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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Al Fayed v Advocate General for Scotland (representing the IRC) [2004] ScotCS 278 (29 June 2004)
URL: http://www.bailii.org/scot/cases/ScotCS/2004/278.html
Cite as: 77 TC 273, [2004] STC 1703, [2004] ScotCS 278
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JISCBAILII_CASE_TAX
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FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
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Lord President Lord Kirkwood Lord MacLean
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OPINION OF THE COURT delivered by THE LORD PRESIDENT in RECLAIMING MOTION in PETITION at the instance of (FIRST) MOHAMED ABDEL MONEIM ALI FAYED; (SECOND) ALI ALI FAYED; and (THIRD) SALAH ELDIN ALI FAYED Petitioners; for Judicial Review of a decision by the Commissioners of Inland Revenue _______ |
Act: Kean, Q.C., D.E.L. Johnston; Maclay Murray & Spens (Petitioner and Reclaimer)
Alt: Hodge Q.C., Paterson; D.S. Wishart (Respondents)
29 June 2004
[1] This is the Opinion of the Court to which all members of the court have contributed. [2] The petitioners have reclaimed against the interlocutor of the Lord Ordinary dated 31 May 2002, refusing their petition for judicial review, in which they seek, inter alia, declarator that the Commissioners of Inland Revenue, the respondents, are obliged to abide by the Agreement dated 22 and 28 April 1997 (to which we will refer as the 1997 Agreement); reduction of the decision intimated by two letters dated 2 June 2000; and declarator that the continuing failure of the respondents to hold themselves bound by the 1997 Agreement is incompatible with the petitioners' Convention rights.Introduction
[3] The petitioners are brothers. The first petitioner is resident in London. The second petitioner is resident in the United States of America, and the third petitioner is resident in Switzerland. The first and second petitioners are directors of various companies in the Harrods Group. The first petitioner is a United Kingdom taxpayer, and is regarded by the respondents for tax purposes as being resident and ordinarily resident in the United Kingdom. At least until 5 April 2000, if not thereafter, he was regarded by the respondents as not being domiciled in the United Kingdom. The second and third petitioners are regarded by the respondents for tax purposes as being neither resident nor domiciled in the United Kingdom. [4] The 1997 Agreement is an example of a "forward tax agreement" which, in the present context, is an agreement in terms of which an individual will pay, and the respondents will accept, a specified sum in respect of designated future years of assessment in full and final settlement of income tax and capital gains tax to which the individual might otherwise have been liable by reason of the receipt of foreign remittances, or constructive remittances, in the United Kingdom. It appears that the respondents entered into such agreements from the early 1980s, if not before that time. If an individual is resident and ordinarily resident in the United Kingdom, and is not domiciled in the United Kingdom, he is chargeable to tax on United Kingdom-source income and capital gains in the normal way. However, in regard to foreign-source income and capital gains, he is taxable in the United Kingdom only in so far as they are remitted to the United Kingdom.The 1997 Agreement
[5] This was constituted by the respondents' acceptance of an offer made by accountants on behalf of the petitioners and Emad Fayed, a deceased son of the first petitioner ("the family members"), in a letter dated 22 April 1997. It was in the following terms:"We act for Mohamed Al-Fayed, Ali, Salah and Emad Fayed ("our clients"). We are instructed to make an offer to the Commissioners of Inland Revenue containing the following terms which will become a binding agreement (hereinafter called 'the Agreement') if that offer is accepted in the manner hereinafter indicated.
1 Mohamed Al-Fayed, Ali, Salah and Emad Fayed will be treated by the Inland Revenue as not domiciled for all Years of Assessment covered by this Agreement. Only Mohamed Al-Fayed of our clients is currently regarded by the Inland Revenue as resident and ordinarily resident in the United Kingdom for tax purposes, but this letter covers the position for each of them over the period referred to below.
2 Following recent discussions between representatives of our clients and Officers of the Inland Revenue, we are authorised to offer the payment of the sum of £240,000 in respect of each of the Years of Assessment ended 5 April 1998 to 2003 inclusive in full and final settlement of income tax or capital gains tax (and interest and penalties thereon) to which they become liable by reason of the receipt of foreign source income or capital gains including remittances, or constructive remittances, to the United Kingdom of funds or other assets from outside the United Kingdom which are assessable or may be assessable on them personally either singularly or jointly and in particular but without prejudice to the generality of the foregoing which are assessable or may be assessable:
(a) under Case IV, V or VI of Schedule D (as defined in section 18(3)
ICTA 1988), or
(b) under Case III of Schedule E (as defined in section 19(1) ICTA 1988),
or
(c) under Sections 1 and 12 and Chapter II of Part III TCGA 1992 in
respect of any chargeable gains arising on the disposal, or part disposal, of any asset as defined in Section 21(1) TCGA 1992 situated outside the United Kingdom by our clients, but only where the proceeds of the disposal, or part disposal, or the asset in question do not exceed £15 million.
For the purpose of this subparagraph:
(i) the provisions of Section 275 TCGA 1992 shall apply.
(ii) the disposal, or part disposal, of an asset shall be considered to
arise in any of the circumstances detailed in Chapter II of Part II of TCGA 1992.
3 The payment in paragraph 2 above will also cover any assessment to tax in respect of emoluments chargeable to income tax under Schedule E by virtue of Section 154 ICTA 1988 where it can be shown that the provision of services or supplies etc., was habitually provided to our clients prior to 6 April, 1990. This is on the understanding that the cost of services or supplies etc., was then reimbursed to the company providing the particular services or supplies, if that was the practice prior to 6 April 1990, and continues to be reimbursed.
4 It is agreed that the Inland Revenue may not pursue an appeal before the Commissioners against an assessment of emoluments under Sections 145 and 146 ICTA 1988 against our clients unless and until a decision is reached by the Appeal Commissioners, albeit subject to further appeal, in favour of the Inland Revenue in another case involving similar circumstances. In such circumstances our clients will be informed of the result of that other decision by the Inland Revenue and they will have the option within twelve months of the date of that notification to reimburse to the relevant company concerned amounts equivalent to the assessable benefit which might then be regarded as arising so that no liability arises subsequent to 5 April 1997. Only if our clients do not exercise that option will the Inland Revenue be able to pursue the appeal against emoluments chargeable by virtue of the said Sections 145 and 146.
5 Each payment of £240,000 will be made on or before 31 January in each of the Years of Assessment ended 5 April, 1998 to 2003 inclusive.
6 If at any time any of the said payments or any part thereof shall be in arrears and unpaid by the day specified herein then interest shall be payable upon the said payments or any balance thereof as remains unpaid at such rates as may from time to time be prescribed by the Taxes Acts for interest on overdue income tax from that day until the date of payment.
7 If following demand being made by the Inland Revenue the payment or part of the payment referred to in paragraph 5 above shall remain unpaid 30 days after the due date for payment, the Commissioners of Inland Revenue shall be at liberty to seek recovery of such sum from our clients under this Agreement as may then remain due and unpaid together with any interest that shall have accrued thereon pursuant to paragraph 6 above.
8 In the event that the Commissioners of Inland Revenue do not recover from our clients under this Agreement such sum as may then remain unpaid together with any interest that shall have accrued thereon pursuant to paragraph 6 above within six months of the date on which the Commissioners of Inland Revenue notify our clients that they are seeking to recover any sum from our clients pursuant to paragraph 7 above, then the Commissioners of Inland Revenue shall be at liberty to treat this Agreement as repudiated by our clients, in which event such assessments may be made on them and such other proceedings brought against them as may be necessary to recover duties, interest and penalties thought to be outstanding. Save as aforesaid this Agreement shall be irrevocable.
9 Our clients will complete Tax Returns for the Years of Assessment ended 5 April 1998 to 2003 inclusive as follows. The sections of the Tax Returns requiring details of foreign source income and capital gains, including the legislation referred to in paragraph 2 above, will be completed 'as per the Agreement dated 28 April 1997'. All other sections of such Tax Returns referring to income and capital gains not covered by this Agreement will be completed as required and any such income and capital gains not covered by this Agreement will be assessable in the normal way.
10 By accepting the terms of this Agreement, the Commissioners of Inland Revenue accept for all Years of Assessment referred to in paragraph 2 above that Mohamed Al-Fayed shall be treated as resident but not domiciled for all United Kingdom taxation purposes, including all Double Taxation agreements to which the United Kingdom is a signatory and inheritance tax. The same treatment will apply to any other of our clients who is resident in the United Kingdom in any Year of Assessment. Subject to paragraphs 7 and 8 above, the only other circumstances which would arise to vary or terminate this Agreement would be the death of either Mohamed Al-Fayed or Ali Fayed or the departure of Mohamed Al-Fayed from the United Kingdom so that he thereafter ceased to be resident in the United Kingdom. The variation in the event of the death of Mohamed Al-Fayed or Ali Fayed would be a one-half reduction in the amount of the payment referred to in paragraph 2 above. On the death of the survivor of Mohamed Al-Fayed and Ali Fayed, this Agreement will terminate. The departure of Mohamed Al-Fayed from the United Kingdom so that he thereafter ceased to be resident in the United Kingdom, would result in the termination of this Agreement if Ali Fayed was not resident in the United Kingdom at the date of such departure. If Ali Fayed was so resident, the variation in this Agreement would be a one-half reduction in the amount referred to in paragraph 2 above. For the year(s) of death or departure, the amount payable would be calculated on a pro rata basis being the proportion that the number of days for which the variation applies in any Year of Assessment bears to the number of days of that Year of Assessment. Mohamed Al-Fayed accepts that until he gives notice of departure under this Agreement, he is considered to be resident and ordinarily resident in the United Kingdom.
11 References in this Agreement to a statutory provision means that provision as it may be amended or re-enacted from time to time and includes a reference to any provision replacing such provision, and references to a named tax include a reference to any tax replacing such tax.
12 It is understood that during the year ended 5 April 2003 discussions will be held with an Officer of the Inland Revenue for the purpose of negotiating a continuation of this Agreement for a further six years on such terms as are then appropriate in respect of foreign source income and capital gains including remittances for Years of Assessment ending after 5 April, 2003. Such revised terms shall take account of the provisions of this Agreement and any subsequent changes to existing taxation legislation enacted by future Finance Acts.
13 The Agreement made in September 1990 covering foreign source income and capital gains including remittances to the United Kingdom in the six years ending 5 April, 1997 is unaffected by this offer and remains in full force and effect for the year ended 5 April, 1997".
