANAGEMENT SERVICES LIMITED
(4) PEARL GROUP SERVICES LIMITED
- and –
|THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS
Raymond Hill (instructed by HMRC) for the Defendants
Hearing dates: 2 to 4 October 2018
Further written submissions on 19 and 26 October 2018
Crown Copyright ©
Mr Justice Phillips :
The legislative background and its interpretation
(a) Claims for repayment of VAT input tax
"(1) A taxable person shall-
(a) in respect of supplies made by him, and
(b) in respect of the acquisition by him from other member States of any goods,
account for any pay VAT by reference to such periods (in this Act referred to as "prescribed accounting periods") at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.
(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.
(6) A deduction under subsection (2) above and payment of a VAT credit shall not be made or paid except on a claim made in such manner and at such time as may be determined by or under regulations; and, in the case of a person who has made no taxable supplies in the period concerned or any previous period, payment of a VAT credit shall be made subject to such conditions (if any) as the Commissioners think fit to impose, including conditions as to repayment in specified circumstances."
"(1) [Subject to paragraph (1A) below], and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable [save that, where he does not at that time hold the document or invoice required by paragraph (2) below, he shall make his claim on the return for the prescribed accounting period in which he holds that document or invoice]."
"The requirement in section 25(6) of VATA 1994 that a claim for deduction of input tax be made at such time as may be determined by or under regulations does not apply to a claim for deduction of input tax that became chargeable, and in respect of which the claimant held the required evidence, in a prescribed accounting period ending before 1 May 1997 if the claim is made before 1 April 2009."
(b) VAT groups
"(1) Where under [sections 43A to 43D] any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and-
…. all members of the group shall be liable jointly and severally for any VAT due from the representative member."
"29. … It…follows from the operation of section 43 of VATA that where there have been overpayments of VAT by the representative member of a VAT group, the person entitled to submit a claim during the currency of a VAT group, unless the claim has been assigned, is either the current representative member of the VAT group or a person acting as agent of that representative member."
The facts and the evidence
(a) The basic chronology
"…the Commissioners do not accept Pearl's view that the principles of the Kretztechnik case apply to what they describe as the investment elements of the products described in the claims for overpaid input tax by Pearl…"
"The Appeal in relation to Pearl is bound to fail as the Appellant [PGMS] is not entitled to claim on behalf of Pearl VAT allegedly under-recovered by Pearl in the period before it was a member of the Appellant's VAT group."
(b) Initial disclosure by the Commissioners
"It is a trite point that parties to litigation do not owe each other a duty of care, and while it may be unfortunate that neither party correctly analysed which Pearl entity was the correct claimant until the limitation period had elapsed, absent bad faith and/or the creation of a legitimate expectation, the Commissioners are entitled – and we would say in the interests of fairness to the general body of taxpayers normally expected – to refuse to accept a claim made out of time."
"identified that substantial part of claim not made by correct taxable person as pearl was in henderson VAT group and that VAT group is still extant therefore only the rep member of that VAT group can claim …"
(c) The Commissioners' undertaking to the court
"…(i) provides any further relevant information - and any significant documents - which explain the Defendants' consideration of the Claimants' claim for repayment during the five-year period from the making of the claim on 9th November 2007 until Mrs Sheila Brown's note of 29th June 2012 identifying that a substantial part of the claim was not made by the correct person, including in particular an explanation (insofar as possible) as to why no question of the Claimants' entitlement to make the claim was raised during that period and (ii) confirms that there is no documentary material prior to that dated 29 June 2012 already disclosed related to the identity of the appropriate claimant for repayment of under-recovered input VAT and (insofar as possible) explaining the circumstances of Ms Brown's composition of that note."
