Jurisdiction and the Rule of Law
In R (oao Boulting & Anor) v HMRC [2020] EWHC 2207 (Admin), the High Court refused permission to bring a judicial review claim against HMRC, on the basis that the taxpayer had an 'alternative remedy'.
This blog is based on an article first published in Tax Journal on 2 October 2020.
The importance of judicial review
Judicial review has a special quality which sets it apart from other forms of litigation. It is the main way the courts supervise bodies exercising public functions, such as HMRC, to ensure that they have acted lawfully in the discharge of their duties. The role of the court in judicial review proceedings is to conduct a review of the process by which the decision was reached in order to determine whether that decision was lawfully arrived at.
Judicial review, though much maligned by some politicians, is a critical component in providing access to justice and maintaining the rule of law. It is often described as the "remedy of last resort" and, importantly, permission to bring a judicial review claim must be sought from the court. The court may refuse permission to commence judicial review proceedings if there exists a route to an adequate alternative remedy – such as a statutory appeal to the First-tier Tribunal (FTT). The FTT, by contrast, cannot determine matters of public law.
Background
In 1993, Mr Boulting co-founded a company to deliver apprenticeships and career development programmes in the South West of England. The business was successful and the company became a wholly owned subsidiary of PSC Training and Development Group Limited (the Company), of which Mr Boulting was the majority shareholder. In 2013, the board of the Company discussed a new management strategy. It was decided that Mr Boulting would retire as a director to allow his son to take this strategy forward. In order to facilitate this, it was agreed that Mr Boulting would gift 38% of his shareholding to his son and sell 8% to the Company.
Prior to 1980, it was not permissible in the UK for a company to buy its own shares. This hindered shareholders who wished to sell shares in a family run company in such a way as to ensure that ownership of the company was kept in the family. Accordingly, the Companies Act 1980 permitted such a sale in certain circumstances. The Finance Act 1982, introduced fiscal advantages to shareholders selling shares to their company for the benefit of the company’s business, for example, by allowing the smooth transition of the management of the company upon the retirement of a substantial shareholder. The fiscal advantage was that the tax paid on the price of the shares would, if certain conditions were met, be at the lower CGT rate rather than the higher income tax rate.
The current statutory regime is set out in the Corporation Tax Act 2010 (CTA). Section 1033 deals with the purchase by an unquoted trading company of its own shares. Section 1033 provides that a payment made by a company on the purchase of its own shares is not a distribution for the purpose of CGT where the company is an unquoted trading company and, amongst other things, the purchase is "made wholly or mainly for the purpose of benefitting a trade carried on by the company". Where the main purpose of the transaction is to benefit the shareholder, then the CGT treatment will not apply. In the instant case, it was considered that the conditions in section 1033 were satisfied so that the sale proceeds would be treated as capital and not as an income distribution.
Section 1044, CTA, provides that a company may seek a pre-transaction clearance from HMRC. The Company sought clearance from HMRC on 9 October 2014 and on 22 October 2014, HMRC confirmed that section 1033 CTA would apply to the proposed transaction, with the effect that the sale proceeds would be treated as capital and not as income from a distribution. In the clearance application, it was stated that the consideration to be paid to Mr Boulting was £600,000 per share.
Mr Boulting reported the sale in the capital gains section of his self-assessment tax return, paying CGT on the gain. In October 2016, HMRC launched an enquiry into Mr Boulting's tax return and assessed him to income tax on the gain. This was on the basis that the amount paid for the shares by the Company (i.e. £600,000 per share) was materially greater than market value (£66,900 per share), and therefore it could not be argued that the payment was made to benefit the Company’s trade. HMRC contended that as the clearance application did not fully and accurately disclose all the facts and circumstances material for HMRC to make a decision, the clearance previously given was void.
In arriving at this decision, HMRC relied on section 1045(6), CTA, which provides (relevantly) that: “if particulars provided [in the application or in response to any request by HMRC for further information] do not fully and accurately disclose all facts and circumstances material for [HMRC’s] decision [the subsequent clearance given] is void”.
HMRC argued that it had not appreciated how valuable the shares were and so it did not realise how much tax would be saved by treating the share buyback as capital rather than as income. HMRC said that the clearance was void on the basis that it had been made without full and accurate disclosure in that the shares in question were each worth £66,900 and not £600,000. Accordingly, as the price paid for the shares was considerably more than their market value, it could not be for the benefit of the Company's trade but rather for Mr Boulting's benefit and therefore the appropriate tax to be paid was income tax. HMRC issued a closure notice to Mr Boulting confirming its conclusion.