The circumstances
[6] The 1997 agreement was preceded by earlier forward tax agreements in 1985 and 1990. In his Opinion the Lord Ordinary sets out at some length the background to the three agreements in paragraphs 11-53. In paragraphs 55-98 he gives a summary of the events leading up to the present proceedings. In the course of the hearing of the reclaiming motion there was no suggestion that these narratives were in any respect inaccurate or deficient. It is sufficient for us to refer to them, and to draw attention to a number of salient features as follows. [7] It appears that the 1985 Agreement arose out of a proposal made by Mr. G. Sargent of Messrs Peat, Marwick, Mitchell & Company on behalf of the family members at a meeting on 16 May 1985 with Mr. Peter Stribblehill an Inspector in the respondents' Special Office in Solihull who was then investigating the residence, domicile and potential tax liability of the family members. The Revenue believed that they might have been resident in the United Kingdom for some time, and that they might have failed to declare taxable income or gains. At that meeting Mr. Sargent said that it would be quite possible for the family members to plan their affairs so that they brought only capital into the United Kingdom; that they had very substantial amounts of capital available, principally in Switzerland; that they could make all the appropriate arrangements to ensure that there was no liability to United Kingdom taxation in future years even if they were resident in the United Kingdom; that, against that, they appreciated that they perhaps had some obligation to the United Kingdom authorities and that in addition they did not want the trouble of having to arrange their affairs precisely. In these circumstances they wondered if it would be possible for a round sum figure of tax to be paid for future years' liabilities, subject to reviews, taking into account both inflation and the level of their United Kingdom involvement, from time to time. This would mean that the family members were accepting that they were remitting to the United Kingdom a mixture of both capital and income and that they would accept, for the purpose of United Kingdom taxation, that the amount of income that those remittances included was equivalent to a sum grossed up from the amount of tax which they agreed to pay. In a letter to the respondents dated 27 June 1985 Messrs Peat, Marwick, Mitchell & Company stated:"The brothers recognise that in the past their administrative arrangements may not have been so tightly drawn as to enable them to be absolutely sure that no income funds have been received in the U.K. It is on that basis, and to avoid what would be a very time consuming exercise in tracing the source of all funds received in the U.K. over a period of years, that they have proposed to make a round sum payment, notwithstanding that their intention has been that such funds as have been brought to the U.K. do not give rise to any tax liability.
We should also reiterate that the annual tax payment suggested in respect of future years should also be taken into account in evaluating the settlement for past years since, as you will be well aware, the brothers could so organise their affairs as to be absolutely certain that no funds received in the U.K. represent income".
At the same time the accountants provided documentation from a Swiss bank from which substantial funds had been remitted to the United Kingdom, which confirmed that the remittances had come from a capital account.
[8] The Agreement in 1985 was set out in an exchange of letters dated 7 and 8 November 1985. Provision was made for the payment of a sum in respect of income tax for 13 years of assessment to 1985/86, on the basis of an acknowledgement that the petitioners had been resident in the United Kingdom since 1973. For this purpose one third of the remittances then disclosed by the family members was to be treated as taxable. In regard to the tax years from 1985/86 to 1990/91, it was agreed that they would declare annual income sufficient to give rise to a specified total annual tax payment. For the first year it was £150,000. In subsequent years it was to be indexed from that sum. [9] The Agreement in 1990 followed the disclosure that, due to what was said to be the fault of the Midland Bank, considerably larger sums had been remitted to the United Kingdom than had previously been disclosed to the respondents. It was also discovered that substantial remittances had been paid into accounts with the Royal Bank of Scotland in the names of the petitioners. The Agreement, which was made on 28 September 1990, related both to back tax and to forward tax. As regards back tax, provision was made for the payment of a sum of over £31m to cover the personal liability of the family members (to 5 April 1990) and the liability (to 31 December 1989) of certain companies with which they were associated, "in consideration of no assessments being made and no proceedings of whatsoever nature being taken" against the family members or the companies. Credit was to be given for the back tax settlement of 1985 and for the sums paid under the forward tax agreement. No information was provided to vouch disputed matters of fact as to the level of remittances, or the extent to which they were personal or corporate. No information was provided as to the level of remittances in the years between 1985/86 and 1989/90. As regards forward tax, it was agreed that each of the family members should pay £200,000 in respect of each of the tax years 1991/92 to 1996/97 inclusive"in full and final settlement of income tax or capital gains tax to which they become liable by reason of remittances, or of constructive remittances, to the United Kingdom of funds from outside the United Kingdom which are assessable or may be assessable on them personally either singularly or jointly".
"On reflection, I think I am a little more relaxed than you are although I understand your concern. The basic position is clear, I think. Certain taxpayers resident but not domiciled in the U.K. have such significant capital abroad that, with careful advice, they could and would so arrange their affairs that only capital was omitted (sic) to the U.K. to sustain them and their dependants in the lifestyle they are accustomed to. We could audit that process, at a cost, but with very uncertain chances (if any) of successful challenge. To minimise cost and inconvenience all round arrangements have been made for the equivalent of annual voluntary settlements in lieu of specifically unquantified but estimated liability. I, myself, see no difficulty in that, now or under self-assessment. Under S.A. I assume that these people would not get a return anyway. If they did we would presumably work on the basis that we had predetermined their annual taxable 'income' for a period of years and that would feature in the return. The difficulty I have is that not all the forward contracts seem to be on the same basis (indefinite, five years reviewable, change of circumstances trigger etc.). Unless Mr. Cleave [solicitor of Inland Revenue] sees any problems I have overlooked, my inclination is that we should not seek to overturn existing agreements although we should be prepared to review and re-negotiate as appropriate. For new cases in the future, if there are any, I think we should probe the circumstances to establish resident but not domiciled status, continue to probe and make some judgement on, as you do, the level of risk we are looking at and the prospects for successful challenge and then negotiate a settlement as appropriate. I do not think any new agreements should be open-ended but should be subject to review in the light of a change of circumstances or of the law and, in any event, at regular intervals. Five years seems to be the norm established and I would not dissent from that".
"by reason of the receipt of foreign source income or capital gains including remittances, or constructive remittances, to the United Kingdom of funds or other assets from outside the United Kingdom ... ".
"I am advised that the letter of agreement is not enforceable because it is ultra vires. The agreement takes no account of the possibility of there being a false factual basis for the contract. Also it does not allow for any changes in the facts or circumstances for any unexpired years or for changes in future legislation. I should also make it plain the agreement is ultra vires because it does not reflect as it should the performance by the Revenue of its statutory duties and care and management powers to assess and collect tax. Accordingly, the letter dated 7 March 2000 can be disregarded in respect of its reference to the suspension of the agreement. The agreement is not and never has been binding in law. In view of the history of the arrangements the Inland Revenue do not believe that it would be appropriate to re-open the back years in respect of liability to income tax and capital gains tax on foreign source income and capital gains prior to 5 April 2000. Accordingly, in this connection I would be grateful if you could arrange for your client to forward to me a cheque for £240,000 made payable to the Inland Revenue in respect of the year to 5 April 2000.
For the years from 6 April 2000 onwards Tax Returns will have to be completed in accordance with the family's statutory responsibilities, and without reference to the agreement ... ".
Mr. A.M. Carmichael, H.M. Inspector of Taxes S.C.O., handed a letter in similar terms to the petitioners' accountants at a meeting on 2 June 2000. The petitioners' solicitors wrote to the respondents on 8 June 2000 enclosing a cheque for £240,000 in respect of the year to 5 April 2000, expressly on the basis that the 1997 Agreement remained in full force and effect.
[23] As at 2 June 2000 there were eight other forward tax agreements in existence. The respondents instituted a review of all such agreements. Following the advice of counsel, Mr. D. Pate of the respondents' office at 114/116 George Street, Edinburgh produced a note dated 2 October 2000 setting out criteria by reference to which forward tax agreements were to be treated. According to the note, a forward tax agreement was to be regarded as ultra vires where it was entered into without obtaining meaningful factual information on which a proper view of liability to U.K. taxation at that time could be based; and where the agreement made no provision either for its termination or for review of its terms by the respondents on a material change of circumstances. Any such review, unless as the respondents' optional alternative to termination, must enable liability to be amended to ensure that payments due under the agreement are not smaller than would be due on a proper view of liability to U.K. taxation. [24] Before the Lord Ordinary, as he noted at paragraph 111, counsel for the respondents refrained from arguing that a forward tax agreement was by its nature ultra vires. Counsel confined themselves to the proposition that the 1997 Agreement was ultra vires because the respondents entered into it on an inadequate basis of information and because it lacked a sufficient provision for review or termination on the occurrence of a material change of circumstances. However, the Lord Ordinary took the view that the submission for the respondents raised more fundamental questions which could not be avoided. He concluded that the 1997 Agreement was, by its nature, ultra vires, in respect that the making of a forward tax agreement was not a proper exercise of the respondents' duties of care and management. In paragraph 119 of the Opinion he added:"The respondents are constrained by their statutory duties. They are not in a commercial market place operating an extra-statutory system of levying money on the basis that if that money were not paid, there would be a possibility that they could lawfully assess the individual to tax. To put the whole matter in another way, the respondents' duty to collect tax lawfully due arises only where transactions have occurred that create a liability to tax (R v. Sampson and Others ex p Lansing Bagnall Ltd. (1986) 61 T.C. 112, Balcombe L.J. at p. 127)".
"instructed to state that the Revenue does not consider itself to be contractually bound by any forward tax agreement providing for payment of an annual lump sum in respect of remittances. It follows that there is no such agreement on which renewal could be sought. It is the Department's policy that it does not propose to enter any new agreement of that type".
The issues in this appeal
[27] It is convenient at this point to set out what was stated to this court by counsel for the respondents as their position. [28] Counsel explained that, following the receipt of advice from counsel in May 2000, the respondents initially considered that a forward tax agreement would be intra vires, if (i) they had obtained at the outset reasonably reliable information as to the circumstances of the taxpayer, which would form a baseline; and (ii) the forward tax agreement provided for its termination or variation on a material change of circumstances. It was thought that, if these conditions were satisfied, the resulting arrangement would be sufficiently close to the effect of a statutory assessment to tax. This assumed that the taxpayer kept proper records and identified and disclosed remittances of income or capital gains. This approach was illustrated in the letters from Mr. McGuigan and Mr. Pate dated 2 June and 2 October 2000, to which we have referred above. [29] During the course of the debate before the Lord Ordinary, it became clear that there was a more fundamental issue in regard to vires. The respondents now accepted that the Lord Ordinary was correct in declining to hold that the arrangement made by the 1997 Agreement was a sufficient approximation to reality. The respondents did not consider themselves contractually bound by any forward tax agreement. It was recognised that their pleadings still reflected the position as it had been in October 2000. However, the only averments from which they had departed were those set out in Answer 74 at page 85B of the reclaiming print, in which they admitted that they continued to honour the terms of forward tax agreements with other taxpayers. [30] In the result the respondents maintained that, in common with all other forward tax agreements, the 1997 Agreement was ultra vires, in respect that it provided for payment of a fixed annual sum in respect of future tax liabilities. Further, and in any event, they maintained that the 1997 Agreement was ultra vires on the narrower ground that it provided that the petitioners fell to be treated as not domiciled in the United Kingdom (irrespective of the true position), that it covered their potential tax liability in respect of foreign income and capital gains even if they were not remitted to the United Kingdom, and that it was not subject to termination or review in the event of a change of circumstances. [31] Lastly, while the respondents maintained that the 1997 Agreement was ultra vires, they had accepted that it would be unfair for them to seek restitutio ad integrum in respect of the period ending on 6 April 2000. [32] In the light of the above the first question for this court is whether the Lord Ordinary was right in holding that the 1997 Agreement was ultra vires of the respondents. [33] If the 1997 Agreement was ultra vires, there remain two consequential questions. The first is whether the respondents' decision to terminate the 1997 Agreement as from 6 April 2000 was no unfair as to amount to an abuse of power: and in any event breached the petitioners legitimate expectations. The second is whether the Human Rights Act 1998 applied to the respondents' decision which was intimated by the two letters of 2 June 2000, and, if so, whether the rights of the petitioners under the European Convention on Human Rights and Freedoms were breached.The duties and functions of the respondents
[34] Under section 1(1) of the Inland Revenue Regulation Act 1890 ("the 1890 Act") provision was made for the appointment of persons to be "Commissioners for the collection and management of inland revenue". In section 13(1) of the 1890 Act it was provided that the Commissioners were to "collect and cause to be collected every part of inland revenue". The expression "inland revenue" was defined in section 39 as meaning"the revenue of the United Kingdom collected or imposed as stamp duties, taxes, ... and placed under the care and management of the Commissioners, and any part thereof".
