R (on the application of UK Uncut Legal Action Ltd) v HM Revenue & Customs Commissioners On 13 June 2012, Simon J granted the campaign group UK Uncut permission to apply for a declaration that HMRC
On 13 June 2012, Simon J granted the campaign group UK Uncut permission to apply for a declaration that HMRC had breached their public law duties by failing to comply with their published Litigation and Settlement Strategy ("LSS") when (in 2010) they reached a settlement agreement with Goldman Sachs ("GS") in relation to GS's payment of outstanding NICs.
The 2010 settlement agreement provided that GS would pay the principal, but no interest. Simon J held that there was public interest in the matter, and that the issue of illegality should be addressed at a full hearing.
What happens next?
UK Uncut will review the National Audit Office’s report Settling large tax disputes (see below) that was published on 14 June to determine if it should revise its case. It has 28 days from then to serve amended grounds on HMRC; and HMRC has until 14 September to respond. A full hearing will follow subsequently.
As well as the issue of illegality, standing and the appropriate remedy are likely to be addressed at the hearing. Claimants must have a sufficient interest in a matter to bring an application for judicial review. Whilst recently, the courts have adopted an increasingly liberal approach to standing, particularly when applications are brought by public interest or campaigning groups, it is still the case that what one judge described as no more than meddlesome busybodies do not have a right to bring claims. In relation to remedies, Simon J. indicated that there was no prospect of an order unravelling the settlement agreement. Whether UK Uncut would consider that a declaration that the 2010 settlement agreement was unlawful provides it with "just satisfaction" is yet to be known. HMRC have already accepted that errors had been made in relation to the making of the 2010 agreement; and, in December 2011, HMRC's conduct in this regard was criticised in a report of the Public Accounts Committee. Accordingly, whether a declaration of the High Court that HMRC's conduct was unlawful would assist in ensuring that HMRC's conduct is in future in accordance with its own procedures is, at best, moot.
Settling large tax disputes
Following the Public Accounts Committee expressing concern about how HMRC had reached settlements in a number of high profile matters, Sir Andrew Park (a retired tax judge) was asked to review five of those settlements to determine whether the settlements were consistent with LSS and whether HMRC had followed its own procedures. His conclusions were summarised in the National Audit Office’s report, Settling large tax disputes.
He concluded that all five settlements were reasonable, and that at least one may have been better than reasonable (for HMRC). The settlements were complex and there was no clear answer to what represented the ‘right’ tax liability. In each case, there was a range of justifiable positions that HMRC could have taken. The NAO’s examination included consideration of whether the settlement in each case was as good as or better than the outcome that might be expected from litigation, taking into account the risks, cost, uncertainties and timescale of the latter option.
One settlement may not have been compatible with the LSS. LSS provides that in a dispute that has an all-or-nothing character, it must be settled on all-or-nothing terms. "Splitting the difference" is prohibited. The main tax issue in Company D's case was whether the controlled foreign companies ("CFC") provisions applied to its subsidiary company that had been incorporated in another EU country. Company D argued that the motive test exemption applied and that the CFC rules were unlawful as a matter of EU law. Following Cadbury Schweppes (Case C-196/04), HMRC developed a new approach to resolving a number of long-standing CFC cases: the CFC would pay a dividend to itsUK shareholder, which would elect to pay tax on the dividend (or if the CFC could not pay an actual dividend, theUK shareholder would be taxed on a deemed dividend). If a sufficient proportion of the CFC's profits was charged toUK tax, then the motive test exemption was deemed to have been met. After four months of negotiation, Company D agreed that over a billion pounds would be paid to resolve the CFC issue under the new approach. The agreed settlement was lower than the tax liability that would have been established had HMRC won in litigation, but the issue had an all-or-nothing character to it. Accordingly, it could be argued that the settlement breached LSS. However, Sir Andrew Park emphasised that, given the uncertainties and the costs of litigation, the settlement was a reasonable one. This was not least because, in his opinion, Company D had a good chance of winning both the arguments (in which case it would have had no tax liability).
What next?
Case D in particular suggests that LSS is not sufficiently flexible. In that case where there was, in effect, a choice between a reasonable settlement and a strict application of LSS, LSS yielded. That seems appropriate, but HMRC breaching its governance rules (even if those governance rules are flawed) raises the concern that external observers will not be confident in the appropriateness of settlements reached. Further, depending on how the UK Uncut case progresses, they may even seek to intervene to have such settlements overturned. Whilst the updated LSS is an improvement on the original, further updating is needed so that HMRC may adopt a similar cost-benefit analysis to litigation and settlement that commercial enterprises invariably undertake when in the like but opposite position.
