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Permission for judicial review fails in diverted profits tax case

Permitting judicial review of the issue of a diverted profits tax (DPT) charging notice would "undermine parliament's intent", the High Court has decided in a case concerning oil and gas distributing company, Glencore Energy.11 Jul 2017

In rejecting the company's application for judicial review of the issue of the charging notice by HM Revenue & Customs (HMRC), Mr Justice Green said that the statutory review process in the DPT legislation was a "perfectly adequate alternative remedy".

Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-law.com said: "DPT has to be paid within 30 days of the issue of a charging notice. Although the DPT legislation provides a framework for eventually challenging the charging notice, if the company has to appeal to the tax tribunal, the matter may only be finally resolved years after the tax has been paid. It is therefore not surprising that Glencore wanted to use judicial review to try to speed up the process."

DPT was introduced in 2015 ostensibly to target tax avoidance by multinationals operating in the UK. It imposes a tax charge of 25% in two different situations. The first is where there is a group with a UK subsidiary or permanent establishment (PE) and there are arrangements between connected parties, which 'lack economic substance' in order to exploit tax mismatches. The second scenario is where a non-UK resident trading company carries on activity in the UK which is designed to ensure that the non-UK company does not create a UK PE.

HMRC argued that agreements entered into between Glencore Energy UK and Swiss-based group company, Glencore International, were designed to divert otherwise taxable profits away from the UK and were therefore subject to DPT. HMRC issued a charging notice to Glencore, imposing a charge for DPT for around £21 million.

If HMRC considers that a company may be liable for DPT, it issues a preliminary notice outlining the grounds on which HMRC considers that DPT is payable and calculating the DPT based on certain simplified assumptions. A company then has 30 days to contact HMRC to correct any obvious errors in the notice, but there is no right to appeal the preliminary notice.

HMRC then issues a charging notice stating the amount of DPT payable, or it notifies the company that no DPT is payable. Following receipt of a charging notice, a company has 30 days to pay any DPT due. There is no right to appeal the charging notice prior to payment and there are no grounds for delaying payment. Following payment, HMRC has 12 months in which it must review the charge to DPT. The company can only appeal a DPT charge after the end of the review period. An appeal is heard by the Tax Tribunal in the normal way.

Glencore applied for permission to challenge HMRC's issue of the charging notice by way of judicial review on the basis that it had applied a test which was not in accordance with relevant statutory requirements, failed to take account of their representations, failed to give reasons for the calculation of DPT and that the calculation of the DPT was irrational.

Judicial review was described by the judge as "a remedy of last resort". Where an alternative remedy exists that has to be exhausted before any application for permission to apply for judicial review is made, he said.

Glencore argued that HMRC's review of the DPT charge was not capable of amounting to an alternative remedy because it was not judicial or independent of HMRC. It also argued that it was an inadequate remedy because the legislation permitted a review only into the amount of DPT that was chargeable and not into whether there was a liability at all. It also argued that judicial review would save time and expense.

The judge dismissed all these arguments. He said that the review was capable of amounting to an alternative remedy as it was designed to work in accordance with the statutory appeal process and it was compulsory for HMRC to conduct the review. He described it as a "form of mandatory mediation or ADR (alternative dispute resolution) prior to litigation" designed to narrow the evidential and legal disputes.

Although the wording of the legislation is not entirely clear, the judge said that properly interpreted in the light of its parliamentary purpose, the review process includes a duty on the part of HMRC to consider liability issues. He also dismissed the argument that a judicial review would save time and expense saying that as no 'show-stopper' argument had been raised that would bring HMRC's action to an end, judicial review would not obviate the need for the review process or an appeal to the tax tribunal.

"To permit judicial review in this case at this stage would undermine parliament's intent," the judge said. "There is no prejudice to the taxpayer in requiring adherence to the statutory procedure. The review process follows on from issuance of the charging notice so is intended to be expeditious. It has a fixed duration so cannot be dragged out and it can be brought to a speedier end thereby bringing forward the right to appeal."

"There is no real utility in this case proceeding to a judicial review and I consider [Glencore's] case to be stronger under the statutory procedure than under judicial review. There is no clear saving in time or expense. There are no really important points of law arising which justify a judgment of the High Court," he said.

In a separate decision, Mr Justice Green considered an application from Glencore for permission to appeal his decision. HMRC argued that the High Court had no jurisdiction to grant permission to appeal.

Civil Procedure Rule (CPR) 52.3(2)(a) provides the general rule on applications for permission to appeal, and states that permission may be granted by the lower court or the appeal court. However, HMRC argued that there is a specific rule for appeals against refusals of permission to apply for a judicial review, after a hearing, contained in CPR 52.8(1). HMRC argued that this makes clear that there is no right on the part of the High Court to grant permission and that permission must be sought specifically from the Court of Appeal.

The judge agreed with HMRC's arguments and ruled that he had no power to grant permission.