Judicial review of accelerated tax payment notices dismissed by judge

A challenge by way of judicial review to notices issued by HM Revenue & Customs (HMRC) requiring “accelerated payment” of tax pending the outcome of a tax dispute has been dismissed by Mrs Justice Simler DBE in the High Court.04 Aug 2015

Tax Disputes and Investigations Litigation & International Arbitration Tax Judicial review

The partner payment notices were issued to members of limited liability partnerships (LLPs) set up by Ingenious Media plc to invest in films.

Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-law.com, which was acting for Messrs Rowe and Worrall, the two test claimants and the 150 or so other claimants involved, said that the individuals had claimed that the notices were not issued lawfully because “despite the statutory language, no real discretion had been exercised by HMRC, who had adopted an industrialised process for issuing notices – based on ‘when’ not ‘whether’ considerations”.

The individuals had argued that in issuing the notices “HMRC gave no consideration to relevant circumstances – such as the fact that the legislation was designed to address situations where HMRC had no pre-existing power to hold onto cash pending the outcome of the tax dispute – which was not the case here where HMRC checked the claims over 10 years ago and could have refused to repay them at the time pending further investigations, but chose instead to pay,” he said.

The individuals also argued that the notices were given in breach of their legitimate expectation that they would not have to pay any tax in dispute until after the First Tier Tribunal had decided all relevant issues. The case considering the substantive issues is in the course of being considered in the First Tier Tribunal.

The judge said that the PPNs were “lawfully issued” and that “the principles of natural justice have been adhered to by the statutory scheme and by HMRC in exercise of the discretion conferred by FA 2014”.

Collins said: “We are disappointed by the judgment, which in our view does not does not adequately address a number of serious issues raised by this new legislation. For many of the claimants, HMRC checked and repaid the tax in question over 10 years ago when it could have instead held on to the money pending any further investigations – yet it is now trying to use new legislation to claw money back.”

The judge also dismissed claims that the issue of the notices involved an unlawful interference with property rights under Article 1 of the First Protocol and was in breach of Article 6 of the Convention for the Protection of Human Rights because it involved the retrospective imposition of a payment obligation the claimants could not have predicted when they joined the partnerships.

“There has been no unlawful interference with the claimants’ possessions by the giving of PPNs in this case. Article 6 of the Convention does not apply but in any event, the claimants have had access to an independent and impartial tribunal on judicial review,” she said.

The individuals also argued that the statutory conditions for issuing the notices had not in any event been met – because HMRC had failed to open an enquiry into the repayment claims and were out of time to assess to recover the tax repayment itself, irrespective of the outcome of the case.

Collins said: “In many cases, the claimants also say that HMRC has not followed proper procedures and is now out of time to recover any tax, whatever the merits of the underlying dispute. It cannot therefore be correct that the legislation can give HMRC an ‘accelerated payment’ of something which they cannot collect at all”.

Accelerated payment notices (APNs) were introduced in July 2014 and allow HMRC to demand the payment of disputed tax associated with a tax avoidance scheme up front – before a tribunal or court has decided whether or not a scheme is effective. PPNs are similar to APNs but are used where a notice is given to a member of a partnership or an LLP.

APNs and PPNs can be issued where schemes demonstrate certain ‘avoidance hallmarks’; such as the scheme being subject to disclosure requirements under the Disclosure of Tax Avoidance Schemes (DOTAS) rules. APNs or PPNs can be issued in relation to schemes that were entered into before the APN and PPN legislation came into force.

Before APNs and PPNs were introduced HMRC had to win a tribunal case before it could demand disputed tax in these cases – except where repayments of tax were claimed, as in the case of Rowe & Worrall, in which case HMRC already had the power to hold the money in dispute.

Once a notice is issued, a taxpayer has 90 days to pay the tax unless they successfully make representations to HMRC that the notice should not have been issued. However, representations can only be made on the grounds that the statutory conditions for the notice were not fulfilled – for example that the scheme was not a DOTAS scheme or that the amount of the accelerated payment claimed is incorrect. There is no right of appeal against an APN. Accelerated payments will be repaid with interest in the event that the scheme is ultimately proved to work.

APNs and PPNs have been issued in relation to a number of different investments that HMRC says do not result in the tax relief claimed. These include investments structured to obtain business premises renovation allowance (BPRA), so called ‘contractor loan schemes’ and employee funded retirement benefit schemes (EFRBS).

Collins said: “A number of judicial review applications in relation to APNs issued in respect of other arrangements have been stayed pending the outcome of the Ingenious Media application, so the decision will have implications for a large number of investors. We cannot comment at this stage about whether the applicants in Rowe & Worrall will be seeking to appeal”.

David Richardson, Director of Counter Avoidance at HMRC, said: “This is an important result, and good news for the vast majority of taxpayers who do not try to avoid paying their fair share of tax”.

“We expect to complete the issue of around 64,000 notices tax by the end of 2016 bringing forward £5.5bn in payments for the Exchequer by March 2020,” he said.