Tax Disputes Quarterly: Spring 2024

Welcome to our Spring 2024 edition of Tax Disputes Quarterly: your one-stop primer on developments in the world of tax investigations and disputes. These past few months have brought a broad range of cases: on anti-avoidance, VAT, and the ever-topical Unallowable Purpose rules, as well as a few more ambitious attempts to appear before the Tribunal confidentially and to simply ‘undo’ a tax scheme that hasn’t worked. As always, let us know what you’d like to see in future editions.

Ramsay rides again: The Ramsay approach (or doctrine or principle, take your pick) was, for many years, the mainstay of HMRC's attack on tax avoidance. It allows a Tribunal to look holistically at a transaction that comprises a series of artificial steps. Today, it's often less relevant, as anti-avoidance legislation has tightened. That it remains of some importance can be seen in this recent case concerning a marketed dividend scheme, described by the Tribunal as a "paradigm case for the application of the Ramsay principle". Read our review of the decision in Clipperton here.

Businesses liability for fraud: There have been two very significant developments in relation to businesses' liability for failing to prevent fraud in recent months. These should cause businesses to look again at their processes to ensure that they would have a defensible position if challenged by tax authorities.

• The CJEU in P sp. z o.o. v Dyrektor Izby Administracji Skarbowej w Lublinie has held that a business may be liable for VAT on an invoice issued fraudulently by one of its employees if it failed to exercise sufficient due diligence in relation to the employee's activities.

• The UK Economic Crime and Corporate Transparency Act came into force in late 2023 and in a tax context, its most significant aspect is the introduction of a new offence of failure to prevent fraud, adding to the existing offence of failure to prevent the facilitation of tax evasion, which includes failing to prevent the offence of cheating the public revenue. You can find our overview of the Act here.

Applications for taxpayer anonymity: The Tax Tribunals are public fora and the circumstances in which appeals can be brought privately are very limited. The taxpayer would have to apply for anonymity. In this case, the FTT deferred a decision on such an application and made an interim privacy order – something that the Upper Tribunal decided was inappropriate. See our case review (HMRC v A Taxpayer) here.

Judicial review claims in a statutory appeals world: The law on circumstances in which the Tax Tribunals can hear public law arguments is difficult. (It differs between the First-tier and Upper Tribunal, and depends on some quite narrow questions of statutory language.) Houldsworth v HMRC is another case that tries to grapple with, and articulate, the rules. It casts some doubt on the recent Henryk Zeman decision. It’s worth a read if only to understand the complexity of the issue.

Mistake of law and rescission: Some cases are difficult; in others, one commends a party’s bravery in making a particular argument. This is perhaps one of the latter type. Here, taxpayers sought to ‘unwind’ a tax avoidance scheme that failed (arguing that the mistake as to the tax consequences vitiated the transaction, so as to allow recission). The decision of the FTT in Mahmood v HMRC shows, if it were in doubt, that a common mistake about tax consequences is unlikely to be sufficient to allow the parties to rescind their contract. That has consequences both for tax (they could not escape the consequences of their planning) but also for the underlying transaction (which was not unwound).

Unallowable purpose in the ‘losses’ context: ‘Unallowable purpose’ cases are in vogue at the moment. The rules disallow interest deductions where there is a “main purpose” of tax avoidance. The cases therefore tend to turn on whether a particular purpose (a) is a tax avoidance purpose, and (b) is the “main purpose". In Kwik-Fit Group v HMRC, the Court of Appeal addressed this question in the case of a restructuring designed to release ‘trapped’ losses.

VAT recovery: In Metatron v HMRC, the FTT held that any claim for recovery of overpaid VAT by the recipient of a supply under the Reemtsma principle must be brought before the County Court. In so doing, it dodged the really interesting question around whether and to what extent a taxpayer might rely on the Reemtsma question post Brexit, given the provisions of the Withdrawal Act.

What is incidental?: The Court of Appeal’s decision in Dolphin Drilling may relate specifically to an obscure aspect of the tax legislation applying to oil contractors, but its decision on the correct approach to determining whether a use is “incidental” to another could have far wider application. Read our overview here.

HMRC transfer pricing and DPT statistics: Whilst these may not challenge the best sellers list, for those working in tax disputes, HMRC’s statistics make interesting reading and provide valuable insights into HMRC's approaches and priorities to international taxation. They should be on the reading list for any multinational operating in the UK.

Carelessness and professional advice: This one might send a shiver down the spine of in-house tax teams reliant on professional advice. The decision of the FTT in Boston Consulting is an important one concerning the application of the mixed membership partnership rules, but also contains some important observations on the question of carelessness. In particular, the FTT held that evidence of obtaining specialist external advice by the business was insufficient to counter the evidence of carelessness as that advice was predicated on a different structure, made incorrect assumptions and was lacking in depth and quality. This case concerned assessment time-limits, and there is also an obvious read-across to penalties, which are similarly assessed on the basis of “careless” conduct. Read our full review here.

We'll be back over the summer with another issue. If you'd like to discuss anything in this email, please contact us.