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Rowe and accelerated payments

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In The Queen (on the application of Rowe and others) v HMRC [2015] EWHC 2293 (Admin), the claimants challenged the legality of partner payment notices (PPNs). The case raises complex issues on the conflict between the powers of the state to combat tax avoidance and the rights and expectations of individual taxpayers. Simler J resoundingly rejected all five grounds of challenge. However, Rowe provides an opportunity to consider whether grounds of appeal should be refined. The debate will continue and the case demonstrates that judicial review remains an important option in some tax cases.

The power to issue partner payment notices (PPNs) forms part of the regime introduced by FA 2014 Part 4, which includes follower notices (FNs) and accelerated payment notices (APNs). As Simler J states at para 133 of the judgment in The Queen (on the application of Rowe and Others) v HMRC [2015] EWHC 2293 (Admin) (reported in Tax Journal, 7 August 2015), the APN/PPN regime ‘involves a requirement to make an accelerated payment pending resolution of a tax dispute in cases where tax avoidance schemes are used. Underlying appeal rights in relation to the disputed tax are preserved.’
HMRC, in a recent press release, puts it more bluntly. The new regime ‘changes the underlying economics of tax avoidance. People who try to avoid tax have to pay tax upfront while their avoidance is being investigated.’
This aim may be laudable in principle. While a healthy tax system needs to breathe through its loopholes, the last decade has seen an upsurge in egregious avoidance schemes, with a consequential erosion of the tax base.
The new regime, however, is undoubtedly draconian. The issue of an APN triggers a liability to pay an amount specified as ‘understated tax’ within 90 days (FA 2014 ss 220, 223). This is in advance of any judicial determination. The taxpayer has limited rights to ‘make representations’ about the amount or whether the statutory conditions are satisfied (s 222). Failure to pay attracts a penalty of 5% of the unpaid amount, with further penalties of 5% at five months and 11 months (s 226). The latter penalties do not apply where there is a tax appeal, since separate penalties apply under TMA 1970 s 55.
Where an APN/PPN has been issued, the right to postpone tax pending an appeal is removed (TMA 1970 s 55, new sub-ss (8B)–(8D)). This applies to any appeal, whether it commenced before or after introduction of the new regime.
HMRC ‘may’ issue an APN where three statutory conditions are satisfied (FA 2014 s 219). These are:
  • Condition A: a tax enquiry or appeal is open;
  • Condition B: a return, claim or appeal is made on the basis that a tax advantage results from particular arrangements; and
  • Condition C: where:
    • HMRC has issued an FN (FA 2014 Part 4 Chapter 2) to the taxpayer following an adverse ruling in another similar case;
    • the arrangements are notifiable under the disclosure of tax avoidance schemes (DOTAS) regime (FA 2004 ss 306-318); or
    • a counteraction notice has been issued under the general anti-abuse rule (GAAR) in respect of the asserted tax advantage.
Essentially, the same conditions apply to the issue of PPNs (FA 2014 Schs 31 and 32).

Significance of DOTAS

In most cases, Condition C is likely to be satisfied because the arrangements are within DOTAS. A key point, which does not strongly appear from the judgment in Rowe, is that the DOTAS regime was intended as an information gathering tool. It was to give HMRC early warning of certain arrangements, enabling it to gauge their use and extent and decide whether to challenge them or ask Parliament for remedial legislation. DOTAS, therefore, identifies both objectionable and unobjectionable arrangements, the latter being those which fall within the parameters laid down in case law (see, for example, Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1). Such cases, of course, are also outside the scope of the GAAR.
The Rowe case concerned PPNs issued to partners in the Ingenious Film and Ingenious Game LLPs. Investment in the British film industry, with generous tax breaks, was positively encouraged by the previous government. Most of the expenditure in producing films is incurred upfront, generating losses in early years. In Rowe, there were 154 claimants. The lead claimants gave evidence that their investment was motivated by the desire to promote the industry. Some claims were sideways loss relief claims for a current year. These were not subject to HMRC enquiry and tax repayments had been made some ten years prior to the issue of the PPNs. Other claims were carry back loss relief claims, where HMRC had enquired into the returns of the LLPs (but not of the individual partners) and issued closure notices denying any tax relief for trading losses.
Appeals are currently being heard by the FTT, but a decision is unlikely before 2016. The lead claimants also testified that they regarded the tax repayments as unconditional. They had not planned their finances on the basis that these might become repayable before the hearing of any appeal; and peremptory demand for payment would cause hardship requiring the sale of assets. They challenged the PPNs on five grounds:
  • Condition B not met;
  • breach of natural justice;
  • breach of legitimate expectation;
  • irrationality; and
  • human rights.
Each is worth discussing.

