Judicial Review and tax
Introduction – Judicial review and tax
The 2019 Loan Charge Action Group has launched a judicial review against HMRC in relation to the 2019 Loan Charge. In recent years, the courts have seen a sharp increase in judicial review against HMRC.
In light of this, I consider it useful to explore this topical subject and address the general concept of judicial review within a tax context.
Judicial review is a process whereby the courts exercise jurisdiction over the legality of administrative powers and decisions. Founded upon the rule of law, this remedy is fundamental to ensure power is exercised fairly by administrative organisations. Notably, judicial review is not an appeal seeking to challenge the merit of the decision made by an administrative body, but instead is based on the method for which the decision is made.
Within the context of tax, taxpayers may seek to review the decisions of HMRC. Notably, HMRC is a “tax-collecting agency, not a tax-imposing authority” and has a legislative duty to collect and manage taxes due under legislation. Therefore,
“[t]he taxpayer’s only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law.”
Resultingly, within a tax context, judicial review considers the validity of the decisions HMRC conclude, in accordance with its legislative duty.
Traditionally, there are three ‘grounds’ for judicial review, these are defined as illegality, irrationality and procedural impropriety. As will be seen, the development of the law in this area has resulted in the grounds evolving, which has resulted in the addition of grounds, alongside the boundaries between the grounds becoming increasingly indistinct.
Ultra-vires/Illegality – judicial review and tax
As noted above, statute affords a public body its authority. Therefore, HMRC is limited by statute to the extent it can exercise its power. If HMRC acts outside of the power vested in it by statute, the extent to which it acts beyond its power is ultra-vires.
A specific example of HMRC acting ultra-vires is exemplified in the case of Al Fayed and others v Advocate General for Scotland (representing the Inland Revenue Commissioners). In this case, HMRC agreed with the applicants to accept a specified payment in respect of future tax years, in satisfaction of the taxpayer’s future tax liability. All of the taxpayers were resident in the UK but domiciled outside of the UK and therefore, should have been taxed on their foreign source income on a remittance basis.
In deciding the case, the Court of Session held, that in making the agreement, the Revenue authority acted ultra-vires in agreeing to such an arrangement. Specifically, in creating the agreement they had disabled themselves from obtaining the highest practicable net return for the exchequer. Therefore,
“it amounted to an agreement not to tax what otherwise were taxable transactions. […] The effect of the Agreement was also that the [Revenue Authority] 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 IRC (No 2)  STC 10, Lord Wilberforce at page 19).”
In reality, an example such as this is highly unlikely now. Instead, due to the aggressive nature of HMRC in recent times, a more probable scenario that would satisfy the ground of illegality may include HMRC acting beyond its power in collecting tax, as opposed to not collecting tax, as in Al Fayed.
Irrationality/Unreasonableness – judicial review and tax
A taxpayer may seek judicial review if HMRC has acted irrationally or unreasonably. The leading case in this area is Associated Provincial Picture Houses Ltd v Wednesbury Corporation, which specifies, “if a decision on a competent matter is so unreasonable that no reasonable authority could ever have come to it, then the courts can interfere”. In effect, this looks to remedy decisions that are substantively that unreasonable, they should not be applied.
In tax, one plausible argument previously made on this ground is to suggest that HMRC are treating taxpayers of the same category differently. For example, in R v Inland Revenue Commissioners, ex parte Unilever plc and related application the court recognised,
“what may seem fair treatment of one taxpayer may be unfair if other taxpayers similarly placed have been treated differently.”
Further, in R (on the application of British Sky Broadcasting Group plc) v Customs and Excise Commissioners, the petitioner alleged differential treatment from its competitors, which the court confirmed would amount to unreasonableness, if established.
However, as detailed in Unilever, in practice this would be a difficult ground to satisfy, principally because the required threshold to is ‘notoriously high’ and the courts reluctance to substitute its opinion for the authorities.
Procedural Impropriety/Unfairness/Abuse of Power – judicial review and tax
Procedural impropriety focuses on the procedural aspects of the decision-making process, and seeks to remedy where it is exercised abusively.
In Unilever, the petitioner had previously submitted a late claim for a relief, each year for 20 years. However, in a later year, HMRC changed its policy without warning or statutory backing and refused to allow Unilever’s claim for relief.
The court specified the appropriate level of fairness needed to satisfy the test as either,
“on the one hand mere unfairness—conduct which may be characterised as ‘a bit rich’ but nevertheless understandable–and on the other hand a decision so outrageously unfair that it should not be allowed to stand.”
In placing significance on the fact that HMRC had previously accepted and allowed the late claims for loss relief, the court held that the HMRC’s revised policy fell within the latter category and therefore, HMRC were not allowed to refuse the late claim for the relief.
In comparison, in Al Fayed, the petitioners sought to argue that it was unfair for the Revenue Authority to withdraw from the agreement they had, despite (as noted above) the agreement being ultra-vires. The Court explained,
“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 IRC, ex p Unilever plc, 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.”
The two cases provide an illustrative comparison of the differing outcomes. The Court in Al Fayed did not go on to discuss whether it would have considered the Authorities’ conduct to be unfair, had it been intra-vires. However, it is clear that a high burden is required to satisfy the court that it is unfair.
The ground of procedural impropriety has become the subject of significant development and qualification. Most recently, in R (on the application of Gallaher Group Ltd and others) v The Competition and Markets Authority, Lord Carnwath undertook a “cleaning up process” of the indistinct grounds of judicial review. He expressly divided the concept of unfairness and noted that substantive unfairness, of itself is not a ground for judicial review. Instead, he notes that unfairness as a ground for judicial review is limited to the context of procedural unfairness only.