The scope of "inland revenue" was expanded by section 1(1) of the Taxes Management Act 1970 ("the 1970 Act") which provides:
"Income tax, corporation tax and capital gains tax shall be under the care and management of the Commissioners of Inland Revenue ... and the definition of 'inland revenue' in section 39 of the Inland Revenue Regulation Act 1890 shall have effect accordingly".
"Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay".
Assessment and collection were, of course, functions of the respondents.
[36] It is not in dispute that the respondents have a managerial discretion as to the best and most practicable means of maximising taxes for the Exchequer. In I.R.C. v. National Federation of Self-Employed and Small Businesses Limited [1982] AC 617, to which we will refer as the "Fleet Street Casuals case", Lord Diplock stated at page 636 that:"the board are charged by statute with the care, management and collection on behalf of the Crown of income tax, corporation tax and capital gains tax. In the exercise of these functions the board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection".
At page 651 Lord Scarman endorsed the view that:
"in the daily discharge of their duties inspectors are constantly required to balance the duty to collect 'every part' of due tax against the duty of good management. This conflict of duties can be resolved only by good managerial decisions, some of which will inevitably mean that not all the tax known to be due will be collected".
He went on to say, on the same page, that:
"the modern case law recognises a legal duty owed by the revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims. The duty has to be considered as one of several arising within the complex comprised in the care and management of a tax, every part of which it is their duty, if they can, to collect".
To this may be added the observation of Bingham L.J. in R. v. I.R.C. ex parte M.F.K. Underwriting Agents Limited [1990] 1 WLR 1545 ("the M.F.K. case") at page 1568 where, after referring to cases in which the respondents had acted within their managerial discretion, he said that "the revenue's judgment on the best way of collecting tax should not lightly be cast aside".
[37] The taxing statutes do not in terms confer a general power on the respondents to enter into agreements with taxpayers in regard to tax liabilities. However, section 1(2) of the 1890 Act states:"The Commissioners shall have all necessary powers for carrying into execution every Act of Parliament relating to inland revenue ... ".
It is not in dispute that the respondents have such powers as are apt to facilitate, or are conducive and incidental to, the carrying out of their statutory functions. At the same time it is right to note the observation of Lord Templeman in Hazell v. Hammersmith L.B.C. [1992] 2 A.C. 1 at page 31:
"The authorities also show that a power is not incidental merely because it is convenient or desirable or profitable".
Ultra vires: - submissions of the parties in regard to forward tax agreements in general
[38] It is convenient to set out the parties' contentions by taking in the first place their submissions on the broad question whether a forward tax agreement, as defined in paragraph [3] of our Opinion, was ultra vires. Later in this Opinion we will set out their submissions in regard to the question whether, even if the general proposition is not well founded, the 1997 Agreement was, by reason of its terms, ultra vires. [39] Counsel for the petitioners submitted that for the respondents to enter into an agreement such as the 1997 Agreement was incidental to their powers of care and management of Inland Revenue. Senior counsel summarised their position in the following propositions:(i) the respondents' duty to collect could not be isolated from their function of
administration and management;
(ii) the respondents were entitled to administer and manage in such a way as to
maximise the net revenue received, in the light of such matters as their resources, the difficulties of making an assessment and the cost of collection;
(iii) the respondents had a duty of fairness to every taxpayer. They did not require
to employ the same mechanism or investigation in the case of every taxpayer;
(iv) it was a matter for the respondents to judge what steps should be taken to
collect and agree payments with taxpayers;
(v) if the respondents judged it appropriate to employ a particular form of
agreement, the court should not interfere simply because on the face of it the respondents had agreed to forego tax which Parliament told them to collect; and
(vi) if the respondents made a policy decision that they could lawfully collect tax
by means of a forward tax agreement, while that judgment would not be conclusive, it would be relevant to the determination of whether their conduct was lawful.
These propositions were said to be supported by the observation of Bingham L.J. in the Fleet Street Casuals case, at page 1568, that the respondents' judgment on the best way of collecting tax should not lightly be cast aside.
[40] Counsel for the petitioners pointed out the rationale for the respondents entering into the 1997 Agreement. It was concerned with the difficulty of identifying the source of the remittances, that is to say whether they constituted income or capital gains, on the one hand or capital, on the other. For the respondents the investigation might be time-consuming, and expensive; and ultimately unsuccessful. There was a risk that the petitioners might make arrangements whereby there would be no taxable remittances to the United Kingdom. For his part, the taxpayer might consider it worthwhile to pay a sum in order to be secure. For the respondents, entering into a forward tax agreement involved a judgment on their part as to the future "tax take". The respondents were entitled to forego the collection of potential tax in order to secure the certainty of a higher net return. It was a matter for their judgment as to whether this was embodied in a memorandum or was set out in an agreement, and for how many years such an arrangement should endure. None of the agreements was in perpetuity. [41] Senior counsel for the petitioners emphasised that it was clear that the respondents considered, when they were negotiating for and concluding the various agreements, that they were concerned with payments in respect of inland revenue. In their approach to these agreements the respondents wanted to cover the future as well as the past. The process by which the 1997 Agreement was arrived at took some months. It was not being dealt with by junior officials. There was a marked distinction between an assertion that the respondents' officials had shown a lack of judgment and the claim that the Agreement was ultra vires. There was no suggestion, prior to the present proceedings, that the respondents had entered into the agreements "blind", or that the agreed payments were "random". There was a presumption that public bodies, such as the respondents, acted lawfully. A margin of appreciation was afforded to their judgment. It was not correct to state that the 1997 Agreement was outside the tax system, as the Lord Ordinary held at paragraphs 120-121. Under clause 9 the petitioners were obliged to make a tax return every year, having agreed with the respondents an estimate of their tax liability. It was a misconception to characterise the Agreement as a "conduit for tax avoidance". There was nothing in the Agreement to inhibit the respondents' power to use section 9A of the 1970 Act. If there had been grounds for invoking that provision, its use would not have been regarded as an abuse of power. In the letters dated 2 June 2000, to which the proceedings related, the respondents indicated that they intended to use that provision in order to investigate the benefits obtained by the petitioners, which had been the subject of a report by their accountants in 1996. [42] It was also of significance to note that the claim that the Agreement was ultra vires came after the respondents had attempted to assert that in entering into it they had been misinformed. The respondents had also shifted their position since the letter of 2 June 2000. The state of their pleadings at page 85B could not be reconciled with their current argument that the collection and management of inland revenue involved only the taxation of taxable transactions that had occurred. The position of the respondents was not coherent. If, as they claimed, the 1997 Agreement was ultra vires, how could they lawfully abide by it until 6 April 2000? [43] Counsel for the petitioners supported their argument by comparison with other types of action on the part of the respondents which had been held to be lawful. They referred to the fact that the respondents may legally enter into an agreement with a taxpayer in respect of tax due in the past. Counsel referred to the observation of Nolan L.J. in I.R.C. v. Woollen [1992] S.T.C. 944 at page 950. Having said that the instalments payable under a back duty agreement should not be regarded as having the quality of tax, interest or penalties, he stated:"No assessment of the tax liability is necessarily made in these cases at all and if an assessment is made, as we are told it has been in the present case, what is payable under the agreement is not the result of a final determination of the statutory claim but a compromise between the parties in their contractual capacity".
Taking this as their starting point, counsel argued that there was no difference of principle between a back tax agreement and a forward tax agreement. Both could be embraced within a single agreement, with one having an impact on the other, as in the case of the 1985 Agreement. Each involved the exercise by the respondents of their wide discretion and an element of compromise. Each was made for good management reasons, and in each case the respondents made a judgment as to how much information they could expect to get and formed a view as to what agreement they should enter into. Counsel also pointed out that the 1990 back tax agreement made no apportionment between personal and corporate tax liabilities. The process of negotiation which led up to that Agreement involved "horse trading". It was not a settlement which was made on the basis of a known amount of liability. The respondents entered into such an agreement when they took the view that they could not obtain all the facts. If they could do so, they would make assessments to tax, otherwise they would be in breach of duty. The Fleet Street Casuals case provided another example of a settlement which was made in the absence of a known amount of liability. In that case the respondents entered into an agreement for future tax liabilities which had not yet arisen and might never arise. The respondents could not know whether the casuals would continue to work on the same basis as in the past. The decision showed that the respondents were entitled to make an arrangement for the future even if it meant that, despite having new information, they could not investigate the past years covered by the Agreement. In the present case, counsel submitted, each of the agreements involved an element of compromise, in the absence of evidence as to the taxable remittances to the United Kingdom.
[44] Counsel also founded on the fact that the respondents made extra-statutory concessions in regard to taxpayers' prospective liability to tax. They pointed out that in R. v. I.R.C. ex parte Preston [1985] AC 835 it was held that a decision of the respondents in regard to their future conduct was challengeable on the ground of unfairness where that amounted to an abuse or excess of power. At page 866 Lord Templeman stated:"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".
In the M.F.K. case it was held that the respondents had not by their words and conduct precluded themselves from seeking to tax certain bonds on a particular basis, but Bingham L.J. at page 1569 remarked that he did not consider that the assurances which the Revenue was said to have given were in themselves inconsistent with its statutory duty. At page 1571 he observed that the respondents' own judgment as to whether there was a binding agreement "while not conclusive, is not irrelevant". At page 1574 Judge J., having noted that it had been argued for the Revenue that unfairness could not arise when the Revenue had made representations about its future conduct and policy and probable interpretation of fiscal provisions or if there was no benefit to it, observed that estoppel might arise in relation to future conduct. He concluded, at pages 1574-1575:
"In the present case the revenue promulgated a number of guidelines and answered questions by or on behalf of taxpayers about the likely approach to a number of given problems. The revenue is not bound to give any guidance at all. If, however, the taxpayer approaches the revenue with clear and precise proposals about the future conduct of his fiscal affairs and receives an unequivocal statement about how they will be treated for tax purposes if implemented, the revenue should in my judgment be subject to judicial review on grounds of unfair abuse of power if it peremptorily decides that it will not be bound by such statements when the taxpayers has relied on them".
This went some way to explaining the basis on which the Revenue could lawfully regulate the tax treatment of future transactions by means of such concessions (cf. R. (Wilkinson) v. I.R.C. [2003] 1 WLR 2683).