Condition B not met

This challenge related to the carry back claims and, if successful, the PPNs would be ultra vires and a nullity. In essence, the argument was that the tax advantage did not ‘result from’ the chosen arrangements, but rather from the circumstances of the individual partner’s return. Moreover, HMRC had already repaid the tax.
Simler J rejected this approach as an unduly narrow reading of FA 2014 Sch 32 para 3(3), creating an arbitrary distinction between sideways claims and carry back claims. The argument that no tax would be due because HMRC was too late to commence an enquiry (under TMA 1970 Sch 1A) was also rejected. This point had already been decided by Sales J in R (De Silva and Dokelman) v HMRC [2014] STC 2088.
Simler J declined to differ from Sales J, but agreed with him for the reasons which he gave. The argument, however, will be tested in October 2015 when the Court of Appeal hears the appeal in De Silva. The next three challenges involved well-trodden paths in public law territory.

Breach of natural justice

It was common ground that the principles of natural justice are engaged in the issue of PPNs. Accordingly, HMRC must act fairly. The claimants argued that fairness requires the taxpayer to have an opportunity to make representations before HMRC issues the notice. Relying on Bank Mellat v HM Treasury [2014] AC 700, the claimants emphasised the potentially catastrophic effect of the notices.
Distinguishing that case, however, Simler J held that the APN/PPN scheme already provides safeguards; these are, namely, the right to make representations as to quantum and whether statutory Conditions A to C are satisfied. In appropriate cases, taxpayers could also ask HMRC for time to pay. The standards of fairness are not immutable and depend on the particular context and nature of the rights involved. Following Wiseman v Borneman [1971] AC 297, the common law did not require imposition of additional non-statutory obligations. The argument that the scheme acted as a disincentive to appeal was also rejected.

Legitimate expectation

The claimants argued that, by making the tax repayments and not opening enquiries, HMRC created an expectation that rights to postpone payment had accrued until the underlying appeals were determined. The FA 2014 regime breached that expectation.
Simler J reviewed the case law (in particular R v IRC, ex parte MFK Underwriting Agents Ltd [1990] 1 WLR 1545 and Davies and Another v HMRC [2011] UKSC 47) on the distinction between a mere practice and an assurance which amounts to a representation. She concluded that the chronology fell short of establishing an unambiguous representation by HMRC. In any event, the payment of the claims did not preclude HMRC from opening an enquiry (actual, or ‘deemed’ under TMA 1970 s 12AC(6); see De Silva). Moreover, any expectations at common law could be defeated by legislation (see Wheeler v Office of the Prime Minister [2008] EWHC 1409 (Admin)).


The claimants argued that HMRC had issued PPNs ‘on a blanket basis and on an industrial scale’, without consideration of their individual circumstances. HMRC had interpreted the word ‘may’ in the statute as ‘shall’. Irrationality, however, is a stringent test. A decision maker may have a policy, subject only to Wednesbury review, to decide upon the manner and intensity of the enquiry to be undertaken into any relevant factor; and it is not for the court to interfere (see Khatun v Newham LBC [2004] EWCA Civ 55).
Rejecting the claimants’ arguments, Simler J held that, given the purpose of the scheme, there was nothing irrational in HMRC having a general rule that when the statutory criteria are met, the discretion will be exercised by issuing the notice, save in exceptional circumstances.