It is suggested that substantive unfairness instead fall under other grounds, such as legitimate expectation or rationality.
Although not specifically a tax case, Gallaher is important in that it goes some way towards bringing more of a distinct and structured approach to the disorderly grounds of judicial review. This is particularly so in the case of unfairness, where the ground is qualified by reference to the formal exercising of HMRC’s powers, as opposed to the substantive merit of unfairness, assessed in a vacuum.
Legitimate Expectations – judicial review and tax
Although not one of the traditional grounds of judicial review, legitimate expectations ‘is rooted in fairness’ and has developed significantly since the 1980’s. It seeks to remedy HMRC changing or withdrawing its stated position, which has previously been relied upon by taxpayers and consequently results in unfair detriment to the taxpayer.
In R v Inland Revenue Commissioners, ex parte MFK Underwriting Agencies Ltd and related applications, the court established the applicable test in relation to legitimate expectations. Specifically, the petitioner must satisfy the court that the taxpayer has openly provided all relevant information to HMRC for which they sought ruling (where applicable if a direct ruling has been requested) and the ruling relied upon by the taxpayer must be ‘clear, unambiguous and devoid of relevant qualification’.
The starting point is, “a taxpayer’s only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law.” As a result, taxpayers should firstly look to their position as regards to the law. Therefore, as applied in Al Fayed, the court held,
“There can be no legitimate expectation that a public body will continue to implement an agreement when it has no power to do so. In our opinion, the petitioners could not have had a legitimate expectation that the respondents would have adopted a course of action which was outwith their powers, and continued to maintain a contract which was unlawful. While the petitioners may well have had an expectation, it was not, in the particular circumstances of this case and according to our common law, a legitimate expectation.”
Throughout the development of this ground, petitioners have sought to rely on broader general and public statements made by HMRC. For example, in R (on the application of Davies and another) v Revenue and Customs Commissioners); R (on the application of Gaines-Cooper) v Revenue and Customs Commissioners, the court considered the effectiveness of HMRC manuals and whether statements made in those manuals could be relied upon.
The court held that HMRC will be held to statements, such as those in HMRC Manuals, where the statements are clear and unambiguous.
Most recently, the Court of Appeal in R (on the application of Hely-Hutchinson) v Revenue and Customs Commissioners considered the extent to which HMRC can be held to their representations, when they are changed for being incorrect.
The petitioner brought a judicial review on the ground of legitimate expectation, following HMRC changing its policy and not applying a relief that it had previously applied in error, even though the petitioner relied on the erroneous interpretation of the law.
The court noted,
“If HMRC finds that they need to resile from guidance, a taxpayer can only rely on the legitimate expectation that the guidance created where, having regard to the legitimate expectation, it would be so unfair as to amount to an abuse of power.”
Therefore, a petitioner may only be successful if they can show there was conspicuous unfairness as a result of the change in position.
Having confirmed the potential legitimacy of HMRC changing its decision, the question arises as to how HMRC may introduce a change in policy, so as to ensure that this would not lead to conspicuous unfairness.
In R (on the application of GSTS Pathology LLP & Others) v HMRC, HMRC withdrew the standard rating of VAT in relation to the services offered by the petitioner, following a number of previous assurances and offered only 3 months’ notice prior to implementing the change in policy. The petitioner applied for injunctive relief, to suspend the implementation of the change in policy, pending an appeal to the tax tribunal.
The court granted an injunction for the petitioner, prohibiting HMRC from collecting the tax due under its change in policy. In confirming the previous assurances were correct at the point they were made, the court found,
“The more difficult question is […] in what circumstances would it be fair to the claimants for HMRC to adopt a different tax treatment? […] All that the claimants could legitimately expect in such circumstances it seems to me is that the change in tax treatment would be managed fair and sufficient notice of its implementation given to allow the claimants a reasonable time in which to re-organise their affairs.”
“Where the balance is struck between these competing arguments may depend on the particular facts of the case. A number of features in the present case–in combination–have led me to conclude that HMRC cannot, without unfairness to the claimants, impose a different tax treatment from that stated in the rulings without any objective change in circumstances.”
What is noticeable is that the court is accepting towards HMRC where there is an objective reason behind the change in policy, i.e. a change in the law. Similarly, as demonstrated in Hely-Hutchinson, this will even be extended to where HMRC have made genuine a mistake as to their interpretation or application of the law. However, GSTS demonstrates that the courts will take a hard-line approach where HMRC introduce a change in policy, without any objective reason or mistake and this leads to conspicuous unfairness.
Conclusion – judicial review and tax
Despite the principled and distinct grounding of judicial review, the law has clearly evolved into a complex and indistinct area. Furthermore, as Keith Gordon notes, “[f]or tax practitioners, there is sometimes some discomfort about reverting to nebulous subjects such as fairness when tax is so steeped in statute and the precision that is meant to result from that.”
Despite this, decisions such as Gallaher have assisted in bringing greater clarity to the grounds for judicial review. Nevertheless, even with greater clarity, petitioners are still faced with significant substantive difficulty in seeking to satisfy the high thresholds required to successfully challenge HMRC in judicial review. As HMRC now seeks to ‘flex its muscles’ and recover as much tax as possible for the exchequer, this area of law will continue to be increasingly important to protect taxpayers’ rights and therefore further development and clarity in this area is highly likely.
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