Contentious tax quarterly review (Q4 2019)
In this quarterly review we consider: HMRC’s increasing propensity to seek to strike out the taxpayer’s case; recent developments in relation to IR35; the timing of tribunal decisions; and the potential implications of the Inverclyde decision.
(Article originally published on Tax Journal on 29th November 2019)
HMRC is able, in certain circumstances, to ask the tribunal to strike out a taxpayer’s case where, inter alia, there has been material non-compliance with the tribunal’s directions and/or the taxpayer is mounting a hopeless case. Decisions on IR35 continue to highlight just how hard it is to determine whether a worker comes within the relevant anti-avoidance provisions, and we now have the view of the Upper Tribunal in Christa Ackroyd’s case. Additionally, there is increasing disparity in the time it takes the tribunal to release its decisions, and extended delay can cause detriment to some businesses whilst they await the decision of the tribunal. The tribunal decision in Inverclyde v HMRC has thrown into doubt whether HMRC has been properly opening enquiries into certain LLPs.
There is anecdotal evidence to suggest that HMRC is increasingly making applications to the tribunal to have the taxpayer’s appeal struck out.
Rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273, provides that the tribunal may strike out the whole or a part of the proceedings if ‘the Tribunal considers there is no reasonable prospect of the appellant’s case, or part of it, succeeding’.
The power afforded by rule 8(3)(c) is discretionary and is intended to be exercised in circumstances where the tribunal is of the view that the case is hopeless and has no reasonable prospects of succeeding. The Upper Tribunal, in HMRC v Fairford Group  STC 156, provided guidance on how the tribunal should assess whether a case has no reasonable prospect of success. The tribunal is required to apply certain principles that have been developed by the courts. At para 41 of its decision, the Upper Tribunal said:
‘In our judgment an application to strike out in the FTT under r 8(3)(c) should be considered in a similar way to an application under CPR 3.4 in civil proceedings (whilst recognising that there is no equivalent jurisdiction in the FTT Rules to summary judgment under Pt 24). The tribunal must consider whether there is a realistic, as opposed to a fanciful (in the sense of it being entirely without substance), prospect of succeeding on the issue at a full hearing ... A ‘realistic’ prospect of success is one that carries some degree of conviction and not one that is merely arguable ... The tribunal must avoid conducting a ‘mini-trial’. As Lord Hope observed in Three Rivers, the strike-out procedure is to deal with cases that are not fit for a full hearing at all.’
In cases where there are legal issues that are so clear, and which render the appellant’s case hopeless, the tribunal will strike out the appeal. Such cases ordinarily centre on whether the tribunal has jurisdiction to hear an appeal, i.e. whether there is a statutory right of appeal against the decision in question, or whether the appellant’s case raises questions of public law that the tribunal is not permitted to determine (see, by way of recent example, the decision in White and another v HMRC  UKFTT 659 (TC)).
Taxpayers can, therefore, expect strike out applications in circumstances where they are pursuing legal arguments that are hopeless. That should generally not, however, extend to cases where there is a dispute over the facts of the case, for example, whether the business was trading. Such factual issues can only be determined by the tribunal after it has heard and considered all relevant available evidence.
It is only in the most extreme of cases that HMRC should consider seeking to strike out a taxpayer’s case and especially as the resources available to the taxpayer are likely to be far less than those available to HMRC, who can fund multiple hearings before the tribunal.
Readers will be aware of the significant amount of attention that IR35 has attracted in recent months as taxpayers prepare for the upcoming changes to the rules from 6 April 2020. In our June quarterly review (Tax Journal, 3 June 2019), we commented on a number of defeats for HMRC on this issue before the tribunal. That trend has continued with Canal Street Productions Ltd v HMRC  UKFTT 647 (TC) and ALC Consulting Ltd v HMRC  UKFTT (TC). HMRC have, however, had some success in Paya Ltd & Ors v HMRC  UKFTT 583 (TC) and the Upper Tribunal has recently dismissed the taxpayer’s appeal in Christa Ackroyd Media Ltd v HMRC  UKUT 326 (TCC).
Whilst guidance from the Upper Tribunal in this area was greatly needed, it is diffcult to identify from the Ackroyd decision any clear set of principles that can be applied more broadly to other cases.
For example, the taxpayer had argued that the actual contractual provisions between the parties, which were substantial, detailed and comprehensive, reflected reality, to the extent that the ‘hypothetical contract’ would be identical to the actual contract. The Upper Tribunal disagreed and held that the FTT was correct to consider whether the hypothetical contract would have included terms other than those in the contract. That the contract was ‘detailed and negotiated’ did not preclude inclusion or exclusion of such terms. When one compares this with how the tribunal in Paya sought to analyse the contracts in that case to ascertain whether the taxpayer’s services were adequately controlled by the client, irrespective of whether any such control was actually exercised, it is hard to see where an analysis of the hypothetical contract begins and where an analysis of the actual contract ends.
Fundamentally, as was made clear in Canal Street Productions Ltd (concerning a presenter that was on the same show, Look North, as Christa Ackroyd), whether IR35 applies to a given case will be determined by the individual facts of that case.
Readers may also have noticed that in HMRC’s recently released briefing paper on IR35 it is stated that:
‘HMRC have taken the decision that they will only use information resulting from [the IR35] changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.’
