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Court of Appeal dismisses challenges to accelerated payment notices

The Court of Appeal has dismissed two challenges to the issue by the UK's HM Revenue & Customs (HMRC) of notices requiring the payment of disputed tax upfront. The Court dismissed the taxpayers' appeals against two High Court decisions rejecting judicial review challenges to the issue of accelerated payment notices (APNs) and partner payment notices (PPNs).15 Dec 2017

In one of the cases the Court agreed with the taxpayers that HMRC had not followed the proper process for issuing APNs, but it concluded that the notices were validly issued, as it said that if the HMRC officer had followed the proper procedure he would have concluded the arrangements were ineffective and decided to issue the APNs for the sums claims.

APNs were introduced in July 2014 and allow HMRC to demand the payment of disputed tax associated with a tax avoidance scheme up front – before a tribunal or court has decided whether or not a scheme is effective. PPNs are similar to APNs but are used where a notice is given to a member of a partnership or an LLP.

One of the cases considered by the court, involved PPNs issued to over 80 taxpayers, including Mr Rowe, the lead appellant in the case, who had invested in film and other similar partnerships established by Ingenious Media..

The other case concerned APNs issued to several employers including the lead appellant, Vital Nut, in relation to tax deductions for contributions made by employers into employer financed retirement benefit schemes ('EFRBS').

Pinsent Masons, the law firm behind Out-Law.com, acted for the taxpayers in these cases.

The taxpayers argued that the statutory purpose of the APN/PPN legislation was not fulfilled by issuing notices in the circumstances of these cases. The Court of Appeal agreed in principle that if HMRC was to issue payment notices instead of pursuing enquiries that would be an abuse of power but found that HMRC’s delay in the particular circumstances was reasonable. The Court concluded that HMRC’s issuance of the notices was a reasonable exercise of HMRC’s statutory discretion.

In relation to the Vital Nut case, Lord Justice McCombe said that HMRC issued the notices "oblivious to the proper operation of the statutory procedure as [the High Court judge] held it to be and as, before us, they now concede it to be", but he said that relief should still be refused.

"I am confident that a similar decision as to the effectiveness of the scheme would have been taken by the designated officer(s) in these cases as to the sums to be demanded in the notices. Even if the process for determination of the demanded sums cannot be positively demonstrated to have been properly carried out, I would, therefore, accept HMRC's submission that relief should be refused pursuant to section 31(2A) of the Senior Courts Act 1981," Lord Justice McCombe said in his judgment.

Section 31(2A) provides that if it appears to the Court to be highly likely that the outcome for the applicant would not have been substantially different if the conduct complained of had not occurred, the court must refuse to grant relief on an application for judicial review.

HMRC argued that, where a scheme was registered under DOTAS, they were entitled to issue a notice without considering the underlying merits of the scheme in question.  The Court found that it was not wrong in law for HMRC to adopt a general policy of issuing a notice provided sufficient provision was made for cases which ought not properly to fall within it because of exceptional circumstances. The only example given by HMRC of exceptional circumstances was a Supreme Court decision confirming that the arrangements used were effective.

The taxpayers also argued that the regime should not have been applied retrospectively, but the Court concluded that the presumption of non-retrospectivity was not intended to apply in these circumstances. Lady Justice Arden said: "I do not consider that in the ordinary way the fact that the taxpayer entered into a tax avoidance scheme before the FA 2014 came into force is likely to be relevant to the duty of fairness because the notices will impose a prospective obligation to pay money and interest in default."

"It is not disproportionate to decide that the economics of marketed tax avoidance schemes should be altered in the way that PPNs seek to achieve. The large scale tax avoidance, which the schemes seek to achieve, is a legitimate target of legislation such as this and I can see nothing disproportionate in treating the normal run of DOTAS schemes in the same manner, whatever the date of the inception of any particular scheme. The appellants had the benefit of the initial repayments, with the knowledge that the claims might later be challenged. The legislative object remains the same whether or not the scheme came into being before or after the advance payment provisions were enacted. It seems to me that whether or not the individual scheme participant could have been under a disincentive to enter into the scheme by the possibility of a demand of an advance payment is nothing to the point", Lord Justice McCombe said in his judgment.

The taxpayers argued that natural justice required HMRC to inform taxpayers of why their scheme was not effective and that judicial review of the payment notice was not an adequate remedy because the taxpayer would already have needed to liquidate his assets at that point since interim relief is only available if there is hardship.

The Court of Appeal said that the taxpayer should have the opportunity to make representations about the effectiveness of the scheme. 

"As I see it, the FA 2014 does not say that a taxpayer cannot make any further representations, and, when Parliament limits the designated officer's knowledge base to the best of his information and belief, it does not say that the information can only be provided by HMRC. In those circumstances, it seems to me that it must follow that a taxpayer can provide further representations on this point although the designated officer, of course, must reach his own view and is not bound to accept the contentions made by the taxpayer," Lady Justice Arden said.

She also said that HMRC ought to explain the basis of the taxpayer’s liability, but decided that the taxpayers knew why HMRC did not accept the scheme was effective because in the Rowe case the Ingenious partnership cases had already reached the tax tribunal and in the Vital Nut case HMRC had given a warning through Spotlight 6 that it did not consider the EFRBs arrangements to be effective.

The Court dismissed the argument that HMRC had failed to open the correct form of enquiry into carry back claims within the relevant statutory time limits. It followed the recent decision of the Supreme Court in De Silva concluding that an enquiry into the partnership by HMRC was sufficient to enquire into any claim made by a partner to utilise losses with the result that HMRC could, in theory, collect any additional tax.

The court also dismissed arguments that the payment notices were unlawful under s6 of the Human Rights Act 1998 on the basis that they interfered with the peaceful enjoyment of possessions under Article 1 Protocol 1 (A1P1). The Court stopped short of confirming that the taxpayers' A1P1 rights were engaged, but indicated if they had been and interfered with by the PPN, the interference was provided for by law and was suitably proportionate in the circumstances. The Court also said that the availability of judicial review was sufficient to satisfy the right to fair trial within Article 6.