[45] Counsel also relied on the practice of the respondents in giving taxpayers advance clearance in relation to the tax treatment of future transactions. [46] In the light of the above counsel for the petitioners were particularly critical of the Lord Ordinary's adoption of the proposition that "the respondents' duty to collect tax lawfully due arises only where transactions have occurred that create a liability to tax" (paragraph 119). They submitted that this proposition could not be reconciled with his acceptance (at paragraph 114) that it could be said to be within the proper scope of care and management of the inland revenue to give guidance as to the tax treatment of a proposed transaction. It was also inconsistent with his acceptance that the respondents could lawfully retain payments made under the 1997 Agreement. Counsel also founded on the fact that in accordance with section 59A of the 1970 Act the taxpayer required to pay tax during the year of assessment upon an estimate of the taxable transactions which might occur during that year. [47] Counsel for the respondents submitted that the incidental powers and the discretion of the respondents must be directed to the performance of their statutory duty. They could not bind themselves not to perform their duty in the future. It was no part of their duty to collect what was not lawfully due. In performing their duty, they formed a judgment on the amount of information which they required in order to take a view as to the appropriate level of taxation. They could compromise in the absence of full information. There were pragmatic reasons why the respondents entered into forward tax agreements with a few taxpayers from the 1980s. However, this was not in performance of their statutory duty. They were not attempting to collect tax that was due. They were operating an extra-statutory system of levying money on the basis that, if it was not paid, there was a possibility that they could lawfully assess the taxpayer to tax. [48] Counsel pointed out that income tax was an annual tax. The respondents did not have any power to accept a sum which was ascribed in part to income tax on liabilities which would otherwise fall to be assessed in future years. Reference was made to Gresham Life Assurance Society v. Att-General [1916] 1 Ch. 228, and to R. v. I.R.C. ex parte Preston, in which Lord Templeman observed at page 862 that it had been rightly decided that the appellant had no remedy against the Commissioners for breach of contract or representation because they could not bind themselves in advance not to perform their statutory duty in a later year. [49] Parliament imposed tax on actual transactions. Since that was so, a compromise required to relate to actual transactions, for it was in relation to them that the respondents were entitled to collect tax. A forward tax agreement did not involve the taxation of taxable transactions that had occurred. It did not involve the agreement and collection of a compromise sum in relation to an existing liability to tax. It involved the agreement to pay and accept a fixed sum in respect of future transactions which might or might not occur. The sum was unrelated to the amounts involved in future transactions. It was arbitrary, and did not relate to the actual level of taxation which was due on transactions. It particularised the exact sum which was to be paid, but without the respondents having any inkling as to the actual level of taxable transactions. [50] The cost and difficulty for the respondents of establishing whether a source of a foreign remittance was taxable or not, where the taxpayer chose not to co-operate, did not make entering into a forward tax agreement an exercise of a power ancillary to the respondents' duty. The respondents had the alternative of amending returns or making determinations in accordance with the appropriate legislation. [51] Unless a taxpayer did organise his affairs so that he was not liable to tax, the duty of the respondents was to tax him on his taxable transactions. The assertion that the taxpayer could so organise his affairs did not justify the respondents in abandoning the performance of their duty. Before the time when self-assessment was introduced the respondents had the option of making an estimated assessment. Following the introduction of self-assessment the respondents had the power to amend a tax return. In most cases the burden of displacing an assessment lay with the taxpayer. [52] By allowing a taxpayer to pay a fixed sum without reference to the actual levels of taxable remittances in the future, the respondents permitted him to alter his business affairs to take advantage of the contractual concession and bring into the United Kingdom taxable remittances, unlimited in amount, which, if it had not been for the agreement, would not have been brought into this country. This also gave the taxpayer a means by which he could take United Kingdom-source income and dividends offshore and then back into the United Kingdom without paying income tax. By entering into the Agreement the respondents created a conduit for tax avoidance. It amounted to an agreement not to tax what otherwise were taxable transactions. It was not open to the respondents to use section 9A of the 1970 Act in regard to the petitioners' remittances from abroad. The same did not apply in the case of benefits in kind which they received in this country from companies with which they were associated. The effect of the Agreement was also that the respondents renounced their right to enquire into the true financial circumstances of the petitioners during the period of the Agreement, and the right to assess tax by reference to actual transactions. In the result, the effect of the Agreement was that the petitioners were not taxed by law but untaxed by concession (cf. Vestey v. I.R.C. [1980] AC 1148, Lord Wilberforce at page 1173). [53] Further, the Agreement involved unfairness towards other taxpayers who might be resident, but not domiciled, in the United Kingdom and receive remittances there from overseas, but could not credibly represent that they could organise their affairs in order to avoid taxable remittances. In any event it was unfair to other taxpayers to give the taxpayer with whom such an agreement had been made carte blanche to carry out taxable transactions without incurring liability to tax. There must be "no favourites and no sacrificial victims" (Lord Scarman at page 651 in the Fleet Street Casuals case). It was only in exceptional circumstances that the courts would intervene in regard to the respondents' view on the matter of unfairness (R. v. I.R.C. ex parte Preston, Lord Templeman at page 864). The respondents could not behave in the same way as a commercial organisation. It might save the use of valuable manpower and scarce resources, but it would be in breach of the duty of fairness. [54] Counsel for the respondents went on to submit that in making a back tax agreement the respondents had to decide how much information they could reasonably expect to obtain, and whether the taxpayer could meet liability in a larger amount, assuming that the respondents could demonstrate that such a liability existed. In I.R.C. v. Nuttall [1990] S.T.C. 194, in which it was held that the respondents had power to enter into back duty agreements, Parker L.J. observed, at page 200:"If there is a power to enforce there must also necessarily be a power for good consideration to accept some lesser sum. The Revenue of course have no power to refrain from collecting tax which is due, but these agreements are all made in a situation where the actual tax recoverable has not yet been quantified".
At page 204 Bingham L.J. said:
"It would seem to me extraordinary, and also regrettable, if the Revenue could not achieve by agreement that which it could undoubtedly achieve by coercion".
At the same time the court emphasised that there was a limit to the respondents' power to compromise. At page 205 Bingham L.J. said:
"The power to make agreements with taxpayers for the payment of back duty, even in the absence of assessment and appeal, is in my view a power necessary for carrying into execution the legislation relating to Revenue within the meaning of section 1 of the 1890 Act. It is, of course, a power to be exercised with circumspection and due regard to the Revenue's statutory duty to collect the public revenue".
Counsel also pointed out that the respondents could not compel a taxpayer into the equivalent of a forward tax agreement, that is to say an agreement under which he had to pay a fixed sum regardless of the transactions which he actually carried out and gave rise to a tax liability.
[55] In the case of extra-statutory concessions, it was clear since the case of Wilkinson, if not before, that the respondents could not make such concessions where they were at odds with the intention of Parliament. At para. 45 Lord Phillips M.R. observed:"One of the primary tasks of the commissioners is to recover those taxes which Parliament has decreed shall be paid. Section 1 of the 1970 Act permits the commissioners to set about this task pragmatically and to have regard to principles of good management. Concessions can be made where those will facilitate the overall task of tax collection. We draw attention, however, to Lord Diplock's statement that the commissioners' managerial discretion is as to the best manner of obtaining for the national exchequer the highest net return that is practicable".
Ultra vires: - submissions of the parties in regard to the terms of the 1997 Agreement
[60] In regard to the particular terms of the 1997 Agreement, the position of the respondents was that they illustrated their general contention that such agreements were ultra vires. If, however, that contention was not accepted, they demonstrated that the 1997 Agreement was ultra vires.
[61] It is convenient to begin with the submissions made by counsel for the respondents. They pointed out that in 1985 the amount to be paid had been fixed on an incorrect basis, as the full extent of the remittances to the United Kingdom had not been revealed. Since 1985 the first petitioner had increased his presence, and acquired business interests, in the United Kingdom. Since 1985 the respondents had no updated information as to the source of remittances. With reference to the 1997 Agreement there had not been any meaningful information as to the level of taxable remittances which the petitioners were taking in to the United Kingdom. It was to be noted that in stat. 26 at page 40A-B the petitioners averred:"No factual information that could have been provided by the petitioners in 1996 would have enabled the respondents to form a view as to the future liability of the petitioners to United Kingdom tax in respect of remittances made in 1997 and thereafter, which, in principle, would be chargeable to tax in the absence of a forward tax agreement. As the respondents knew, since 1985, the treatment for United Kingdom tax purposes of all remittances received by the petitioners in the United Kingdom had been covered by the terms of the 1985 and the 1990 agreements. Therefore, information about the remittances actually received by the petitioners in the United Kingdom during the period from 1985 until 1996 could give no guidance as to the likely level of future remittances received""
Accordingly, the sum which was fixed for the purpose of the 1997 Agreement was truly random. The fact that officials of the respondents did not ask the petitioners for more information, and that the petitioners could not be blamed for not providing it, did not impinge on the question of vires.
[62] Counsel for the respondents also pointed out that the 1997 Agreement contained no mechanism for its termination or review upon a material change of circumstances. It was to be noted that it did not conform with the policy expressed by Mr. Matheson in his letter dated 27 March 1996, in respect that there was no factual basis which could provide a baseline, and there was no provision for such a review. [63] Further, it was to be noted that clause 2 of the 1997 Agreement provided that the payment was to cover not only tax in respect of remittances, or constructive remittances, to the United Kingdom but also, more generally, "the receipt of foreign source income or capital gains". If the first petitioner became domiciled in the United Kingdom he would be liable to tax on his foreign-source income or capital gains whether or not they were remitted to the United Kingdom. However, clause 2 protected him against the taxation of non-remitted foreign-source income in the event of his acquiring a domicile in the United Kingdom. [64] Quite apart from that, clause 1 and the first two sentences of clause 10 required that the family members should be treated, irrespective of the true position, as not domiciled in the United Kingdom during the years of assessment covered by the Agreement. These provisions would be significant in regard to not only the taxation of income and capital gains but also inheritance tax, which depended on the domicile, or deemed domicile, of the taxpayer. [65] If the submission as to the meaning of clause 2 was not accepted, clauses 1 and 10 assumed significance for not only inheritance tax but also income and capital gains tax. The acquisition of domicile did not depend on a statement of intention, but was determined on an objective assessment of all the relevant circumstances. The terms of the 1997 Agreement committed the respondents to a basis of taxation which would be contrary to the law if the first petitioner had acquired a domicile in the United Kingdom. It should also be noted that clause 2 would apply in the event of there being a change in the legal basis on which foreign source income and capital gains were subject to taxation. [66] Counsel for the petitioners responded by disputing the respondents' interpretation of "the receipt of foreign source income or capital gains" in clause 2. As regards the acquisition of a domicile of choice, this was not to be inferred lightly. In any event it was an implied term that the Agreement would come to an end if one of the petitioners acquired domicile in the United Kingdom. Such an implication was both necessary and in accordance with the principle that a contract should be construed so as to favour its validity rather than its invalidity. Other forward tax agreements had spelt out what would, in any event, be implied. In any event, even if no such term was to be implied, the Agreement would be frustrated in the event of the first petitioner acquiring a domicile in the United Kingdom. The basis on which the parties entered into the 1997 Agreement was that (a) the petitioners would be non-domiciled throughout, and (b) the remittance basis for taxation would continue to subsist. Had either of these bases been altered the Agreement would have been frustrated. There was clear authority that contractual undertakings could be frustrated by supervening legislation. [67] (It should be added, in parenthesis, that during the course of the hearing of the reclaiming motion, counsel for the petitioners sought the addition to the appendix to the reclaiming print of copies of passages in the transcript of evidence given by two officials of the respondents, after the date of the Lord Ordinary's decision, in separate proceedings at the instance of the petitioners which sought to challenge the respondents' investigation of their tax affairs. The purpose for which these passages were to be used was to show that these officials understood that it would have been a repudiation of the 1997 Agreement for the first petitioner to acquire a domicile of choice in the United Kingdom. The motion was opposed by the respondents. It was refused by the court on the grounds that the views of the officials lacked materiality, and that in any event there was no exceptional reason for granting such a motion). [68] Counsel for the respondents commented on these submissions to the effect that clauses 1, 2 and 10 had the effect of excluding any such implied term. They had been deliberately introduced by the petitioners' advisers. Further, according to their averments in stat. 73 at 81D-82A, the petitioners stated that they considered that the provisions as to domicile conferred a benefit. The supposed implied term was not necessary in relation to any of the petitioners. Likewise any question of frustration was excluded. If the petitioners were right, clause 1 and the first two sentences of clause 10 were pointless. There was no uncertainty about their meaning. Frustration was excluded by the provisions in regard to the acquisition of domicile, which prevented the respondents from asserting its tax consequences.Ultra vires - decision