This may bring comfort to some taxpayers who were concerned that a determination statement that indicated that IR35 applied to a state of affairs that also existed pre-April 2020 would expose them to investigation for historic tax years. Whether the statement given by HMRC can properly be relied upon is, however, subject to interpretation. HMRC generally do not have the power to choose not to collect tax where it otherwise would lawfully be due.
There is increasing concern amongst many practitioners and their clients over the length of time which can elapse from the conclusion of an appeal hearing and the tribunal issuing its decision. For example, in Paya Ltd & Ors v HMRC  UKFTT 583 (TC), the tribunal heard the taxpayer’s appeal in May 2018, but the tribunal did not release its decision until September 2019 (a delay of over 17 months). In the Canal Street Productions Ltd case, referred to above, the tribunal took over 12 months to render its decision.
In Bond v Dunster Properties Ltd  EWCA Civ 455, Lady Justice Arden (as she then was) said:
‘Everyone is entitled to a hearing ... within a reasonable time... Delays of this order [22 months] are lamentable and unacceptable. The matter goes further than just the effect on the parties. An unreasonable delay of this kind reflects adversely on the reputation and credibility of the civil justice system as a whole, and reinforces the negative images which the public can have of the way judges and lawyers perform their roles. If there were regular delays of this order, the rule of law would be undermined...’
Both of the tribunal cases referred to above happened to concern IR35, a complex area of the law, where the tribunal is often presented with witness evidence which has to be carefully considered and evaluated by the tribunal. It is less than ideal if the tribunal judge has to refer back to their trial notes many months after such evidence has beenheard, when carrying out this exercise. There are no doubt numerous reasons for delay, including underfunding and the increasing number of appeals being brought before the tribunal (the number of appeals to the First-tier Tribunal has jumped by 43% over the past two years with 7,377 cases in 2017/18, up from 6,559 in 2016/17 and 5,161 in 2015/16). If the tribunal was better resourced and had more judges, it would surely follow that there would be less delay in publishing tribunal decisions. In addition, the fact that some tribunal judges are part-time judges no doubt compounds the problem, as they have their ‘day job’ to attend to, as well as carry out their judicial functions.
Taxpayers who have had their appeals heard but have not received a decision within a few months of the appeal hearing can always ask the tribunal for the reason for the delay and when a decision can be expected. It is understood that the issue of inordinate delay is of interest to the president of the tribunal and taxpayers can write to him if they consider they are experiencing such delay, especially if the delay is having a detrimental effect on the taxpayer’s well-being or business. There is no hard and fast rule for how long a judgment should take to write, but it is not unreasonable for a taxpayer to expect a decision from the tribunal within two to three months of conclusion of the appeal hearing. When a lengthy delay is experienced, taxpayers should consider writing to the tribunal as such correspondence may speed up the process.
The decision in Inverclyde v HMRC  UKFTT 408 (TC), has caused a stir within the professional tax community. Inverclyde Property Renovation LLP and Clackmannanshire Regeneration LLP (the LLPs) submitted partnership returns to HMRC which included claims for business property renovation allowance (BPRA). HMRC opened enquiries into the LLPs under TMA 1970 s 12AC, and on 24 February 2017 issued closure notices to the LLPs, pursuant to TMA 1970 s 28B. The closure notices denied the LLPs’ claims for BPRA on the basis that the LLPs did not carry on a business with a view to profit and therefore the activities were to be treated as carried on by the LLPs themselves, rather than by their members (ITTOIA 2005 s 863(1)).
The LLPs argued, as a preliminary issue, that, in accordance with the decision of the Court of Session in R (oao Spring Salmon and Seafood Ltd) v CIR  Scot CS 39, HMRC had no power to open an enquiry into their returns under TMA 1970 s 12AC, and therefore the closure notices issued under TMA 19070 s 28B, were invalid.
The LLPs argued that the enquiries into their returnsshould have been made under FA 1998 Sch 18 para 24 (the corporation tax self-assessment provisions) and if HMRC wanted to challenge the relevant return of any of the LLPs’ members it should have opened an enquiry into those members’ own returns under TMA 1970 s 9A. HMRC said, because the LLPs filed a partnership return, it was entitled to open an enquiry under s 12A. The FTT found UK tax law treated LLPs as companies for the purposes of tax administration. This applied irrespective of whether an LLP was deemed to be a partnership and paid income and corporation tax as a partnership, or whether statutory deeming did not apply and it paid income and corporation tax as if it were a company.
The FTT considered Lady Smith’s judgment in Spring Salmon to be good law and that TMA 1970 was not part of the income tax acts, and an LLP was not a partnership. The FTT confirmed HMRC should have opened the enquiries under FA 1998 Sch 18 para 24. The closure notices were therefore invalid, and the taxpayers’ appeals were allowed.
The LLPs’ case did not rely on any lacuna in the legislation. This was simply a case of HMRC failing to follow the correct procedural course of action. It is clear from this decision that taxpayers will not be prevented from challenging the procedural course adopted by HMRC, simply because they have accepted incorrectly issued notices of enquiry.
If this decision is correct, it could potentially have significant ramifications for many other taxpayers, including those who participated in so-called ‘film finance’ arrangements. The decision is being appealed to the Upper Tribunal.