(d) The Commissioners' further disclosure and explanation
i) On 20 November 2007 Mr Prentice emailed numerous officers of HMRC, including Mrs Brown, notifying them of the Claim. Mr Prentice asked Mrs Brown to note the "Fleming" claim and asked if there was any other information she needed;
ii) On 5 May 2011 Ms Watkins (who was undertaking a review of the initial rejection of the Claim) emailed Mr Kensell in relation to whether entitlement to claim had been checked. Ms Watkins asked to be "put out of her misery", saying "One of the first things I have to consider is the entitlement to make the claim which I know you will have considered" and referring to the fact that "the Henderson VRN only came into existence on 01.04.77".
iii) Mr Kensell replied the next day, referring to the fact that he had spoken to Ms Watkins and stated "Any entitlement to make a claim was considered in the light of Fleming guidance".
iv) On 15 September 2011 Mr Kensell emailed HMRC's solicitors' department, stating:
"VRN 234 9868 22 Rep Member: Henderson Administration Ltd
[Pearl] was a member of the aforementioned from 01.04.77 to 14.04.05 and during this time was also the Rep member of the group. [Pearl] then joined [the 860 VAT Group].
Finally, I can confirm that [PGSL and PGMS] … had standing to make the relevant claims."
v) On 1 February 2012 Mr Kensell sent an email to another HMRC officer, forwarding his email of 15 September 2011 and reiterating that PGSL and PGMS had standing to make the Claim.
vi) On 26 June 2012 the solicitors' department at HMRC sent the Commissioners' draft defence in the Tribunal Appeal to various officers, including Mr Kensell and Ms Brown, for review and comment. It appears that Counsel had asked, in footnote 5, about entitlement to claim.
vii) The same day Mr Kensell replied, including to Ms Brown, stating:
"I can confirm that the matter of entitlement to claim was resolved fairly shortly after the claims were made"
viii) On 29 June 2012, the date Mrs Brown made her first note on the issue of entitlement, Mrs Brown emailed HMRC solicitors and Mr Kensell, stating:
"I have not been closely involved in this so this point may have been covered. The main claim was made by PGS in 2007 and they made reference to previous VAT registration numbers. My understanding is that in the period of the claim Pearl was a member of the VAT group 234 9868 22 (now Henderson's) registration number is still in existence. The Fleming guidance states:- "
14.2 Claims by VAT groups
Where an overdeclaration of output tax or underdeclaration of input tax is made by a VAT group, the entitlement to claim remains with the representative member of that VAT group for as long as the group remains in existence. This applies regardless of any changes in the composition of the VAT group. Thus the only person who can make a claim for output tax overdeclared or input tax underclaimed by a member of a VAT group is the company that is the representative member of the VAT group at the time when the claim is made.
This would mean the representative member of 234 9868 22 would be the person to submit the claim and to whom any payment should be made. It is of course now too late for the representative member of 234 9868 22 to submit a claim.
ix) There was no written response to Ms Brown's email from Mr Kensell or from any other officer.
(e) Further evidence as to HMRC's consideration of the entitlement issue
"4. I have now directly contacted Richard Prentice, Chris Hardwick and Robert Kensell, respectively the Officers who dealt with this claim in its early stages. I have received responses from all of them. Richard Prentice (…the Officer who initially responded to the Claimants upon receipt of the claim in 2007) states that he cannot recall the specifics of this claim since he dealt with many at that time. He advised that all records relating to Fleming would have been captured to EF. He also stated that he has no other documents or information.
5. Chris Hardwick's response advised that he was involved with the Claimants for a few months in 2007- 2008 but that he recalls very little of the VAT issues discussed at the time. His primary recollection does not relate to Fleming or Kretztechnik claims and he advised that anything from that period would be on EF. He has informed me that any notebooks, e-mails or other correspondence that he might have had would have been destroyed long ago in accordance with HMRC data retention policies."
"3. I took over conduct of this matter sometime in the middle of 2008. Prior to that the case had been handled initially by Richard Prentice and the tax specialist was Chris Hardwick. I can say that the steps that would have been taken on receipt of such a claim would have been as follows. In relation to a claim made on behalf of a VAT group, it would have been necessary to check
"Was the entity part of the VAT group during the period of the claim? Was the correct entity making the claim? Did the entity have an entitlement to the claim? Were any tax periods out of time"?
Once that had been done, the claim would have been referred to a Fleming Theme tax expert to check my recommendation to repay or refuse the claim. The claim would have been accompanied by an Action Sheet.