[69] The authorities clearly show that the respondents have a managerial discretion, and that there are circumstances in which they have power to enter into an agreement with the taxpayer for the payment of a sum of money in respect of the taxpayer's tax liability, even where it may be said that they have foregone the collection of some part of the total amount of tax which was due. They can properly take into account the extent of the information which is likely to be obtainable, and the difficulty involved in identifying the extent of the exact sum which is due. [70] It is not difficult to see the attractions to the respondents in their entering into the series of agreements which led up to the 1997 Agreement. This avoided the time, expense and risk of failure involved in establishing the extent to which the petitioners' remittances to the United Kingdom were taxable. It also circumvented the risk, such as it was, that the petitioners might have arranged their affairs so as to prevent any taxable remittances reaching the United Kingdom. The agreements provided for a certain return in uncertain circumstances. [71] Further, we do not doubt that from the 1980s until May 2000 the respondents proceeded on the footing that there was no question as to whether any of these agreements was beyond their powers. When they began to have misgivings about the 1997 Agreement, they sought to escape from it on a number of grounds, none of which was that it was ultra vires. Even when they had been advised by counsel that the Agreement was ultra vires, they maintained that this was due to the particular terms in which the 1997 Agreement was expressed. [72] However, it is essential to consider whether there was any proper relationship between the respondents' statutory duty and their entering into the 1997 Agreement and its predecessors. [73] Under taxation legislation the respondents have the duty of collecting tax as it falls due in respect of actual transactions. The fact that a taxpayer may have to make a payment during the course of the year of assessment by reference to transactions taking place within the year as a whole does not constitute a true exception to this since the question of what is actually due is subject to a later reconciliation. The respondents have no power to require a taxpayer to accept an advance assessment of his liability to tax in a future year or years. Likewise they have no power to contract with the taxpayer as to his future liability (see Gresham Life Assurance Society v. Att-Gen.). [74] Next, even if the sum to be paid under an agreement between the respondents and the taxpayer was a reasonable estimate of the taxpayers' liability at the outset of the period covered by the agreement, it could not be taken as a measure of that liability throughout the period. The amount of the taxable remittances could readily vary, and it would no doubt be attractive to the taxpayer to maximise such remittances since he would know that the amount to be paid by him remained fixed for the period covered by the agreement. It is also possible that the tax regime would be subject to variation at some time within that period. In these circumstances we accept the respondents' argument that such an agreement would involve a failure on the part of the respondents to exercise their managerial discretion, in the words of the Master of the Rolls in R (Wilkinson) v. I.R.C., to which we have referred earlier, "as to the best manner of obtaining for the national exchequer the highest net return that is practicable". We do not consider that they could exercise their power under section 9A of the 1970 Act to investigate the actual liability of the taxpayer in respect of such remittances, because they had disabled themselves from doing so by entering into the Agreement. [75] We are not persuaded that any of the other practices of the respondents, while accepted as lawful, assist the petitioners in demonstrating that the Agreement was intra vires. [76] A back tax agreement relates to a situation in which the taxpayer has already incurred the tax liability, but its amount has not been determined. Fundamental to the legality of such an agreement is that the respondents have the power to require the taxpayer to pay what is due. As an alternative means to the same end they are regarded as having the power, in the exercise of their managerial discretion, to enter into a contract with the taxpayer for a payment in satisfaction of that liability. In that context they have power to arrange a compromise with the taxpayer, taking into account such factors as may be relevant. The fact that such an agreement is within the powers of the respondents cannot confer on them a power to enter into a forward tax agreement which otherwise would be ultra vires. Combining the two agreements in a single document, or agreeing that one is to form a consideration in respect of the other, makes no difference. [77] We do not consider that the Fleet Street Casuals case provides any support for the petitioners' submissions. So far as the agreement in that case was concerned with the future, there was no question of the respondents agreeing with the taxpayers the extent or level of their liability. As was pointed out by Lord Wilberforce at page 632, the respondents were empowered by a statutory instrument to make special arrangements for the collection of tax in the case of persons in casual employment. In that case, as he narrated at page 634, this power was used in order to make an arrangement which would ensure that for the future tax would either be deducted at source or would be properly assessed. It is true, as he narrated on the following page, that if a casual worker had registered with the Inspector of Taxes before 6 April 1979 and co-operated fully and promptly in settling his tax affairs, investigation into any tax that had been lost would not have been carried out for tax years before 6 April 1977. However, it has to be noted that this arrangement was made in circumstances in which the respondents reasonably considered that an attempt to collect the whole amount which was due from hostile workers whose identity was unknown, and for a period of more than two years in the past, would have been unlikely to produce any substantial sums of money and would have delayed or even frustrated the arrangement. In these unusual circumstances the respondents were regarded as acting "genuinely in the care and management of the taxes, under the powers entrusted to them" (page 635). [78] The decisions in relation to extra-statutory concessions make it plain that it is not lawful for the respondents to make a concession where it would be in conflict with their statutory duty. As regards the decisions in R. v. I.R.C. ex parte Preston, and the M.F.K. case, it requires to be borne in mind that they were concerned, not with the question of whether the conduct of the respondents was ultra vires, but whether it was such as to amount to a misuse or abuse of power. Thus, for example, Lord Templeman in R. v. I.R.C. ex parte Preston observed at page 862 that it had been rightly decided that the taxpayer had no remedy against the respondents for breach of contract because they could not bind themselves in advance not to perform their statutory duty at a later date. [79] For these reasons we are of the opinion that the respondents had no power to enter into a forward tax agreement. The fact that the sum which the respondents contracted to receive was not based on any current information but had merely been updated from the figure which had been used in the agreement in 1985, serves only to underline the conclusion that the Agreement cannot be regarded as facilitating the discharge by the respondents of their duty to collect what was due. [80] Even if we had not reached the view that forward tax agreements were ultra vires of the respondents, we would have held that, in the absence of any terms in the 1997 Agreement which would have ensured that no sum was payable under the Agreement unless it was a genuine and realistic approximation to the actual liability of the petitioners, it was ultra vires. The 1997 Agreement, like its predecessors, contained no provision for termination or alteration of the agreement on a material change of circumstances. [81] The significance of the possible acquisition by the first petitioner of a domicile of choice in the United Kingdom cannot, we consider, be overlooked. If the 1997 Agreement was not ultra vires simply because it was a forward tax agreement, it is plain that, in entering into the Agreement the respondents ran the risk that during its currency the first respondent would acquire such a domicile. In that event, it cannot simply be brushed aside as unrealistic. The tax liability of the first petitioner would, apart from the Agreement, have acquired an extra dimension, in respect that his foreign-source income and capital gains would have been subject to United Kingdom taxation even if they had not been remitted to this country. We consider that there was considerable force in the respondents' argument that the effect of clause 2 of the Agreement was that that liability would also have been covered by the Agreement and hence by the payment which was contracted to be made in full and final settlement. However, even if that is not so, the respondents had bound themselves to treat him and the other family members as not being domiciled in the United Kingdom for the duration of the Agreement. These considerations demonstrate one further aspect of the way in which the respondents disabled themselves from carrying out their duty of collecting tax that would be due in the event of the first petitioner acquiring a domicile of choice in the United Kingdom. We are quite unable to regard the 1997 Agreement as being subject to an implied term that the first petitioner should not acquire a domicile of choice in the United Kingdom. Likewise, we cannot accept that his acquisition of that domicile would have frustrated the Agreement. The respondents, as it seems to me, were correct in submitting that each of these propositions was flatly contradicted by the express terms of the Agreement. [82] For these reasons, even if we had taken the view that the 1997 Agreement was not ultra vires by reason of its being a forward tax agreement, its terms were such as to render it ultra vires.Unfairness and abuse of power - submissions of the parties
[83] The Lord Ordinary held that the termination of the Agreement could not be seen as an abuse of power on the part of the respondents. Having reached the conclusion that the Agreement was ultra vires of the respondents, he considered that it could not be unfair to the petitioners to be deprived of the benefits resulting from it. While counsel for the petitioners had contended that they had been prejudiced by the fact that the Agreement had been terminated without notice, the Lord Ordinary took the view that the question of prejudice was premature and that he was unable to say, on the basis of the information before him, that the petitioners had suffered, or must inevitably suffer, material prejudice as a result of the respondents' decision to bring the Agreement to an end. [84] Counsel for the petitioners submitted that the respondents' decision to terminate the 1997 Agreement in June 2000 was so unfair as to amount to an abuse of power. The Lord Ordinary had erred in his approach to the issue of unfairness and abuse of power. In particular, he had erred in law in holding that the respondents had been able, without unfairness to the petitioners, to make their decision not to abide by the 1997 Agreement. It was well-established that the respondents were under a duty of fairness to taxpayers, and between taxpayers, and that their decisions are amenable to review on grounds of unfairness (Preston v. Inland Revenue Commissioners [1985] AC 835 per Lord Templeman at pages 864 and 866; R. v. Inland Revenue Commissioners, ex parte Unilever plc [1996] STC 681). The underlying principle was that improper or capricious exercise of a discretionary power constituted a failure to exercise the discretion which the law had conferred. One instance of unfairness was conduct equivalent to a breach of contract or representation such as could, in other circumstances, be redressed at private law. Such instances of unfairness could properly be described as abuse of power in respect that the power was exercised unfairly. The decision-making might also be characterised as irrational in the Wednesbury sense. [85] Counsel submitted that in the present case there were four principal manifestations of unfairness. In the first place, it was clear that the respondents had been determined, come what may, to withdraw from the 1997 Agreement well in advance of arriving at the view that it was ultra vires. An intention on their part to withdraw from or rescind the Agreement went back at least to November 1999 and had been re-iterated in documents from January and February 2000 onwards. The respondents had shifted their ground on how to treat the Agreement and the reasons which they advanced. The respondents had initially purported to "suspend" the Agreement and return the petitioners' cheque, and then they had proposed to regard it as being vitiated by misrepresentation. Both of these approaches presupposed that the Agreement was, in fact, within their powers. It was not until April 2000 that the ultra vires issue first surfaced. There had been a lack of candour in the respondents' affidavits which was relevant to the issue of unfairness. The basis on which Mr. Whitehead had expressed his concerns about the Agreement - the availability to the first petitioner of large sums of cash - was itself irrational. It was clear that the respondents had, over a long period, been looking for any reason, which they thought they could justify, for withdrawing from the Agreement, and had eventually latched on to the ultra vires ground. [86] The way in which the respondents had behaved in the period leading up to their decision not to proceed further with the 1997 Agreement was of particular significance. Counsel referred to the affidavit by Mr. Middleton, Director of the Special Compliance Office, relating to a meeting which he had with Mr. Matheson of the Board of Inland Revenue in May 2000 (Appendix 4/35). At that time it had been Mr. Middleton's understanding that the Agreement was ultra vires of the respondents, and the purpose of the meeting had been to decide how to proceed in the light of that knowledge. Mr. Middleton had put a range of options to Mr. Matheson with his views on each, views which, he said, took into account the requirements of fairness. The four options were (one) to allow the Agreement to continue after 2003; (two) to allow the Agreement to run until 2003 and at that point refuse to renew it; (three) to terminate the Agreement as from 6 April 2000 and (four) to terminate the Agreement from 6 April 2000 and re-open the earlier years. The last option was rejected because it was thought to be unfair, but counsel for the petitioners submitted that there was no indication as to why the other options, and in particular option (two), had been rejected. [87] Secondly, the respondents had treated other taxpayers with whom they had entered into forward tax agreements differently from the petitioners, and had not sought to terminate their contracts. The respondents had known that the petitioners' accountants were aware that forward tax agreements had been entered into with other taxpayers. The respondents had ascertained what contracts were still in force and had decided to review them, and information concerning a number of those contracts had been made available to the petitioners' advisers. The respondents had sought to explain the criteria which they were adopting in order to assess whether a contract was intra vires or ultra vires. However, they had endeavoured to preserve the other contracts. After the Lord Ordinary had issued his Opinion, the respondents had continued to treat the petitioners differently from other taxpayers. While the Lord Ordinary had held that all forward