Human rights

The claimants originally sought a declaration of incompatibility under the Human Rights Act 1998 s 4, but that ground was not pursued. The issue argued was whether art 1 of Protocol 1 (A1P1), which protects the right to peaceful enjoyment of possessions, was engaged; and, if so, whether it was breached. It was accepted that PPNs can be given lawfully where interference with that right is in accordance with law, justified and proportionate. Infringement was alleged in four ways:
  • by removing the right to postpone payment under TMA 1970 s 55;
  • given that no enquiry was opened into the carry back claims, by interfering with a right to property which had already crystallised;
  • by interfering with the possession created by repayment of the loss claims before the dispute was concluded; and
  • by imposing what amounted to a tax before any tax liability was established.
Simler J held that A1P1 was not engaged but, in any event, the challenges failed.
The taxpayers’ entitlement to regard the tax repayments as ‘possessions’ within A1P1 was insufficiently certain. At best, they were claims in a genuine dispute (see Kopecký v Slovakia (2005) 41 EHRR 43). In each case, income tax was payable by the claimants. Their investment in Ingenious and the losses allocated to them afforded only a basis for claiming that their income tax liability should be reduced to reflect those losses. Repayment by HMRC was not a final determination.
Simler J also relied on ToTel v FTT [2011] STC 1485 (ToTel) and APVCO 19 Ltd v HM Treasury [2015] EWCA Civ 648 (APVCO). Both cases involve indirect taxes. ToTel concerned the requirement to deposit VAT charged on supplies before bringing an appeal. APVCO concerned SDLT, where Vos LJ stated (at para 46): ‘money is a possession in one sense, but it is a possession impressed with an arguable claim by HMRC, which prevents it being properly regarded as a possession for A1P1 purposes’. Simler J also regarded these cases as establishing that legislation can remove the argument that money in the taxpayer’s pocket is a possession, by requiring that it should fund disputed tax. Accordingly, it was held that A1P1 rights were not engaged.
In the alternative, the judge went on to hold that the FA 2014 regime was ‘foreseeable’, and therefore ‘prescribed by law’ (within the proviso to A1P1), and also that it complied with the principle of proportionality. In tax cases, such a challenge faces a high hurdle (see Allan v HMRC [2015] UKUT 16 (TCC)). The margin of appreciation enjoyed by the state is a wide one and proportionality is breached only in the most extreme cases.
A challenge based on art 6 also failed because tax cases are excluded from its scope (see Ferrazzini v Italy [2001] STC 1314). The argument that the claimants had received a peremptory demand which was not ‘tax’ was unsustainable. In substance, the accelerated payments were no more than a requirement to make a payment on account of tax which, if found not to be due, would be repaid by HMRC with interest.


Permission to appeal has been refused on all grounds. However, an application to the Court of Appeal is pending. If De Silva is reversed, the Rowe claimants should be entitled to succeed on the carry back claims. There is also considerable scope for revisiting the sideways claims. A key issue will be whether HMRC properly exercised its discretion to issue the notices. Is it sufficient compliance with HMRC’s public law duties to operate a blanket policy? How relevant is it that the planning schemes here were, in a sense, encouraged by the (previous) government and that (as HMRC may itself accept) some DOTAS schemes work?
Another area ripe for further argument, which the court may be called upon to grapple with, is the concept of a ‘possession’ for the purposes of A1P1. Do the dicta in the indirect tax cases of ToTel (at first instance) and APVCO also apply to tax repayments which the taxpayer has received unconditionally and converted into other property?
There is, of course, no procedure for referring cases to the European Court of Human Rights (ECtHR). This is in contrast to VAT disputes, for example, where CJEU references are now commonplace. Marks & Spencer v Commrs of Customs & Excise (C-62/00) [2002] STC 1036 is a leading example, where the CJEU held that the retrospective curtailment of the time limit for reclaiming overpaid VAT breached EU law general principles. The route to the ECtHR, however, is tortuous and uncertain.

Where next, post-Rowe?

Numerous cases are stayed behind Rowe. In some, permission to bring judicial review has already been granted; in others, it is pending. Applications for further stays will be required, in order to protect the claimants’ position. Factual scenarios differ.
However, Rowe is an important watershed. It provides an opportunity to consider whether the grounds of appeal should be refined. Should further information be requested from HMRC (as to the policy and decision making process for issuing notices)? Should claimants provide further evidence of their individual circumstances? Rowe underlines the importance of progressing enquiries and outstanding appeals to judgment or settlement. Will the new regime encourage HMRC to delay matters once the moneys are sitting in its bank account?
The claimants in Rowe have lost the first round. However, as para 68 of the judgment confirms, judicial review still has its place as a weapon in the tax arena even if, as it appears, HMRC is currently more heavily armoured.