R (on the application of UK Uncut Legal Action Ltd) v HM Revenue & Customs Commissioners
On 13 June 2012, Simon J granted the campaign group UK Uncut permission to apply for a declaration that HMRC had breached their public law duties by failing to comply with their published Litigation and Settlement Strategy ("LSS") when (in 2010) they reached a settlement agreement with Goldman Sachs ("GS") in relation to GS's payment of outstanding NICs.
The 2010 settlement agreement provided that GS would pay the principal, but no interest. Simon J held that there was public interest in the matter, and that the issue of illegality should be addressed at a full hearing.
What happens next?
UK Uncut will review the National Audit Office’s report Settling large tax disputes (see below) that was published on 14 June to determine if it should revise its case. It has 28 days from then to serve amended grounds on HMRC; and HMRC has until 14 September to respond. A full hearing will follow subsequently.
As well as the issue of illegality, standing and the appropriate remedy are likely to be addressed at the hearing. Claimants must have a sufficient interest in a matter to bring an application for judicial review. Whilst recently, the courts have adopted an increasingly liberal approach to standing, particularly when applications are brought by public interest or campaigning groups, it is still the case that what one judge described as no more than meddlesome busybodies do not have a right to bring claims. In relation to remedies, Simon J. indicated that there was no prospect of an order unravelling the settlement agreement. Whether UK Uncut would consider that a declaration that the 2010 settlement agreement was unlawful provides it with "just satisfaction" is yet to be known. HMRC have already accepted that errors had been made in relation to the making of the 2010 agreement; and, in December 2011, HMRC's conduct in this regard was criticised in a report of the Public Accounts Committee. Accordingly, whether a declaration of the High Court that HMRC's conduct was unlawful would assist in ensuring that HMRC's conduct is in future in accordance with its own procedures is, at best, moot.
Settling large tax disputes
Following the Public Accounts Committee expressing concern about how HMRC had reached settlements in a number of high profile matters, Sir Andrew Park (a retired tax judge) was asked to review five of those settlements to determine whether the settlements were consistent with LSS and whether HMRC had followed its own procedures. His conclusions were summarised in the National Audit Office’s report, Settling large tax disputes.
He concluded that all five settlements were reasonable, and that at least one may have been better than reasonable (for HMRC). The settlements were complex and there was no clear answer to what represented the ‘right’ tax liability. In each case, there was a range of justifiable positions that HMRC could have taken. The NAO’s examination included consideration of whether the settlement in each case was as good as or better than the outcome that might be expected from litigation, taking into account the risks, cost, uncertainties and timescale of the latter option.
One settlement may not have been compatible with the LSS. LSS provides that in a dispute that has an all-or-nothing character, it must be settled on all-or-nothing terms. "Splitting the difference" is prohibited. The main tax issue in Company D's case was whether the controlled foreign companies ("CFC") provisions applied to its subsidiary company that had been incorporated in another EU country. Company D argued that the motive test exemption applied and that the CFC rules were unlawful as a matter of EU law. Following Cadbury Schweppes (Case C-196/04), HMRC developed a new approach to resolving a number of long-standing CFC cases: the CFC would pay a dividend to itsUK shareholder, which would elect to pay tax on the dividend (or if the CFC could not pay an actual dividend, theUK shareholder would be taxed on a deemed dividend). If a sufficient proportion of the CFC's profits was charged toUK tax, then the motive test exemption was deemed to have been met. After four months of negotiation, Company D agreed that over a billion pounds would be paid to resolve the CFC issue under the new approach. The agreed settlement was lower than the tax liability that would have been established had HMRC won in litigation, but the issue had an all-or-nothing character to it. Accordingly, it could be argued that the settlement breached LSS. However, Sir Andrew Park emphasised that, given the uncertainties and the costs of litigation, the settlement was a reasonable one. This was not least because, in his opinion, Company D had a good chance of winning both the arguments (in which case it would have had no tax liability).
What next?
Case D in particular suggests that LSS is not sufficiently flexible. In that case where there was, in effect, a choice between a reasonable settlement and a strict application of LSS, LSS yielded. That seems appropriate, but HMRC breaching its governance rules (even if those governance rules are flawed) raises the concern that external observers will not be confident in the appropriateness of settlements reached. Further, depending on how the UK Uncut case progresses, they may even seek to intervene to have such settlements overturned. Whilst the updated LSS is an improvement on the original, further updating is needed so that HMRC may adopt a similar cost-benefit analysis to litigation and settlement that commercial enterprises invariably undertake when in the like but opposite position.