tax agreements were ultra vires of the respondents, the respondents had maintained in force a number of forward contracts. [88] The respondents' decision to terminate the 1997 Agreement was to be contrasted with their determination to continue with forward tax contracts which they had entered into with other taxpayers. It was conceded by the respondents in their pleadings that no forward tax agreements, apart from the one with the petitioners, had been terminated between 1 April 2000 and 1 May 2001. Counsel referred to the respondents' stated position that they had initially assessed the validity of other forward tax agreements on the basis of dual criteria, but submitted, under reference to Mr. Pate's letter of 2 October 2000 (Appendix 5/15) that there had in fact been three criteria. Further, the respondents conceded in their pleadings that, after their review, they had continued to honour the terms of forward tax agreements with other taxpayers. Reference was made to Cases C and G. It was submitted that those contracts had not met the respondents' criteria but they had continued in force. Further, in relation to the issue of fairness, the respondents had referred to the position of other taxpayers who could not afford to enter into forward tax contracts. However, counsel submitted, the petitioners fell to be compared, not to the general body of taxpayers, but to the other taxpayers who had entered into forward tax contracts with the respondents. The petitioners had been treated unfairly, and the most obvious example of that was Case G where the respondents had accepted that the contract did not meet their criteria and had simply severed the offending provisions. It was also of significance that the respondents' decision to terminate the 1997 Agreement was founded on events that developed at the end of 1999 or the beginning of 2000, when a tax inspector had wished to investigate the Harrods group of companies, and before the ultra vires issue had been raised. [89] Thirdly, the respondents, when they change the view of the law relating to a particular aspect of taxation which they had previously expressed, routinely allow taxpayers a period of time to adjust their affairs to the new legal position. They had not done so in the present case. [90] Fourthly, the petitioners had arranged their affairs in reliance upon the 1997 Agreement and, in particular, had not sought to put in place the type of complex checks that would be necessary to ensure that no element of foreign-source income or capital gains was remitted into the United Kingdom. This was demonstrated by the terms of Mr. Sargent's affidavit (Appendix 4/40). After the respondents purported to terminate the Agreement, the petitioners had been told that they were to be taxed, in respect of the tax year from 6 April 2000 onwards, without reference to the Agreement. The fact that the petitioners were to be taxed on a basis different from that which had been agreed was potentially prejudicial to them. The 1997 Agreement had conferred benefits on both parties, but the petitioners were to lose their benefits. In any event, as the respondents had intimated that they were withdrawing from a contract which they had made with the petitioners as taxpayers, it was for the respondents to show that there would be no unfairness to the petitioners and that the petitioners would thereby not suffer any prejudice. The fact that the respondents had departed from the 1997 Agreement was in itself sufficient to establish prejudice (R. v. North and East Devon Health Authority, ex parte Coughlan [2001] QB 213). While the respondents had contended that they had had no option but to terminate the Agreement, it was significant that they had chosen to adhere to the Agreement for the first three tax years covered by it. In the circumstances the respondents' decision to terminate the Agreement in June 2000 was so unfair to the petitioners that it amounted to an abuse of power. [91] Counsel for the respondents stated that, if the 1997 Agreement was not ultra vires, they were not advancing any other ground to justify their decision not to be bound by it. Accordingly, the issues of fairness, abuse of power and legitimate expectation required to be considered only on the assumption that the agreement was ultra vires. Counsel submitted that the respondents had not abused their power by terminating the Agreement. Once they had realised that the Agreement was ultra vires, they had had no option but to hold themselves no longer bound by it. [92] In support of their allegations of unfairness, the petitioners had advanced four principal submissions, namely (1) the assertion that the respondents had been determined come what may to withdraw from the Agreement; (2) the respondents' alleged favourable treatment of other taxpayers; (3) the respondents' alleged failure to allow the petitioners time to adjust their affairs to the new position, and (4) the petitioners' reliance on the 1997 Agreement and the absence of checks on remittances. [93] With regard to the first of those submissions, counsel pointed out that the respondents' tradition of propriety and high standards of behaviour had long been recognised in the courts (In re Preston [1985] 1 AC 835 per Lawton L.J. at page 844; R. v. Inland Revenue Commissioners, ex parte Unilever plc [1996] STC 681 per Simon Brown L.J. at page 695). Counsel went on to submit that Revenue officials in different offices had had different levels of knowledge at different times. Certain of the concerns recorded in the internal documents were ill-informed as to the scope of the Agreement and did not demonstrate a fixed intention. But the concern about the possible loop of U.K. dividends offshore and then back onshore under cover of the Agreement was legitimate (Appendix 2/58 and 2/71). Further, there had been good reasons to be concerned about the first petitioner's tax affairs in light of the revelations in the Hamilton trial. As well as the concern about the large amounts of cash involved, the respondents had noted that the first petitioner had been involved for many years in tax irregularities towards favoured employees whom he treated as his own employees. In the circumstances the concern expressed by Revenue officials had been justified. In the event, officials in the Special Compliance Office in Edinburgh had received the case papers from London, reviewed them and taken legal advice, which was to the effect that the 1997 Agreement was ultra vires. It was only after that advice had been received that the decision letter of 2 June 2000 had been issued. In these circumstances the documentary evidence was wholly consistent with the Lord Ordinary's conclusion that the Special Compliance Office in Edinburgh considered the matter afresh and that, before the opinion of counsel was received, their attitude was simply to seek not to renew the agreement. [94] With regard to the petitioners' second main submission, the respondents were in general not able to discuss the affairs of other taxpayers because of their duty of confidentiality. However, the respondents had initially assessed the other extant forward tax contracts on the basis of dual criteria, namely whether there was (a) meaningful information to allow them to reach an informed view on a baseline as to the source and amount of remittances and (b) a change of circumstances clause. After the Lord Ordinary delivered his Opinion on 31 May 2002 the respondents determined to follow its guidance as to the illegality of forward tax agreements generally. By letter dated 20 January 2003 the respondents informed the petitioners' solicitors that "The Revenue does not consider itself to be contractually bound by any forward tax agreements providing for payment of an annual lump sum in respect of remittances". As a result of a continuing review of such contracts, following the issue of the Lord Ordinary's Opinion, existing forward tax agreements involving the payment of a fixed sum in respect of future remittances, including Case G had been brought to an end. The respondents had not knowingly kept in force any such forward tax agreement. Counsel accepted that the respondents had altered their position in light of the Lord Ordinary's Opinion, and that they now took a more radical approach to forward tax agreements than they had done at the outset. This was because they recognised that the initial criteria on the basis of which they had proceeded had not given a complete picture. The Opinion of the Lord Ordinary revealed that the problems went beyond those criteria. However, even if the criteria initially adopted by the respondents were incorrect, it did not follow that the respondents had been wrong to terminate the 1997 Agreement. The legality and fairness of the respondents' actions had to be assessed on the basis of their knowledge at the time of the decision to terminate the Agreement (R. v. (on the application of B Sky B plc) v. Customs & Excise [2001] STC 437, per Elias J. at paras. 14, 16 and 30). [95] So far as the petitioners' third submission was concerned, the documents relied on by them (Appendix 4/4 and 4/42-44) concerned the withdrawal of the Revenue's intra vires expressions of opinion on the law, and the representations had been made to all taxpayers who were liable to be affected. The respondents' practice in relation to changes in their view of the applicable law in any particular circumstances depended on the facts of each case. In the present case the respondents recognised that there might be a need to adjust the amount of tax which should be paid by the petitioners in the tax year to 5 April 2001 if it transpired that they were able to demonstrate unfair prejudice by having entered into, or set in motion, irreversible transactions in reliance on the 1997 Agreement. However, until the petitioners' position on this matter was known, the respondents could not assess what adjustments, if any, would require to be made. [96] With reference to the petitioners' fourth contention, namely that they had relied on the 1997 Agreement, counsel submitted that there was no evidence of the extent of any such reliance. The petitioners were now asserting "potential prejudice" and it was no more than mere assertion. Once the respondents had become aware on legal advice that the 1997 Agreement was ultra vires, they had sought to withdraw the benefits of the contract immediately, as the contract was illegal, and the conferring of such benefits was unfair on other taxpayers. However, at the same time they sought to do so in a way which would avoid causing the petitioners unfair prejudice, namely (a) by not re-opening the taxation of remittances before 6 April 2000 and (b) by recognising that the petitioners might be able to make out a case for special consideration for the assessment and collection of tax in relation to irreversible transactions undertaken in the tax year 2000/ 2001. The respondents recognised that it might have taken the petitioners a period of time after 2 June 2000 to organise their affairs in relation to remittances to deal with the fact that the 1997 Agreement was no longer in force. The respondents accepted that the petitioners should not be unfairly prejudiced by the absence of notice of termination. For example, remittance transactions might have taken place between 6 April and 2 June 2000 in reliance on the Agreement, and other transactions might have been in the pipeline as at 2 June and might by then have become irreversible. The petitioners might have required a period of time to set up arrangements to deal with the situation following the termination of the Agreement. It would be open to the petitioners to raise these matters with the respondents. No assessment for the tax year April 2000 to April 2001 had been prepared, and no attempt had been made by the respondents to collect tax for that period. The respondents would be able to avoid unfairness to the petitioners amounting to an abuse of power, and accept that they have a legal duty to do so. Counsel submitted that the Lord Ordinary was right when he observed (in para. [156]) that it was premature to conclude that the petitioners had suffered, or would inevitably suffer, prejudice which would make the setting aside of the invalid Agreement an abuse of power. On the whole matter counsel submitted that there had been no unfairness amounting to an abuse of power.Unfairness and abuse of power - decision
[97] As we have said, all the submissions which were made to us in relation to unfairness and abuse of power, and also legitimate expectation, were made on the assumption that the 1997 Agreement had been ultra vires of the respondents. On behalf of the petitioners it was submitted that, even though the Agreement was ultra vires, they were still entitled to the remedy that they seek. That remedy relates to the respondents' decision not to abide by the terms of the 1997 Agreement and to require the petitioners to complete tax returns for the years of assessment from 6 April 2000 to 5 April 2003 inclusive without reference to the Agreement. Accordingly, the petitioners' contention is that the respondents should have been bound by the terms of the Agreement until the stipulated expiry date in April 2003. [98] It was common ground that the respondents are under a duty at common law to act fairly towards the general body of taxpayers, and towards each individual taxpayer, and in that connection the respondents are not immune from the process of judicial review. In the case of a challenge based on alleged unfairness, each case must, of course, depend on its own particular facts, and it is for the court to determine whether there has been unfairness and, if there has, whether it was such as to amount to an abuse of power. [99] In the present case the first question for consideration is whether, having regard to the fact that the respondents acted ultra vires when they entered into the 1997 Agreement, they had a discretion to continue to comply with the terms of the Agreement once they were aware that it was ultra vires. In our opinion, a statutory authority that has entered into a contract which was ex hypothesi outwith its powers, and later, during the currency of the agreement, acquires knowledge that it had no power to enter into the contract, cannot be said to have a discretion to continue to comply with its terms until the stipulated expiry date. If they did so, they would, as the Lord Ordinary observed (in para. [146]), be continuing in a state of non-compliance with their statutory duties. [100] The next question for consideration is whether the respondents' decision to terminate the Agreement in June 2000 was unfair to the petitioners and, indeed, was so unfair as to amount to an abuse of power. There is no doubt that it is unlawful for a public authority, such as the respondents, to act with conspicuous unfairness, and in that sense abuse its power. In applying the test of fairness in a particular case, the court will have regard to all the relevant circumstances and determine whether there has been an abuse of power. It is not difficult to envisage cases where a public authority is possessed of lawful powers which it misuses in an unfair manner. Thus, in R. v. Inland Revenue Commissioners ex parte Unilever plc, supra and R. v. North and East Devon Health Authority ex parte Coughlan, supra, the power which was held to have been abused in each case was a perfectly lawful power. It is, in our opinion, more difficult to envisage a case where a public authority has acted unfairly in a situation where, having ascertained that it had been acting outside its powers, it refuses to continue to do so. [101] The petitioners have criticised the respondents' decision to terminate the 1997 Agreement on four main grounds. In the first place, it was said that it was clear that the respondents had been determined, come what may, to withdraw from the Agreement and that that had been their position for some time prior to receiving counsel's advice in May 2000 that the Agreement was ultra vires. In our opinion, that allegation has not been made out. It is clear that, for some time before counsel's advice was sought, concerns about the Agreement had been expressed at various levels of the Revenue, and on differing grounds. However, what seems to us to be of importance in this connection is that, in spite of those concerns being expressed, it was not until the respondents had received the advice of counsel that