4. Unfortunately owing to the lapse of time I cannot now recall what consideration was given to the question of who the correct representative member of the relevant VAT group was, and whether I specifically considered it or simply assumed that this had already been done in receipt of the claim.
5. What I can say is that had this been recognised as an issue, it would have been raised with the Claimants at an early stage. It was no part of HMRC's strategy for handling the claims arising out of the Fleming decision to conceal potential objections of that sort…
6. In particular I do not recall having any role in Sheila Brown's reconsideration of entitlement and (although I accept I was copied into it) I do not recall seeing Sheila's email of 2012. I would not have been particularly interested in the details of an individual claim at that time because it was no longer part of my daily casework responsibility."
"At the time the claim was received in London in 2007, she was based in Edinburgh and was not connected to the claim other than to log it because she was responsible for logging significant claims in the Finance and Insurance sectors. She had involvement in later Fleming Claims and her checks included ensuring that the claimant was the correct taxable person.
Her understanding of how the claims were worked in general in London was that Tax Specialists deferred to Policy on technical issues because these claims were theme-worked issues regarding whether the argument of principle was accepted. There was often an understanding between the Tax Specialists and the business that the quantum would be considered after the principle argument had been looked at. After claims handling of this issue was transferred from London to Edinburgh, she was asked to look at it immediately before the Statement of Case was submitted. She went back to the basic checks as per the ones she had carried out on other Fleming claims and discovered that there was an issue regarding entitlement to claim. There was some uncertainty about the extent of the issue since the appeal was for three claims so, after consultation with Marco Criscuolo, it was decided to include the statement in the Statement of Case that the claim was bound to fail because the wrong person had claimed. This claim had already been rejected in full (hence the appeal), and her opinion at the time was that this was just another reason for the claim being rejected, in addition to existing technical arguments".
(f) Analysis of HMRC's consideration and determination of entitlement
".. I have not come across any evidence that HMRC was aware that the claimants did not have entitlement to claim prior to the involvement of Sheila Brown in 2012. Emails from Robert Kensell would, on the face of it, indicate that either (a) entitlement to claim had been checked by HMRC and accepted in error or (b) entitlement had not been checked but was assumed to have been confirmed. It is a matter of record that the HMRC personnel involved in the claim changed a number of times, particularly in the period immediately following receipt of the original claim. Additionally, the payment of separate claims to the second and third claimants in December 2010 would also indicate that HMRC had not identified the entitlement issue regarding the claimant, because if it had been such claims should also have been refused on the same grounds as the current one."
Did HMRC consider and determine the issue of entitlement prior to 31 March 2009?
i) Mr Kensell states unequivocally, in his witness statement, that it would have been necessary, before referring the matter to specialists, to check that "...the correct entity [was] making the claim", no doubt being one of the "basic checks" to which Mrs Brown referred and which resulted in her to identifying the problem in 2012;
ii) There is no doubt that the Claim was referred to tax specialists, indicating that the preliminary checks had been carried out and considered to have been passed;
iii) Ms Watkins, in her email to Mr Kensell of 5 May 2011, stated she knew that he "will have considered" the question of entitlement. Mr Kensell spoke to Ms Watkins, then confirmed in writing that "entitlement to make a claim was considered…". This was not a casual or off-the-cuff confirmation: Mr Kensell knew that Ms Watkins was conducting a review of the rejection of the claim and that she first had to consider the question of entitlement;
iv) In his internal emails of 15 September 2011 and 1 February 2012 (including to the solicitors' department) Mr Kensell expressly confirmed that PGSL and PGMS had standing to make the Claims.
v) Mr Kensell again confirmed to colleagues at HMRC on 26 June 2012, in unequivocal terms, that the matter of entitlement had been resolved shortly after the Claim was made and the companies did have standing to make the Claim. The context was again formal and required candour and precision, namely, the response to a question from Counsel for the purpose of finalising HMRC's statement of case in the First Appeal.
vi) Mr Kensell, in his witness statement (made after Mr Beal had set out his contentions as to the inferences that should be drawn) does not suggest that he made a mistake in writing any of the above emails (indeed, he does not refer to them at all).
