Tax Disputes Quarterly – Autumn 2024

Welcome to our Autumn 2024 edition of Tax Disputes Quarterly.

Sometimes tax disputes are about substantive questions of tax law. Their importance is narrow and deep: highly relevant to those faced with the same problem. Others are about procedure, and their application is much broader. Recent cases have skewed heavily in favour of procedure – so this month’s list is a guide to what to do, or not do, on issues from reliance on professional advice, HMRC guidance, and bringing different types of litigation to challenge HMRC.

Go City: ‘protective’ VAT assessments. Direct taxes have formal enquiries that, once open, can run for a long time, allowing HMRC to consider its position before raising assessments to tax or amending returns. Indirect taxes do not, and HMRC must assess underpaid tax within the statutory time limit. This creates time pressure on HMRC to raise assessments; many of us will have come across the concept of a “protective assessment” that allows HMRC to keep its position open. Go City is a reminder that this approach of “assess now; ask questions later” is unlawful: HMRC can only assess taxpayers where it has formed the view that there is, rather than simply might be, an error.

Hill: what you can and can’t blame on your tax advisers. HMRC can issue formal notices requiring taxpayers to provide information. Failure to comply with those notices attracts a penalty. The penalty can be appealed on the basis of a reasonable excuse. In this case, taxpayers’ attempts to argue that the advice of their professional advisers amounted to a reasonable excuse failed, in circumstances where that advice was inapplicable to the factual circumstances and “neither of [the] appellants took objectively appropriate steps to consider whether it was reasonable to rely on the advisers and the advice provided”. The question of reasonable reliance on professional advisers is critical for taxpayers in the penalty context, and follows the Boston Consulting Group decision that focused on similar questions in the context of time limits for assessment. We’re watching this space.

Telent Technology: No, you’re estopped! Estoppel is a set of legal rules that prevent a person from insisting on their legal rights where it would be ‘unconscionable’ to do so. In Telent, both HMRC and the taxpayer sought to rely on slightly different estoppel arguments against each other. The facts of the case are a little frustrating: Telent made a claim to recover input VAT on investment management services, withdrew that claim, and (having changed advisers) made another claim for the same period. HMRC initially argued that Telent was estopped from making the second claim, did not make the point in its formal pleadings, and then sought to run that argument at a later date. If you’re following to this point, you might find it quite amusing that Telent then argued that HMRC was estopped from arguing that Telent was estopped from making the second claim.

Out of this procedural soup, the Upper Tribunal produced a clear judgment from which taxpayers should take two messages: first, to be cautious about withdrawing claims; and second, to make procedural arguments such as estoppel early (it hurt Telent’s case that it made its estoppel argument late in the day).

Elite Management: Don’t mess with ‘unless’ orders. An ‘unless’ order is the sort of thing that keeps litigators awake at night. It’s an order from a court or tribunal that ‘unless’ the recipient takes a certain procedural step by a given deadline, their case is struck out. The Tax Tribunals, uniquely, have a half-way-house whereby HMRC’s case isn’t struck out, but instead HMRC is barred from further participation in the appeal – a sort of sin-bin where HMRC have to watch the case take place without them. Barring orders against HMRC are very rare (our team conducted what was, as far as we know, the first unopposed hearing following a barring order in 2016) and only tend to be made where HMRC repeatedly breaches directions of the Tribunal. Elite Management is interesting for its emphasis that, if the order provides that the consequence of HMRC’s breach is automatic, that really is the end of the matter. Here, HMRC’s failure was quite small (the late service of a bundle of documents by a matter of hours), but it was not open to HMRC to argue that the order ought not to take effect simply on the basis that it was disproportionate.

Austick and Labeikis: No cutting corners. Taxpayers wishing to challenge HMRC’s decisions must do so by a statutory appeal, or (if no such appeal route exists, and under quite strict circumstances) by means of judicial review. Two recent cases, both in the ‘avoidance schemes’ context, show the folly of trying to circumvent these processes. In Austick, a taxpayer who had participated in a film finance scheme sought a declaration from the High Court under the CPR ‘Part 8’ claims process that he had no additional tax liabilities. In Labeikis, a taxpayer affected by the loan charge (a tax on outstanding balances of disguised remuneration loans) sought a declaration, also under Part 8, that the loan charge was contrary to EU law or international human rights law. Neither claimant (remotely) succeeded: the court found variously that their claims were abusive, breached the ‘exclusivity principle’ that appeals subject to the jurisdiction of the tax tribunals should only be made by that route, were public law claims that should have been made by way of judicial review, and were speculative rather than raising real issues of law.

Sewell: sympathy, but no remedy. Sometimes, taxpayers approach HMRC for advice. Sometimes, HMRC gives that advice. And sometimes, that advice is wrong. Sewell is such a case. It’s also, sadly for the taxpayer, a reminder that it is very hard to hold HMRC to erroneous advice, even where the tribunal has explicit sympathy for the taxpayer.

UBS: what can you get from a judicial review? In the UBS decision, the taxpayer sought judicial review of HMRC’s refusal to exercise a discretionary power that would, in effect, disapply some of UBS’s PAYE obligations. The case was procedurally complicated because of HMRC’s attempt shortly before the hearing to withdraw (by saying that another officer would think again about whether to exercise the power) and render the matter moot, but this did not succeed – the Tribunal held that the claim would only have become academic if by ‘withdrawing’ the challenged decision HMRC had given the taxpayer what it wanted i.e. the exercise of the power, which it had not done. The Tribunal’s decision on the core issues is instructive: the taxpayer succeeded in showing that HMRC’s decision not to exercise the power was unlawful, on the basis that HMRC had misdirected itself, but did not succeed in persuading the Tribunal that the only lawful decision would have been to exercise the power, and therefore did not secure an order mandating HMRC’s exercise of the power. There is helpful commentary in the judgment about the availability of different types of judicial review remedies.

We will return with another issue in the winter. If you'd like to discuss anything in this email, please contact us.