the decision to terminate the Agreement was taken. We consider that the respondents were entitled, and indeed bound, once they were advised that the Agreement was ultra vires, to decide that, even though it had been running for three years, they could not lawfully abide by the terms of the Agreement for the remainder of the stipulated term. Their decision to refuse to continue to be bound by the Agreement, in the knowledge that it was ultra vires, cannot, in our opinion, properly be categorised as unfair, and in particular it cannot be said to be unfair merely because officials of the Revenue had previously expressed concerns about the Agreement, concerns which had not established that it was ultra vires. [102] The petitioners' second main criticism of the respondents' decision to terminate the Agreement was that they had treated other taxpayers who had entered into formal tax contracts with them differently from the petitioners, and had not sought to terminate their contracts. We accept that the duty to act fairly may be infringed where the Revenue treats similarly placed taxpayers differently, although each case must, of course, be considered in light of its own particular circumstances. It was established that, after the respondents had been advised that the 1997 Agreement was ultra vires, they had conducted a review of other existing forward tax contracts, applying what they described as dual criteria, criteria which were criticised by the petitioners, and that other tax agreements continued in force after the 1997 Agreement had been terminated. Reference was made to Case G which was apparently continued in force after the offending provisions in that agreement had been severed. However, after the Lord Ordinary's Opinion had been issued in May 2002 the respondents re-examined the forward tax agreements which were still extant and, after doing so, adopted a more radical approach and decided to terminate all agreements which provided for payment of an annual lump sum in respect of future remittances. While there is no averment to that effect in the respondents' pleadings, we were informed by counsel for the respondents that this had been done, and we have no reason not to accept the assurance which we were given. While there was, therefore, some delay on the part of the respondents in according equal treatment to all taxpayers with forward tax agreements of that nature, we cannot, in the circumstances, categorise the respondents' actions as being unfair to the petitioners, particularly as it appears that the advice which they received from counsel in May 2000 related to the 1997 Agreement with the petitioners. In any event, on the basis of the information before us we have not been persuaded that the other taxpayers with forward tax agreements in 2000 had necessarily been in the same position as the petitioners. In short, we cannot regard the failure of the respondents to terminate all the other forward tax agreements at the same time as the 1997 Agreement was terminated as constituting unfairness, and certainly not unfairness which amounted to an abuse of power. [103] The third criticism was to the effect that the respondents, by terminating the 1997 Agreement without notice, had failed to allow the petitioners a period of time in which to adjust their financial affairs to the new legal position of there not being a valid agreement. However, the Agreement was ultra vires and the respondents took the view that, if a period of notice had been allowed, that would have given the petitioners the opportunity to introduce into the United Kingdom substantial sums of taxable remittances during the period of notice. We cannot regard the respondents' decision not to allow a period of notice as being unfair to the petitioners, provided that the respondents are prepared to do all in their power to ensure that the petitioners do not suffer unfair prejudice as a result of the termination of the Agreement, and the respondents have given an undertaking to that effect. [104] That brings us to the fourth criticism advanced by the petitioners which was to the effect that they had managed their affairs in reliance on the 1997 Agreement and, in particular, had not sought to put in place the complex checks that would have been required to ensure that no foreign-source income and capital gains were remitted into the United Kingdom. They had now been told that they were to be taxed, without reference to the Agreement, for the tax years from 6 April 2000 onwards. It was accepted that prior to 2 June 2000 the petitioners had been arranging their affairs in reliance on the Agreement. It was also accepted that between 5 April and 2 June 2000 the petitioners might have brought taxable remittances into the United Kingdom, and also that arrangements for the introduction of further remittances might have been made which were irreversible. The respondents stated that, on the receipt of the necessary information from the petitioners, steps would be taken to prevent them from suffering unfair prejudice as a consequence of the termination. Further, the respondents took the view that it would not have been fair to have sought to re-open the tax years prior to 6 April 2000 as it was appreciated that the petitioners would have arranged their financial affairs for those years in reliance on the Agreement and, indeed, may well not have kept any records, so that the petitioners retained the benefits of the Agreement in respect of those earlier years. In our opinion, the attitude of the respondents on this matter was perfectly reasonable and certainly cannot properly be regarded as being unfair. [105] The petitioners have contended that they have already suffered prejudice as a result of the termination of the Agreement without notice. There is, however, no information before us which would enable us to be satisfied that they have, in fact, suffered prejudice or as to the extent of any such prejudice. It was argued that prejudice was inevitable, but in our opinion in a case of this nature prejudice cannot be assumed, particularly in view of the undertaking given by the respondents that they will take steps to prevent unfair prejudice. In the circumstances we agree with the Lord Ordinary that the question of prejudice, in the absence of detailed evidence vouching prejudice, is premature. [106] On the whole matter we are of the opinion that the petitioners have failed to establish that there was unfairness on the part of the respondents amounting to an abuse of power.Legitimate expectation - submissions of the parties
[107] Counsel for the petitioners submitted that the petitioners had had a legitimate expectation that the respondents would abide by the terms of the 1997 Agreement. Breach of a legitimate expectation could properly be categorised as an abuse of power. The Lord Ordinary held, in para. [154] of his Opinion, that where a public authority acts outwith its statutory powers, it could not be obliged to continue to act ultra vires in consideration of the expectations of another party. The law protected only those expectations which were legitimate and, where the actions of a public body are ultra vires, the idea of legitimate expectation, substantive or procedural, could have no place. [108] Counsel submitted that the Lord Ordinary had erred in law in holding that the petitioners could have no legitimate expectation in relation to an agreement which was shown to be ultra vires. While it was accepted that ordinarily a person could have no legitimate expectation that a statutory authority would act in excess of its powers, that proposition was subject to the qualification that it must not act unfairly or irrationally. The proposition that there could never be a legitimate expectation that a statutory body would act contrary to law was too broad and was unsound in law. A public authority could effectively be prevented from departing from its agreement if that agreement had resulted in legitimate expectations of the other party. The 1997 Agreement had constituted an undertaking by the respondents as to how they would act in the future in relation to the petitioners' tax affairs during the currency of the Agreement, an undertaking which had been given on the basis of information requested by the respondents and supplied by the petitioners, and which had given rise to a legitimate expectation on the part of the petitioners that the respondents would abide by its terms (R. v. North and East Devon Health Authority, ex parte Coughlan supra). This was not a case of a statutory body contracting not to use its powers. By virtue of entering into the 1997 Agreement, the respondents had exercised their powers. [109] It was also important to consider the context in which the 1997 Agreement was concluded, namely in relation to the respondents' discretion in the exercise of their powers of care and management of inland revenue. Where there was clear mandatory legislation, there might be no legitimate expectation that a statutory body would exceed its powers, but the position was different where discretionary powers were involved, and their exercise in a certain way would involve either substantive unfairness to, or breach of a legitimate expectation by, certain persons. Cases which were not concerned with discretionary powers were of no assistance in relation to the present case. The Lord Ordinary had relied on two cases which fell into that category, namely, Balfour v. Sharp (1833) 11 S. 784 and York Corporation v. Henry Leetham & Sons Limited [1924] 1 Ch. 557. However, the Lord Ordinary's statement of the law was not correct in the context of the exercise of discretionary powers. In the present case the respondents had a discretion which they were entitled to exercise, and there was no statutory bar in existence as there was in the case of Balfour. Reference was made to Southport Corporation v. Birkdale District Electricity Supply Co. Limited [1925] Ch. 794, [1926] A.C. 355, a case to which the Lord Ordinary had not been referred and which cast doubt on York Corporation. The importance of the discretionary context was demonstrated in Southport Corporation, supra, R. v. Customs and Excise Commissioners, ex parte Kay & Co. Limited [1996] S.T.C. 1500, R. v. Chief Constable, ex parte I.T.F. Limited [1999] 2 AC 418 and R. v. Inland Revenue Commissioners, ex parte M.F.K Underwriting Agents Limited [1990] 1 WLR 1545. [110] In the particular circumstances of this case, it was submitted that there had been a legitimate expectation on the part of the petitioners that the respondents would abide by the terms of the 1997 Agreement, and there had been a breach of that legitimate expectation which had amounted to an abuse of power. The Lord Ordinary had erred in his approach to this issue and the respondents should be held bound by the agreement even if it was ultra vires. [111] Counsel for the respondents accepted that breach of a legitimate expectation was one aspect of unfairness which could amount to an abuse of power. The petitioners were seeking to rely on the alleged breach in order to establish that the respondents were obliged to abide by the 1997 Agreement, even if it was ultra vires, until its contractual expiry date on 5 April 2003. However, a public body was not entitled to enter into, or continue to maintain, a contract which was incompatible with the due exercise of its public duties, and there could be no legitimate expectation that a public body would continue to uphold an ultra vires contract. In particular, the respondents did not have a discretion to continue to fail to comply with their statutory duty once they were aware that they had entered into a contract which was ultra vires (R. v. Inland Revenue Commissioners, ex parte Preston [1983] S.T.C. 257 per Woolf J. at page 264). A taxpayer could have no legitimate expectation that he would be entitled to an ultra vires relaxation of a statutory requirement (R. v. Att-General, ex parte I.C.I. plc [1990] 60 T.C. 1 per Lord Oliver of Aylmerton at page 64; R. v. Inland Revenue Commissioners, ex parte M.F.K. Underwriting Agents Limited [1990] 1 WLR 1545 per Bingham L.J. at 1569 and Judge J. at page 1573). The respondents did not have a discretion to keep in force an illegal agreement when it could be terminated in a way that avoided an abuse of power. As from 2 June 2000 the petitioners should have been taking steps to deal with their affairs on the basis that the 1997 Agreement had been ultra vires. [112] In the present case the respondents have acted fairly. They had no option but to terminate the Agreement once they realised that it was ultra vires, and the termination had not constituted an abuse of power. The respondents considered a number of options, which were set out in Mr. Middleton's affidavit (Appendix 4/35). It would have been unlawful for the respondents to have allowed the Agreement to continue until its expiry date in April 2003. While the entire 1997 Agreement was ultra vires, the respondents took the view that it would have been unfair to have opened up the earlier tax years prior to 5 April 2000, as the petitioners had probably organised their financial affairs in reliance on the Agreement in relation to those tax years, and may well not have kept records. The respondents have stated that they are prepared to take steps to ensure that the petitioners do not suffer unfair prejudice if they can demonstrate that they were committed to transactions which they would not have undertaken had they had advance notice that the Agreement was being terminated. [113] The case of R. v. North and East Devon Health Authority, ex parte Coughlan, supra, and the other substantive cases dealing with the issue of legitimate expectation, such as R. v. Inland Revenue Commissioners, ex parte Matrix Securities Limited [1994] 1 WLR 334 and R. v. Inland Revenue Commissioners, ex parte M.F.K. Underwriting Agents Limited, supra, were cases where the initial representation or promise which was departed from had been a lawful representation or promise. The petitioners had cited no case law in the United Kingdom to support the proposition that the respondents could continue to be bound by an ultra vires agreement once they were aware that it was ultra vires. While the petitioners' counsel had sought to challenge the relevance of Balfour v. Sharp, supra, and York Corporation v. Henry Leetham & Sons, supra, cases which had been founded on by the Lord Ordinary, it was important to appreciate that the Lord Ordinary was discussing the issue on the hypothesis that the 1997 agreement was ultra vires. Although reservations had been expressed in the Southport case about the decision in the case of York Corporation, they did not affect the legal principle that a public body could not enter into a contract which was incompatible with the due exercise of its public duties. In the present case the court was dealing with the respondents' statutory duty to collect tax on actual transactions, and the respondents had no discretion to maintain a forward tax agreement that was ultra vires. On the whole matter it was submitted that there had been no breach of the petitioners' legitimate expectation.Legitimate expectation - decision
[114] It was not in dispute that the frustration of a legitimate expectation is capable, in appropriate circumstances, of amounting to an abuse of power. In this case the petitioners' contention was that they had a legitimate expectation that the respondents would abide by the 1997 Agreement until its stipulated expiry date in April 2003, and that the respondents, by terminating it in June 2000, had breached that legitimate expectation. That breach had been so unfair as to constitute an abuse of power, and the respondents should be bound by the terms of the Agreement until the stipulated expiry date. [115] In R. v. Inland Revenue Commissioners ex parte M.F.K. Underwriting Limited, supra, Bingham L.J. made the following observations (at pages 1569-70):"If a public authority so conducts itself as to create a legitimate expectation that a certain course will be followed it would often be unfair if the authority were permitted to follow a different course to the detriment of one who entertained the expectation, particularly if he acted on it. If in private law a body would be in breach of contract in so acting or estopped from so acting a public authority should generally be in no better position. The doctrine of legitimate expectation is rooted in fairness".