Did Mr Kensell make an error in determining entitlement?
i) In his email to the solicitors' department of HMRC on 15 September 2011, Mr Kensell set out in clear terms (in capital letters, in bold and underlined), that HAL was the representative member of the 234 VAT Group and that Pearl had been a member of that group from 1977 until April 2005 and had also been the representative member during that time. In that context, Mr Kensell expressly confirmed that Pearl had standing to make the claim. Further, there is no reason to believe that he had any different information when, in his words, "the question of entitlement was resolved fairly shortly after the claims were made"
ii) Mr Kensell expressly informed Ms Watkins in his email of 6 May 2011 that entitlement to claim was considered in the light of Fleming guidance (such guidance including advice that the only company that can make a claim for input tax underclaimed by a member of a VAT Group is the representative member of the group when the claim was made).
i) Mr Kensell had been an officer of HMRC for 16 years in 2008 and must be assumed to be careful and competent as well as very experienced;
ii) Determining entitlement was a "basic check" which could be carried out easily and quickly, just as Mrs Brown did on 29 June 2012;
iii) Further, Ms Watkins considered the question of entitlement in May 2011 and was alive to issues concerning the 234 VAT group (hence "can you put me out of my misery"). She and Mr Kensell had a telephone discussion, referred to by Mr Kensell in his email in response. Mr Kensell thereafter confirmed that entitlement to claim had been considered and Mr Watkins took no point on entitlement in her review decision of 7 June 2011. Neither Mr Kensell nor Ms Watkins has given any evidence as to their discussion, nor the basis of the conclusion they reached, let alone evidence that they both were operating under a mistaken understanding;
iv) Indeed, Mr Kensell does not suggest in his witness statement that he was, at any time during the period in question, labouring under a misapprehension as to the relevant requirements, nor that he otherwise made a mistake;
v) When Mrs Brown identified a problem with entitlement on 29 June 2009, she obviously called into question the settled view held by the officer dealing with the case, the solicitors' department at HMRC and the numerous other officers Mr Kensell had informed that the issue of entitlement had been determined in favour of the claimants. Opening up such an issue after the expiry of the limitation period, in direct contradiction of the existing HMRC internal stance, must have raised questions and provoked enquiries. Yet there is no documentary or any other evidence as to what steps were taken to investigate the position. Mr Kensell's rather surprising evidence is that he does not recall Mrs Brown's email on the point and that he was not interested in the issue. It appears to be his evidence that he was not thereafter asked about his previous emails confirming that entitlement had been checked and that the claimants did have standing.
(g) Conclusion as to HMRC's consideration and determination of entitlement
The challenge to HMRC's decision
(a) The legal principles
"… a taxpayer cannot complain of unfairness, merely because the commissioners decide to perform their statutory duties including their duties under section 460 to make an assessment and to enforce a liability to tax. The commissioners may decide to abstain from exercising their powers and performing their duties on ground of unfairness, but the commissioners themselves must bear in mind that their primary duty is to collect, not to forgive, taxes. And if the commissioners decide to proceed, the court cannot in the absence of exceptional circumstances decide to be unfair that which the commissioners by taking action against the taxpayer have determined to be fair. The commissioners possess unique knowledge of fiscal practices and policy. The commissioners are inhibited from presenting full reasons to the court for their decisions because of the duty of confidentiality owed by the commissioners to each and every taxpayer.
The court can only intervene by judicial review to direct the commissioners to abstain from performing their statutory duties or from exercising their statutory powers if the court is satisfied that "the unfairness" of which the applicant complains renders the insistence by the commissioner on performing their duties or exercising their powers an abuse of power by the commissioners.
In most cases in which the court has granted judicial review on grounds of "unfairness" amounting to abuse of power there has been some proven element of improper motive..."
