Q&A: New restrictions on interim payments in tax cases

A new test for interim payment applications in tax cases (other than those relating to NIC) has recently been proposed for applications made on or after 26 June 2013. The changes could be seen as a cynical move by HMRC, which serves to delay payment to taxpayers where in ordinary commercial circumstances such an interim remedy would be available.

What’s the background?

In common law claims for a repayment of tax overpaid (typically in EU tax matters), it was previously possible for a taxpayer to obtain an interim payment if the court was satisfied that ‘if the claim went to trial, the claimant would obtain judgment for a substantial amount of money’ (CPR 25.7(c)). This interim remedy is not just available for tax cases but is available (and often obtained) in commercial cases.

What has now been proposed?

On 26 June 2013, an amendment to Finance Bill 2013 (in House of Commons Notice of Amendments NC7) was announced which seeks to make the threshold for an interim payment substantially harder to meet. The amendment applies where an application for an interim payment relates to a tax matter where a point of law has yet to be finally determined. The court may now only grant an interim remedy in these circumstances if, either ‘taking account of all sources of funding (including borrowing) reasonably likely to be available to fund the proceedings, the payment of the sum is necessary to enable the proceedings to continue’, or ‘the circumstances of the claimant are exceptional and such that the granting of the remedy is necessary in the interests of justice’.

The amendment has retrospective effect to 26 June and requires a court to unwind an interim payment granted between 26 June and the passing of the Act, if it has been granted on the basis of the previous test, if an application is made to unwind it.

How will taxpayers be affected?

This development should be of some concern to taxpayers. Taxpayers who have already obtained an interim payment under previous rules are not affected by the proposed legislation. Likewise, those who have filed an application for an interim payment prior to 26 June 2013 but who have not yet had their hearing, should not be tested under the proposed legislation.

The development is of concern for several reasons:

• First, the draft legislation changes the test with an effect predominantly on EU tax claims. The explanatory note goes as far as to cite as the reason for its legislation ‘several examples of long-running tax litigation, which, because of particular circumstances, are subject to procedural rules of the court rather than the statutory rules which normally apply to tax litigation’. There are very few tax litigation matters currently in the courts rather than the tribunals, so this measure appears to be specifically targeted to direct or indirect EU tax claims.
• The explanatory notes also indicate that the legislation is designed to bring common law actions in line with actions in the tax tribunals. This cannot be the case, since there is nothing in the tax tribunal’s rules which provides for interim payments beyond the tribunal’s general discretion, and the tribunal has itself cast doubt on its ability to grant an interim payment (see, for example, Marks & Spencer v HMRC [2010] UKUT 296 (TC) at para 25).
• Independently of the interim payment process, both the court and tribunal routes allow recovery of the amount the judgment orders to be won, even where an appeal is possible. However, for reasons of procedural efficiency, the quantum of a claim in EU tax matters is typically on hold pending the outcome of the main liability issues (thereby reducing court time dealing with quantum until it is clear to what quantum relates). This measure is therefore doubly damaging to EU tax claimants because, as a matter of agreement, and on the basis of the possibility of interim payments in the current version of the procedural rules, claimants have generally chosen not to take quantum issues early in the case and are therefore not usually able to seek judgment in a specific amount as the case progresses.
• The legislation is also retrospective, with effect from prior to enactment of the legislation, in the same way as the legislation in Marks & Spencer (C-62/00). There is also no transitional period in this provision, which, given that the very same issues of retrospectivity and a lack of transitional period were before the CJEU in the FII GLO on the day the proposed legislation was announced, seems to show either confidence or possibly a want of caution on HMRC’s part.
• Last, but by no means least, the provision itself may contravene EU law by making the exercise of a taxpayer’s right to a remedy virtually impossible or excessively difficult. It is at least arguable that EU law requires a member state to provide interim remedies to give full effectiveness to rights claimed under EU law (see, for example, Unibet C-432/05, para 19).

Was this change expected?

In a landscape where HMRC is known to legislate retroactively in order to defeat taxpayer claims, this development is not completely unexpected, but it is unfair to taxpayers. It is important that taxpayers take note of HMRC’s willingness to legislate at short notice and retrospectively to block ordinary litigation or tax provisions. It is a difficult landscape indeed for taxpayers where HMRC can, at will, thwart a taxpayer’s ability to obtain a remedy available in any other commercial dispute.