"No legitimate expectation could arise from an ultra vires relaxation of the relevant statute by the body responsible for enforcing it".
"Abuses of power may take many forms. One not considered in the Wednesbury case [1948] 1 KB 223 (even though it was arguably what the case was about), was the use of a power for a collateral purpose. Another, as cases like Ex p Preston [1985] AC 835 now make clear, is reneging without adequate justification, by an otherwise lawful decision, on a lawful promise or practice adopted towards a limited number of individuals (our emphasis)" (see also Rowland v. Environment Agency [2003] Ch. 58, [2003] EWCA Civ 1885 per Peter Gibson L.J. at para. 67).
Human Rights
[120] The Lord Ordinary noted that, when the case was argued before him, there was agreement between the parties that, if the Human Rights Act 1998 applied, the petitioners' rights under the 1997 Agreement were a "possession" falling within Article 1 of the First Protocol (Human Rights Act 1988 Schedule 1 Part II) and that even if the Agreement was ultra vires, the decision letter of 2 June 2000 deprived the petitioners of that possession, under reference to Pine Valley Developments Limited v. Ireland (1992) 14 EHRR 319 and now also under reference to Stretch v. U.K. (2004) 38 EHRR 12. Before us, however, the respondents reserved the right to argue, if the case were to go further, that under a contract which is a nullity because it is ultra vires, purported rights under the contract could not be considered to be possessions in terms of Article 1 of The First Protocol on the ground that one cannot have as a possession something which the domestic law never allowed one to have (Wilson v. First County Trust Limited (No. 2) [2004] 1 AC 816 per Lord Hope of Craighead at paragraphs 106 and 108; and Lord Scott of Foscote at paragraphs 167-8). For the purposes of their submissions before us the respondents, under that reservation, were prepared to accept for the sake of argument that, if the Act applied, Article 1 of the First Protocol was engaged. [121] The antecedent question is whether the Act, which commenced on 2 October 2000, applies to a decision made by the respondents on 2 June 2000, it being accepted that in the circumstances of this case the Act does not have retrospective effect ( R. v. D.P.P. ex parte Kebeline [2000] 2 AC 326). [122] The petitioners submitted that the respondents' decision set out in their letter of 2 June 2000 had no effect upon the petitioners' rights. In that letter the petitioners were advised that for the years from 6 April 2000 onwards tax returns would have to be completed in accordance with the family's statutory responsibilities and without reference to the Agreement. The petitioners, however, maintained that there was no effect upon their rights until the respondents refused to accept annual returns made in terms of the 1997 agreement, which they did after 2 October 2000. [123] In rejecting that submission the Lord Ordinary said that, once the 1997 Agreement was terminated, the petitioners could not submit tax returns in the remaining years in accordance with the Agreement. If the decision constituted a breach of any rights of the petitioners it occurred on the date of the decision. What happened thereafter and in the remaining years of the contractual period were not breaches of the Convention, but the consequences of the initial breach which occurred before Convention rights applied. We agree with the Lord Ordinary. The fact that an event has a continuing effect does not constitute a continuing situation. In McDaid v U.K. (1994) 85-A D.R. 134) the Commission, in holding that the six month rule contained in Article 26 of the Convention applied and that the application was inadmissible because it had not been made timeously, acknowledged that the events on "Bloody Sunday" in Londonderry on 30 January 1972 no doubt continued to have serious repercussions on the applicants' lives but since the applicants' complaints had as their source specific events which occurred on identifiable dates, they could not be construed as a continuing situation. Similarly, in Montion v. France (1987) 52 D.R. 227, the Commission held Monsieur Montion's application inadmissible because, although the Prefect's order produced lasting effects, it constituted an instantaneous act against which the applicant had exercised all the remedies available to him under French law, with the result that his situation could not be considered a continuing one. He, too, was caught by the six month rule. [124] In the sequel case to Montion, namely Chassagnou and Others v. France (1999) 29 EHRR 615, a quite different question was raised. The application followed from a decision in August 1987 of the Prefect of Dordogne rejecting an application from Madame Chassagnou and others, including Madame Montion, for the removal of their land from certain hunting grounds. They exercised their rights to sue in the French Courts and, having exhausted all their domestic remedies, they applied timeously to the European Commission and thence to the European Court of Human Rights. The question they raised under the Convention was whether the compulsory transfer of hunting rights over land to an approved municipal hunters' association (ACCA) pursuant to the Loi Verdeille, against the will of the applicants and without compensation or consideration, constituted an abnormal deprivation of the right to use their property, contrary to Article 1 of the First Protocol and especially its second paragraph. That question, however, arose directly from the decision made in August 1987. In Sougrin v. Haringey Health Authority [1992] ICR 650 the Court of Appeal drew, without difficulty, the distinction between a "one-off" act of alleged racial discrimination and its continuing consequences for the appellant on the one hand, and the policy of such discrimination, on the other, which would be a continuing act (see also Reg. v. Secretary of State for Home Department ex parte Rogers (2002) E.W.C.A. Civ. 1944). [125] We are satisfied that both according to European jurisprudence and domestic law the petitioners' case depends upon a single act with certain consequences and not a continuing act. Since the decision complained of took place before the coming into force of the Human Rights Act 1998, the petitioners' Convention rights were not directly affected by that decision, and in particular the petitioners cannot rely on Article 1 of the First Protocol of the European Convention on Human Rights. The effect of that decision, which was duly intimated to the petitioners, was that they lost the benefit of the Agreement with immediate effect. [126] We turn now to Article 1 of the First Protocol, on the assumption that it is engaged. The petitioners submitted that they have been deprived of a "possession" in terms of the Article by the respondents' decision. In particular they founded upon the second sentence of the Article, namely, that no one should be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. They referred in particular to Pressos Compania Naviera S.A. v. Belgium (1995) 21 E.H.R.R. 301, a case in which individuals' undoubted rights to sue were expropriated by the State. Counsel for the respondents accepted that, according to Strasbourg jurisprudence, a legitimate expectation might be a "possession", even if it was based on a nullity (Pine Valley Developments Limited v. Ireland (1992) 14 EHRR 319; Stretch v. U.K.). But in this case the respondents did not accept that the petitioners were deprived of their possessions. If, however, the court were to decide otherwise and hold that the petitioners had been deprived of their legitimate expectation that their rights under the Agreement would continue, it is for the respondents, in our view, to justify their interference in terms of the second and third sentences of the Article. [127] What the respondents must demonstrate in these circumstances is that their interference is proportionate. An interference with the peaceful enjoyment of possessions must strike a fair balance between the demands of the general interest of the community and the requirement to protect the individual's fundamental rights (Pressos at paragraph 38). To put it another way, the burden is on the respondents to show that the means adopted were not greater than necessary (R. v. Lambert [2002] 2 AC 545 per Lord Steyn at page 572). In striking that balance contracting states are granted by European jurisprudence a wide margin of appreciation (National and Provincial Building Society v. U.K. [1997] STC 1466, especially paragraphs 80-1; Gasus Dosier-und Fordertechnik GmbH v. Netherlands (1995) 20 EHRR 403; Fredin v. Sweden (1991) 13 EHRR 784, especially at paragraph 51). The individual's fundamental rights are, however, not absolute rights. There must be a disproportionate and intolerable interference impairing the very substance of those rights. [128] In this case it was submitted on behalf of the respondents that the petitioners as taxpayers had enjoyed an unwarranted and ultra vires concession which increased the burden on other taxpayers. Thus the respondents were pursuing a legitimate aim in departing from the Agreement since there was a need to tax individuals fairly. In a domestic case the taxpayer had no legitimate expectation of such rights as the petitioners had enjoyed for a number of years. [129] We are of opinion that, on the assumption that the Act applies, the rescinding of the 1997 Agreement was an interference with the petitioners' rights under the Agreement, at least in the sense of their legitimate expectation. But we are also of opinion that by rescinding the Agreement the respondents were pursuing a legitimate aim, namely to apply the tax system fairly between taxpayers. A fair balance was struck between the interests of the community and the protection of the petitioners' rights. Such interference as there was, was justified and was not therefore disproportionate. [130] We would only add that, even if we had found in favour of the petitioners in relation to their case based on Article 1 of the First Protocol, they would not have been entitled to decree of declarator that the respondents were obliged to abide by the terms of the 1997 Agreement. In Rowland v. Environment Agency, supra, Lightman J. summarised the principles to be derived from the decision of the European Court of Human Rights in the Pine Valley case, principles which were endorsed on appeal ([2003] EWCA Civ 1885, see in particular Peter Gibson L.J. at para. 85). The third principle, which referred to legitimate expectation in the context of Article 1, stated inter alia as follows:"(3) the legitimate expectation cannot entitle a party to realisation by the public body of the expectation which it is beyond the powers of the public body to realise, but may entitle him to other relief ... ".
Conclusion
[133] For the foregoing reasons we shall refuse the reclaiming motion.