Top Ten Tax Cases of 2023

The Supreme Court in Skatteforvaltningen v Solo Capital Partners LLP [2023] UKSC 40 held that a claim for repayment of monies by the Danish tax authorities, alleged to have been fraudulently obtained by the appellants, was not rendered inadmissible by the well-established ‘revenue rule’ that the courts of one country will not enforce the tax laws of another. This decision is a highly important qualification to the revenue rule in English private international law.

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Taxpayers entering into an Advance Pricing Agreement (APA) might expect that the tax treatment of their transactions entered into during the period of the APA would be solely determined by the terms of the APA. However, in R (on the application of Refinitiv Ltd) v HMRC [2023] UKUT 257, the Upper Tribunal (‘UT’) upheld HMRC’s decision not to allow the taxpayer to rely on an APA following a sale. The decision might have quite wide application and transfer pricing practitioners will want to pay close attention.

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The Tribunal can only hear appeals against certain specified decisions. But when is an indication of HMRC’s position a decision? In this case, a group of taxpayers filed a claim for a refund of VAT, and HMRC replied to some of the technical arguments, concluding that it did not agree with the position advanced by the taxpayers. While HMRC viewed this as the first step in a wider discussion, the taxpayers treated it as a final decision and brought an appeal accordingly. The Tribunal agreed with the taxpayers. Whether this influences HMRC’s approach going forwards remains to be seen.

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What does “deliberate” mean in the context of penalties? Would reckless behaviour as to the correctness of a return amount to a “deliberate” inaccuracy? What of turning a blind eye? These issues were considered by the UT in CPR Commercials Ltd v HMRC [2023] UKUT 61, a case concerning a taxpayer which simply assumed that vehicles had been exported (entitling it to zero-rate its supplies). The decision stresses that the test is a subjective, not an objective, one. Accordingly, it was not sufficient to support a penalty based on deliberate conduct to find that the taxpayer could not reasonably have concluded that the return was accurate. There needs to be evidence that the taxpayer knew or suspected that the document contained an inaccuracy.

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First on our list is this important case about the VAT exemption for payments and transfers. It confirms the orthodox view that, in order to fall within the relevant exemption, the services supplied must have the effect of actually transferring the funds, and directly alter the legal and financial situation of the relevant parties. Merely giving instructions for a payment or transfer to be made, even where such instructions were necessary and the transfer happened automatically as a result, was insufficient. The decision brings the UK in line with the European cases: Bookit Ltd v HMRC (Case C-607/14), National Exhibition Centre Ltd v HMRC (Case C-130/15) and DPAS (Case C-5/17).

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In HMRC v Gray & Farrar International, the Court of Appeal was asked to determine the correct test for characterising a single, complex supply for VAT purposes. The single, complex supply at issue in the case was one of ‘matchmaking’ services (Ed.: that’s romantic matchmaking, not recruitment as I naively first thought.), which the taxpayer considered to be “the services of consultants” and thus outside the scope of UK VAT when provided to non UK or EU clients. The Court ultimately agreed with the Upper Tribunal that the correct approach was the “predominant element” test from Mesto – i.e. where it is possible to identify, from the viewpoint of a typical customer, a predominant element amongst the elements of the single complex supply, that predominant element is used to characterise the supply for VAT purposes. However, the Court’s decision went against the taxpayer: the “predominant element” was the matchmaking service itself, not the services of consultants.

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A taxpayer that was a member of a VAT group wished to backdate its membership, and applied to HMRC for registration with effect from a date in the past. HMRC has discretion to allow a backdated application to join a VAT group, under s43B(4) Value Added Tax Act 1994. However, the UT decided that the FtT did not have jurisdiction under s83 to hear an appeal against a refusal to exercise the s43B(4) discretion. Nor was it possible to treat the application as an application to join the VAT group under s43B(2): the taxpayer was already a member. The effect is that a taxpayer in this position must bring judicial review proceedings.

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The UT’s decision in HMRC v BlueCrest Capital Management (UK) LLP v HMRC [2023] UKUT 232 is highly significant to the ‘salaried members rules’ which are designed to remove the presumption of self-employment for some members of LLPs and so tackle the disguising of employment relationships through LLPs.

The UT confirmed that members of an LLP may exercise significant influence over the affairs of an LLP through their financial and operational influence. The decision of the FtT, now reinforced and given precedential value by the UT decision, indicates that many more members may fall outside these rules than HMRC may previously have accepted to be the case.

