Tax avoidance – judicial review and other developments

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Tax avoidance – judicial review and other developments

Published 9 septiembre 2015

HMRC's recovery of tax quicker than projected

Recent figures released by HMRC record the progress that they have made in seeking early repayment of tax under the Accelerated Payment Notice (APN) regime. This was introduced by the Finance Act 2014, which gave HMRC the power to serve tax demands where there is disputed unpaid tax as a result of the taxpayer's involvement in a tax avoidance scheme.

By way of recap, HMRC's projected figures were that it would recover over £7.5 billion of disputed tax over the 5 years from 2014/15. Some 64,000 taxpayers (individuals and businesses) have or will receive APN tax demands.

HMRC's recent annual report (July 2015) confirmed that £596 million of payments had been received in the first year of the scheme's operation, against a projected revenue of £210 million. About 10,000 APN demands have been served accounting for £1.7 billion of unpaid tax. Despite a relatively slow start, the APN scheme is clearly now well underway. HMRC has a dedicated APN team devoted to the service of APNs and recovery of associated tax. If this trend continues, this is likely to be a bumper year for the Treasury. HMRC's projected collections are £1.23 billion and £1.3 billion for this financial year and the next, and those figures may well be exceeded.

Of interest to taxpayers will be the fact that of the £596 million recovered last year, £28 million had to be repaid to taxpayers after a legal challenge: some respite in an otherwise hostile environment for those who used tax avoidance schemes (and the professionals who advised them).

Judicial review of APNs – HMRC successes

There is no right of appeal against an APN. It is possible for a taxpayer to make representations about the tax concerned, but HMRC is unlikely simply to change its mind if the taxpayer was engaged in a tax avoidance scheme it considers to have been in breach of the rules.

A number of investors challenged APNs (and Partnership Payment Notices, or PPNs, a variant of APNs) and sought to judicially review HMRC's activities in this area.

Pending the judicial review applications, applications for interim relief (injunctions preventing HMRC from issuing APNs or levying penalties) were made by two groups of investors in cases known as Rowe and Dunne. Both were refused by the court. Unless hardship can be shown to exist on the part of the taxpayer, APNs (and PPNs) will have to be paid, together with any penalties, pending the outcome of judicial review proceedings.

A judicial review hearing took place in Rowe in July. The 154 Rowe claimants were all investors in the schemes promoted by Ingenious Media. The court dismissed the claimants case:

The court rejected an argument that the APN system is unfair and a breach of natural justice, and further safeguards should be introduced (such as allowing a taxpayer to make representations prior to issuing an APN). The court found this was against the statutory scheme introduced by Parliament. Whilst there is no right of appeal against an APN, the taxpayer may still challenge HMRC through the courts and, if they succeed, would be repaid.
The court also rejected the claimants' case that the APN system is in breach of their human rights, in particular ECHR Article 6 (the right to a fair trial). The court found that Article 6 did not apply to the issuing of APNs, but even had it done so, the claimants had had access to a fair hearing on judicial review, which would satisfy any Article 6 obligations that applied.

The Dunne judicial review hearing has not yet taken place, but given the outcome of Rowe the Dunne claimants will have an uphill battle to convince the court to come to a different view.

In another judicial review ruling, a group of claimants who had invested in stamp duty mitigation schemes for residential property lost a challenge to HMRC in late June 2015. The scheme was designed to take account of rules to stop stamp duty being paid twice on a property in cases where there was a sub-sale; HMRC won a series of cases in relation to such schemes and legislation was introduced to restrict abuse of the rules. However, some investors were challenged the action taken against them under legislation which they contended was retrospective and in breach of their human rights. The Court of Appeal held that, the facts, their human rights were not infringed and, even if they were, the retrospective legislation introduced to deal with stamp duty avoidance was lawful, and neither unforeseeable nor arbitrary.

The outlook for claims

Some interesting evidence was heard in the court in the Rowe decision. A representative of HMRC's Counter Avoidance Directorate explained the background to the introduction of APNs in the Finance Act 2014 in her witness statement, and she estimated the total value of tax under dispute by HMRC related to marketed avoidance cases at around £14 billion. HMRC has previously indicated that tax of approximately £7 billion is being sought through the use of APNs, but the overall figure HMRC is seeking to retrieve is significantly greater, presumably taking into account other methods of enforcement. Of course, not all of the £14 billion (or indeed the £7 billion) will translate into claims against professionals; claims will not be pursued by every investor, and even where they are pursued investor claimants rarely seek repayment of the tax in full from the professional. Such claims are usually defended on the basis that the tax would have been payable in any event. Rather, investors will seek recompense for their outlay on fees and lost cash investments – usually a percentage of the tax saved, albeit often a substantial percentage.

Of the Rowe decision, David Richardson, the Director of Counter Avoidance at HMRC, said: "This is an important result, and good news for the vast majority of taxpayers who do not try to avoid paying their fair share of tax". He went on to say that "We expect to complete the issue of around 64,000 notices by the end of 2016 bringing forward £5.5bn in payments for the Exchequer by March 2020," he said. This tallies with HMRC's reported figures and means that a process which was expected to take 3-4 financial years may be largely complete in little over two years.

Overall, the warning signs of significant numbers of claims against professional advisers, largely accountants and financial advisers, remain present. Significant losses are being sustained by investors, and on HMRC's present predictions this will peak in the next 12 months. A number of claimant law firms and claims management companies are actively recruiting investors to make claims against professionals. Their promotional literature makes clear they are acutely aware of the limitation difficulties which may face claimants in relation to advice that was given many years ago, and they urge claimants to take action now.

Our experience is that volumes of notifications are being made by accountants in particular, which is generating the usual policy coverage issues. We continue to deal with the defence of such claims – accountants and financial advisers are the main targets, although we are dealing with claims against solicitors too. Whilst there may be some time lag between HMRC making tax demands, and investors making claims, this remains a real area of risk for professionals in the forthcoming year.


Julian Miller

Julian Miller

London - Walbrook

+44 (0)20 7894 6859