"In the present case, the appellant does not allege that the commissioners invoked section 460 for improper purposes or motives or that the commissioners misconstrued their powers and duties. However, the H.T.V. case and the authorities there cited suggest that the commissioners are guilty of "unfairness" amounting to an abuse of power if by taking action under section 460 their conduct would, in the case of an authority other than Crown authority, entitle the appellant to an injunction or damages based on breach of contract or estoppel by representation. In principle I see no reason why the appellant should not be entitled to judicial review of a decision taken by the commissioners if that decision is unfair to the appellant because the conduct of the commissioners is equivalent to a breach of contract or a breach of representation. Such a decision falls within the ambit of an abuse of power for which in the present case judicial review is the sole remedy and an appropriate remedy. There may be cases in which conduct which savours of breach of conduct or breach of representation does not constitute an abuse of power; there may be circumstances in which the court in its discretion might not grant relief by judicial review notwithstanding conduct which savours of breach of contract or breach of representation. In the present case, however, I consider that the appellant is entitled to relief by way of judicial review for "unfairness" amounting to abuse of power if the commissioners have been guilty of conduct equivalent to a breach of contract of breach of representations on their part."
"Save in exceptional circumstances such as those which obtained in the Self-Employed case  AC 617, I do not think it would be proper for the commissioners to absolve a taxpayer from a tax liability of which the commissioners were unaware."
"I would in general terms accept almost all these points… But I am very uneasy at the conclusion which the argument is said to compel in this case. Unilever is, I think, entitled to make a number of points on the facts of this case:
(1)The courts have not previously had occasion to consider the facts analogous to those here. The categories of unfairness are not closed, and precedent should act as a guide not a cage. Each case must be judged on its own facts, bearing in mind the Revenue's unqualified acceptance of a duty to act fairly and in accordance with the highest public standards.
(2) The taxpayer's entitlement to deduct trading losses from other profits in the same year, although provided by statue, gives effect to a very basic principle. A tax regime which did not provide such an entitlement could scarcely be regarded as equitable. A right of set-off against earlier or later accounting periods is less fundamental. But a tax on corporation's profit which did not permit account to be taken of trading loss would be offensive to ordinary notions of fiscal fairness.
(3) While a statutory provision is not to be overridden or disregarded simply because it is regulatory, it is not irrelevant in considering the overall picture that the provision is regulatory. It is one thing for the Revenue to forgive tax which Parliament has ordained shall be collected; it may be quite another for the Revenue to neglect a statutory time limit which, given the Revenue's dealing with a particular taxpayer, lacks any useful purpose.
(4) While the Revenue did not formally exercise their power under s 42(5) of the Taxes Management Act 1970 to determine the form in which a claim for loss relief should be made, they did (by sending Unilever blank profit estimate schedules from the 1960s onwards) indicate the basic information they required at the first stage. When the form was amended and elaborated in 1988, following discussion between the parties, information was sought on other reliefs but not loss relief.
(5) Had the Revenue indicated a wish to be told when trading losses were being deducted from profit in the estimated profit schedules the Unilever could have complied without difficulty, cost or inconvenience. Giving this information would have involved no disadvantage to Unilever and no advantage to the Revenue.
(9) Even if it be accepted that the Revenue were under no legal duty to Unilever to draw attention to the time-limit when the first 'late' computations claiming loss relief were received, the Revenue would no doubt have done so had they noticed the delay and regarded it as significant…. If the Revenue's argument is correct, Unilever is seriously prejudiced by the fact that the point is taken now and not before.
(10) On an objective but untechnical view, it would be hard to regard Unilever as owing £17m additional tax to the Revenue. If this tax is due it can fairly be regarded as an adventitious windfall, accruing to the Revenue through the understandable error of an honest and compliant taxpayer, shared over many years by the Revenue.
These points cumulatively persuade me that on the unique facts of this case the Revenue's argument should be rejected. On the history here, I consider that to reject Unilever's claims in reliance on the time-limit, without clear and general advance notice, is so unfair as to amount to an abuse of power…"
"Of course legal certainty is a highly desirable objective in public administration as elsewhere. But to confine all fairness challenges rigidly within the MFK formulation- requiring in every case an unambiguous and unqualified representation as a starting point- would to my mind impose an unwarranted fetter upon the broader principle operating in this field: the central Wednesbury principle (see Associated Provincial Picture Houses Ltd v Wednesbury Corp  1 KB 223) that an administrative decision is unlawful if 'so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it' (see Council of Civil Service Unions v Minister for the Civil Service  AC at 410 per Lord Diplock). The flexibility necessarily inherent in that guiding principle should not be sacrificed on the altar of legal certainty.
