Conspicuous unfairness and the Liechtenstein disclosure facility

The Court of Appeal has rejected an appeal against refusal of the High Court to grant an application for judicial review of HMRC’s decision to deny the availability of the Liechtenstein Disclosure Facility (LDF) to certain taxpayers with employee benefit trust disputes with HMRC: R (on the application of City Shoes Wholesale Ltd) v HMRC (2016) EWHC 107. The Court agreed that the applicants were not in a comparable position with other taxpayers with EBT disputes who had already been accepted into the LDF prior to a change in policy and as such there was no comparative unfairness in this case.

The decision again shows that HMRC are able to change a previously announced policy and it is only where an individual taxpayer can show that there is either comparative unfairness or the decision is otherwise unfair under the principle of legitimate expectation that a taxpayer has a right to be taxed under the previously announced policy.

Background

In 2009, HMRC introduced the LDF which allowed taxpayers with assets in Liechtenstein to settle their tax affairs with HMRC on favourable terms, including limited penalties, a shortened limitation period and a single composite tax rate. Taxpayers needed to apply for registration under the LDF and would then need to disclose full details of previously undisclosed tax liabilities, but would be offered a bespoke service including the possibility of initial anonymous contact to discuss possible disclosure with HMRC on a no names basis. Although the LDF was initially limited to those tax avoiders with assets in Liechtenstein, it was in practice available more widely as a means of regularising UK tax liabilities for any taxpayers with offshore assets.

BDO acted for a number of taxpayers who wished to use the LDF to settle potential EBT liabilities. Negotiation and discussion on an anonymous basis took place between BDO and HMRC between 2012 and 2014. HMRC essentially made encouraging noises about the availability of the LDF to the affected taxpayers, despite the fact that there was a separate and less generous disclosure and settlement opportunity available specifically for EBT disputes (the EBTSO). BDO successfully registered a number of taxpayers with EBT disputes in late 2012. However, following that, HMRC informed BDO not to send any more applications in pending a review of the process. In July 2013, HMRC first informed BDO that it would now accept further application but then on 31 July 2013 informed BDO that a review of the LDF’s scope was under way and that no further applications would be accepted pending that review.

Despite that, BDO put in further applications to join the LDF on behalf of its clients between September and December 2013, which HMRC put on hold (lasting well beyond the normal 60 day period for dealing with such applications). However, following its review, HMRC announced in August 2014 that the LDF would not be available to claimants to settle EBT disputes and rejected the application which had been submitted. Those applicants brought judicial review proceedings against HMRC.

High Court decision

The High Court rejected the taxpayers’ arguments that it was conspicuously unfair of HMRC to reject their application to join the LDF when they had previously accepted the applications of other taxpayers in essentially the same situation.

The High Court noted that the taxpayers could not be said to have a legitimate expectation that they would receive any substantive benefit under the LDF. The LDF was an invitation to taxpayers to apply for registration under that facility, but made no promise that the application would be accepted. Only once a taxpayer was granted a registration certificate might a taxpayer have any legitimate expectation of entitlement to the benefits of the LDF. In delaying their responses to the taxpayers’ applications beyond the 60 day time limit that HMRC indicated they would meet, HMRC may have been guilty of an administrative default, but no more than that. In any event, that failure had no bearing on the question whether there was any legitimate expectation that they would obtain benefits under the LDF.

The taxpayers also argued that, even if they had no legitimate expectation, there had been “conspicuous unfairness” in their treatment compared to similar taxpayers and that entitled the court to take action. However, internal discussions at the highest level of HMRC had taken place on this matter. The evidence of the Commissioner with responsibility for tax assurance, Edward Troup, was that they had carefully considered various types of taxpayer and the consequences of the change in policy. They had decided that it would be unfair to deny the LDF to those taxpayers with EBT disputes who had already been accepted into the LDF at the time of the change, but that taxpayers who had not been accepted into the LDF were not due such a responsibility. Indeed, it was the nature of the acceptance process that might give rise to a legitimate expectation and a deliberate part of the scheme to make its benefits dependent on such acceptance. The court accepted this explanation and considered that the taxpayers did not “get anywhere near showing the Commissioners treated them with conspicuous unfairness”.

The most that could be said was that they may have been “led up the garden path” and that such treatment may have been “a bit rich”. They had not been given any promises or guarantees of acceptance within the LDF. They were not in the same position as those taxpayers who had been accepted into the LDF (who therefore did have a legitimate expectation) and so there could be no comparative unfairness by reference to that different group of taxpayers. As such, their claim for judicial review failed.

Court of Appeal decision

The Court of Appeal has now rejected the taxpayers’ appeal.

The taxpayers had sought to widen the scope of the “conspicuous unfairness” argument by suggesting that the judge had failed to address the supposed unfairness in treatment between the taxpayers and other non-EBT taxpayers who had continued to have their applications under the LDF accepted from July 2013 onwards even though they had equally not be within the original scope of the LDF. The Court rejected this contention. First the Court noted that the taxpayers had never expressly pleaded this argument and, as a result, the evidence presented to the High Court had never properly addressed the point. Against that background, it would require “very clear” evidence which would “admit of no other reasonable explanation” to found a case based on discrimination compared to other non-EBT taxpayers. In fact, the Court noted that from a contemporaneous HMRC report that the evidence (to the extent there was any) was that the LDF was not applied more widely to other marketed tax avoidance cases. As such, the suggestion that the judge had failed to address this issue was rejected.

The taxpayers also argued that the judge had failed to give sufficient weight to the failure of HMRC to deal with the applications within the 60 day period set out in their policy. Whilst the Court of Appeal accepted that “this complaint had some force” and it was “regrettable that HMRC took no steps to explain to BDO that the claimants’ applications for registration would not be processed in the usual way while the review of the LDF was in progress”, nevertheless it was clear that BDO had no expectation that the applications would in fact be processed. The making of the applications had been a “tactical manoeuvre”. In any event, the failure to process the applications fell far short of conspicuous unfairness.

Finally, the Court rejected the taxpayers’ criticisms of HMRC’s decision making process. It had not focussed solely on the legitimate expectation based risks and had considered the issue of fairness, including fairness to the general body of taxpayers, more widely. More generally, the Court suggested that the taxpayers’ suggestion that the HMRC review did not consider HMRC’s duty to act fairly was “little short of absurd”.

As a result, the Court rejected the taxpayers’ criticisms of the decision of the High Court and dismissed the appeal.

Comment

The decision is in many ways similar to the Hely-Hutchison case where the Court of Appeal took a narrow approach to the question whether two bodies of taxpayer were in comparable positions for the purposes of the “conspicuous unfairness” argument. As such, the decision is another reminder of the difficulties that will be faced by any taxpayer who considers that their treatment has been “unfair” when compared with other taxpayers, particularly where there is no individual legitimate expectation that can be relied upon.