Partner payment notices issued by the Revenue and Customs Commissioners under paragraph 3(3) of Schedule 32 to the Finance Act 2014 were not unlawful.

Simler J so held in dismissing a claim by the claimants, Nigel Rowe, Alec Worrall and others, for judicial review of the decision of the legality of partner payment notices (“PPNs”) given by the Revenue and Customs Commissioners to the claimants in exercise of new powers under the Finance Act 2014.

The 2014 Act gave the commissioners a discretionary power to require taxpayers using tax avoidance schemes to pay a sum representing the tax in dispute in an accelerated payment notice (“APN”) where there was an open inquiry or appeal. In the case of partnerships such payments were demanded in PPNs. The claimants were members of partnerships which were set up to carry on a trade of producing films. Losses were incurred by the partnerships which were allocated to individual partners who sought sideways loss relief by offsetting the losses against other income and gains in the year of the loss, or by carry back of the loss to the earlier year, or both. The underlying substantive tax dispute was being litigated before the First-tier Tribunal (Tax Chamber) (FTT”). The claimants contended that PPNs issued in their cases were unlawful and of no effect because: (i) they were issued in breach of the principles of natural justice because they were never afforded the opportunity to make representations as to why in all the circumstances they should not have been issued; (ii) the notices were ultra vires because Condition B, contained in paragraph 3(3) of Schedule 32 to the 2014 Act was not satisfied; (iii) the notices were given in breach of the claimants’ legitimate expectation that they would not have to pay any tax in dispute until after the FTT had decided all relevant issues, the commissioners having not exercised the right to postpone repayment; (iv) the decision to give notices was unreasonable/irrational in all the circumstances; and (v) the decisions to issue PPNs infringed their rights under article 6 of, and article 1 of the First Protocol (“A1P1”) to, the Convention for the Protection of Human Rights and Fundamental Freedoms.

SIMLER J, dismissing the claim, held that the statutory scheme for giving APNs (including PPNs) was not unfair or insufficient to achieve justice. Parliament had specifically addressed procedural fairness, and prescribed a procedure whereby there was a right to make representations before any payment obligation arose. The PPNs did not deprive the claimants of their statutory right to challenge the underlying tax liabilities, by way of appeal to the FTT. Moreover the scope of representations (extending to the statutory basis for the PPN and the amount) was adequate to ensure that fairness was preserved. It allowed representations to be made challenging the rationality of the designated officer’s determination based on his information and belief, both as to the efficacy of the tax avoidance arrangements and as to the amount.

Condition B was that the return or, as the case may be, appeal was made on the basis that a particular tax advantage resulted from particular arrangements. The claimants contended that the tax advantage only resulted from the partnership arrangements in the case of current year claims, and that in the case of carry back or stand-alone claims, it resulted from the separate claim made by the individual partner. Claimants who received a repayment and those who received a set-off were in the same economic position. Both received a tax advantage whether the share of losses was used in a carry back claim or in a current year claim. There was nothing in the 2014 Act to differentiate between those two situations for the purposes of deciding whether the statutory preconditions were met. Parliament defined “tax advantage” in section 201 of the 2014 Act to encompass both relief from tax as well as repayment of tax. Parliament intended the PPN to operate regardless of the mechanics in which a taxpayer obtained the tax advantage.

The claimants contended that because the commissioners did not open inquiries into their carry back claims under paragraph 5 of Schedule 1A to the Taxes Management Act 1970, and instead met the carry back repayment claims at the time, they reasonably assumed that they could postpone payment of any disputed tax until the appeal had been determined at first instance. In other words, they had accrued section 55 postponement rights based on the commissioners’ conduct, and the PPNs given in 2014 breached their legitimate expectation that those accrued rights would continue until the underlying appeals were determined. It was only in an exceptional case that a claim that a legitimate expectation had been defeated would succeed in the absence of a clear and unequivocal representation. There was simply no evidence of a practice that was so unambiguous, so widespread, so well established and so well recognised as to carry within it a commitment to the claimants of continued treatment in accordance with it. Even if the commissioners made “carry back” repayment claims in circumstances where it was open to them not to do so, that did not prevent the commissioners from opening (either then or subsequently) actual or deemed section 9A inquiries into those losses contained in partner returns to challenge the efficacy of the tax planning. Simply because the claimants received a set-off or a repayment of tax did not give rise to any expectation that that was conclusive. The position in relation to the tax represented by the repayment remained open to challenge, and there was no evidence of anything said or done by the commissioners to suggest otherwise. Since the new powers were contained in primary legislation, even if the claimants could have identified an expectation, based on previous legislation or the practice adopted by the commissioners, that could not give rise to a common law right, enforceable in the courts, constraining Parliament’s constitutional power to enact primary legislation which changed the previous position. Once the 2014 Act came into force following the democratic processes entailed in the passing of primary legislation, no common law “legitimate expectation” could trump that legislative power. The statutory discretion should be exercised consistently with and not running counter to, the primary legislation. The relevant legislation, on its face, made clear that it was intended to apply to existing as well as post-enactment schemes.

The 2014 Act did not identify the matters to be treated as relevant once the statutory preconditions were met, and accordingly Parliament had conferred a discretion on the commissioners to decide what factors to take into account. The approach adopted by the commissioners demonstrated that in the overwhelming majority of cases where they considered that the statutory conditions were satisfied, they would exercise the powers conferred by the 2014 Act by giving APNs or PPNs, and the question was generally one of when, not whether, they would be given. However, that did not mean that the commissioners’ discretion had been unlawfully fettered or turned into a rule without exception. It had not. Given the nature and purpose of PPNs there was nothing wrong with a general rule that when the statutory criteria were met, the discretion would be exercised by issuing the notice, save in exceptional circumstances. Accordingly, the decision to give PPNs was not irrational or unreasonable.

The question was whether the money representing the reduced tax liability (or loss relief claim) held by the claimants pending the determination of the dispute was an existing asset or possession for A1P1 purposes. The claimants’ claims to loss relief had not been established and depended on the application and interpretation of the relevant legislation to the tax avoidance scheme entered into. Accordingly the claimants had no legitimate interest amounting to a property right that had been interfered with by the PPNs, since it had not been established that they were ever entitled to the tax deductions in the first place. That was the very issue being litigated in the FTT. Accordingly, the sums in question could not properly be regarded as a possession for A1P1 purposes. Finally, the claimants contended that PPNs were not tax but were peremptory demands by the commissioners for payment of monies that might or might not in the future give rise to liabilities that were subject to a penalty regime for non-payment, and therefore they determined civil rights under article 6, and did not concern liability to tax. The claimants had therefore been deprived of a fair and public hearing before the FTT. Alternatively, they involved a criminal charge because they were a surcharge with a deterrent and punitive purpose, applicable to a definable group, and involving punitive consequences. In his Lordship’s judgment, article 6 did not apply when the state determined a person’s liability to pay tax. The amounts due under PPNs were, as a matter of substance, payments on account of tax. So far as penalties were concerned, there was a statutory right of appeal to the FTT against any penalty. That satisfied any article 6 obligations in that regard. In any event, even if article 6 did apply to the issuing of a PPN, the claimants had had access to an independent and impartial tribunal on judicial review.