'Unfairness amounting to an abuse of power' as envisaged in Preston and the other Revenue cases is unlawful not because it involves conduct such as would offend some equivalent private law principle, not principally indeed because it breaches a legitimate expectation that some different substantive decision will be taken, but rather because either it is illogical or immoral or both for a public authority to act with conspicuous unfairness and in that sense abuse its power. As Lord Donaldson MR said in R v ITC, ex p TSW: 'The test in public law is fairness, not an adaptation of the law of contract or estoppel.'
In short, I regard the MFK category of legitimate expectation as essentially but a head of Wednesbury unreasonableness, not necessarily exhaustive of the grounds upon which a successful substantive unfairness challenge may be based.
Still less it is necessary to force such a challenge into the straight-jacket of a private law plea of misrepresentation, waiver, acquiescence of some form of estoppel…
Not least will this be so when considering the effect of time limits. These indeed are treated variably even in private law. Sometimes the failure to act within a stipulated time limit will be strictly penalised, even when repeatedly overlooked in the past ...
And there is this too to be said. Public authorities in general and taxing authorities in particular are required to act in a high-principled way, on occasions being subject to a stricter duty of fairness than would apply as between private citizens. This approach is exemplified in cases such as R v Tower Hamlets London BC, ex p Chetnik Developments Ltd  AC 858 and Woolwich Equitable Building Society v IRC  STC 657,  AC 70 and reflected in Lord Mustill's reference in Matrix-Securities (see  1 WLR 334 at 358) to 'the spirit of fair dealing which should inspire the whole of public life'.
Whilst, therefore I for my part accept that the Revenue's conduct here complained of would probably not fall foul of any constraining principle of private law (not even that of estoppel by convention), I cannot regard that as decisive of the case in their favour.
Any unfairness challenge must inevitably turn on its own individual facts. True, as Lord Templeman made clear in Preston, it can only ever succeed in 'exceptional circumstances'. True, too, the court must always guard against straying into the field of public administration. In these circumstances I am very ready to accept that rare indeed will be the case when a fairness challenge will succeed outside the MFK parameters. It is certainly difficult to envisage many situations when, absent breach of a clear representation, a highly reputable and responsible body such as the Revenue will properly will be stigmatised as having acted so unfairly as to have abused their powers- here their power to accept late claims. But I am satisfied that there exists no legal inhibition to such a conclusion…"
"I have quoted at some length from these judgments to show how misleading it can be to take out of context a single expression, such as "conspicuous unfairness", and attempt to elevate it into a free-standing principle of law. The decision in Unilever was unremarkable on its unusual facts, but the reasoning reflects the case law as it then stood. Surprisingly, it does not seem to have been strongly argued (as it surely would be today) that a sufficient representation could be implied from the Revenue's consistent practice over 20 years …. It seems clear in any event from the context that Simon Brown LJ was not proposing "conspicuous unfairness" as a definitive test of illegality, any more than his contrast with conduct characterised as "a bit rich". They were simply expressions used to emphasise the extreme nature of the Revenue's conduct, as related to Lord Diplock's test. In modern terms, and with respect to Lord Diplock, "irrationality" as a ground of review can surely hold its own without the underpinning of such elusive and subjective concepts as judicial "outrage" (whether by reference to logical or moral standards).
41. In summary, procedural unfairness is well-established and well-understood. Substantive unfairness on the other hand - or, in Lord Dyson's words at para 53, "whether there has been unfairness on the part of the authority having regard to all the circumstances" - is not a distinct legal criterion. Nor is it made so by the addition of terms such as "conspicuous" or "abuse of power". Such language adds nothing to the ordinary principles of judicial review, notably in the present context irrationality and legitimate expectation. It is by reference to those principles that cases such as the present must be judged."
(b) Application of the principles in this case