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The UT in JTI Acquisitions Company (2011) Ltd v HMRC [2023] UKUT 194 agreed that the intra-group borrowings of a UK subsidiary that was incorporated as part of arrangements to acquire a US group should be disallowed as the loan had an unallowable purpose. The UT considered that the FtT was entitled to look at the reason that the subsidiary was brought into existence as part of the wider group arrangements, rather than simply looking at the narrow purpose for which the company was party to the loan.

The decision comes soon after HMRC published updated guidance on the application of the unallowable purpose rule. No doubt HMRC will consider that its interpretation of the legislation set out in that expanded guidance is further supported by this latest decision.

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It is important to consider anti-avoidance provisions in context when determining their reach. So thought the Court of Appeal in HMRC v Delinian Ltd (formerly Euromoney Institutional Investor Plc) [2023] EWCA 1281, concerning arrangements put in place to enable one shareholder to benefit from the substantial shareholdings exemption on a share exchange. While the Court recognised that the arrangements involved avoidance, that avoidance could not be said to be the main or one of the main purposes of the exchange.

In this context, the exchange clearly meant ‘the exchange of all the shares in the company’ (not simply those of the taxpayer) and the exchange did not form part of a scheme or arrangements of which (one of) the main purpose was avoidance of tax. The decision has also been recently applied in Wilkinson v HMRC [2023] FTT 695, where the First-tier Tribunal (‘FtT’) additionally stressed that the “exchange” as a whole could not be said to form part of more limited arrangements by one shareholder.

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An important case for anyone involved in HMRC enquiries as the scope of HMRC’s investigatory powers were challenged in Parker Hannifin (GB) Ltd v HMRC [2023] UKFTT 971. HMRC’s information notice did not specify documents or classes of documents it required the taxpayer to produce, but instead asked the taxpayer company to run a series of keyword searches for specified terms across its directors’ emails and produce the output. (In this case, the search terms included “debt”!)

The FtT held that while it was permissible for HMRC to issue an information notice by reference to search terms alone, HMRC could not require the taxpayer to produce all the documents responsive to those searches. HMRC could only require production of the documents that responded to the search terms if those documents were relevant to the enquiry. The FtT also expressed concern that some of the search terms directed by the notice were too broad – and would have set the notice aside on this basis if the taxpayer had not already carried out the searches.

This decision reaffirms a taxpayer’s right to have its advisers review the output of an eDiscovery exercise not only for privileged material and personal data, but also for relevance to the issues actually under enquiry.

HMRC has a lot of roles, including as a criminal investigator. Having conducted an investigation into Newcastle FC that did not lead to criminal charges, HMRC remained in possession of a significant number of documents that it wished to use in a civil investigation that might lead to assessments to underpaid tax. The taxpayer sought return of the documents on the basis that they had been seized as part of the criminal investigation and ought to be returned or destroyed following the investigation.

The FtT decided otherwise: HMRC was empowered under s17 of the Commissioners for Revenue and Customs Act 2005 to share documents internally and the Police and Criminal Evidence Act 1984 did not restrict this power. This will be highly consequential to taxpayers facing potential overlapping criminal and civil investigations, and emphasises the importance of document management at every stage of the process.

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This case is a ‘first’ in the UK. A self-represented litigant in the FtT appeared to use generative AI in the process of drafting their legal submissions. This was a poor use of the tool, which ‘hallucinated’ a series of cases that supported their position – something only discovered once HMRC’s counsel went searching for those cases after they were cited in the proceedings. The First-tier Tribunal, having found that these cases were fictitious, was unimpressed by this manoeuvre and delivered a warning about the proper use of generative AI: it is a powerful tool and will be increasingly important in all forms of litigation, but it should be used carefully and appropriately.

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In Partridge Farms Ltd v HMRC the issue at hand was the VAT treatment of partridges under UK law. Partridge Farms Ltd., a UK-based company, breeds and sells partridges primarily for game purposes. The company argued that partridges should be classified as 'live animals' under the UK VAT Act, which would make their sale zero-rated for VAT purposes. HMRC, however, contended that partridges sold for game purposes should be classified as 'sporting or recreational services', which are standard-rated.

The crux of the dispute hinged on whether the primary purpose of the partridges was for breeding (as live animals) or for game (as a service). The case reached the UK Tax Tribunal, which had to interpret the VAT Act and relevant case law to determine the correct classification. The Tribunal's decision would not only impact Partridge Farms Ltd., but also potentially set a precedent for the VAT treatment of other game birds in the UK.

(We prompted our proprietary generative AI large language model, Percy, to hallucinate a VAT case based on the concept of a partridge in a pear tree. It didn’t want to do it at first, and we had to reassure it that we knew that the case would be fictitious. We’re not sorry. Please don’t cite this in court: your opponent would call fowl.)