Two sets of proceedings were commenced. Mr Boulting and the Company issued an application for judicial review of HMRC's decision to treat the statutory clearance as void and HMRC's subsequent decision to assess Mr Boulting to income tax in respect of his sale of shares in the Company, instead of to CGT, as indicated in the clearance. Mr Boulting also commenced a statutory appeal against the conclusions contained in the closure notice.
As mentioned above, an application for judicial review involves a two-stage process: an application to the court for permission to bring the judicial review claim and, if permission is granted, the application will then proceed to a full substantive hearing. In this case, the court directed that a "rolled-up" hearing be held to determine whether permission should be granted and if permission was granted, the substantive issue.
High Court judgment
HMRC argued, inter alia, that permission should be refused as the FTT, in determining Mr Boulting's statutory appeal, would be able to consider evidence as to the proper valuation of the shares and accordingly the claimants had an alternative remedy.
The claimants argued that there was no alternative remedy available. Where HMRC acted unfairly in refusing to abide by a ruling it has issued, the correct course is to seek a judicial review of that decision. The fact that Mr Boulting was challenging the substantive merits of a decision by way of statutory appeal was not a good ground for refusing permission to bring the judicial review claim in circumstances where it was claimed HMRC had acted contrary to public law requirements. If permission was not granted, there would be no other means by which the claimants could challenge the legality of HMRC's decision to void the clearance. The lawfulness of that decision was inherently a matter of public law and the FTT did not have jurisdiction to determine issues of public law.
In the view of the court, the issue of the valuation of the shares was central to the dispute and could appropriately be dealt with by way of the statutory appeal, rather than by way of judicial review. The appeal to the FTT would give Mr Boulting the remedy he sought if he succeeded, which was to be taxed in accordance with the clearance. Accordingly, the court refused permission on the basis that there was a suitable alternative remedy available, namely, the appeal to the FTT.
Reasoning
The court considered the judgment of the Court of Appeal in R (ota of Glencore Energy UK Ltd) v Revenue and Customs Commissioners [2017] EWCA Civ 1716 in some detail. The Court of Appeal in that case said that to allow judicial review to "intrude" alongside the statutory appeal regime risked disrupting the smooth collection of tax and the efficient functioning of the appeal procedures. It said, at [56]-[57]:
"Treating judicial review in ordinary circumstances as a remedy of last resort fulfils a number of objectives. It ensures the courts give priority to statutory procedures as laid down by Parliament, respecting Parliament’s judgment about what procedures are appropriate for particular contexts ...
… The basic object of the tax regime is to ensure that tax is properly collected when it is due and the taxpayer is not otherwise obliged to pay sums to the state. The regime for appeals on the merits in tax cases is directed to securing that basic objective and is more effective than judicial review to do so: it ensures that a taxpayer is only ultimately liable to pay tax if the law says so, not because HMRC consider that it should". (Our emphasis).
Where Parliament has provided a statutory appeal procedure, the courts are reluctant to allow the judicial review process to be used to challenge a decision of HMRC. Such an approach would be understandable if the FTT was not a creature of statute and was able to consider and determine public law issues, such as whether a power exercised by HMRC has been exercised lawfully. However, the FTT has made it clear on numerous occasions that it is not able to determine public law issues. For example, in Hoey v HMRC [2019] UKFTT 0489 (TC) (a case concerning contractor benefits and income tax, in which the authors are instructed), the FTT said, at [128]:
"Having considered these submissions carefully I have come to the conclusion that not only does the FTT not have a general jurisdiction to consider matters of public law, and, in particular, the operation of the PAYE Regulations … I cannot therefore venture into the question as to whether or not HMRC exercised any discretion they might have under s684(7A) correctly, legally or reasonably."
Significantly, the High Court (Mrs Justice Andrews, as she then was) in the related judicial review proceedings in Hoey (unreported) expressed the view that it also did not have jurisdiction to consider whether the taxpayers were permitted to rely on the credit provisions within the PAYE regime to extinguish their liability (and that that was a matter for the FTT to determine).
Comment
Inour view, this recurring jurisdiction issue needs to be resolved so that taxpayers (and it is always taxpayers) are not caught in a jurisdiction trap which prevents them from pursuing the public law arguments they wish to rely on.
In recent years, the FTT has repeatedly confirmed that its powers are restricted to those conveyed on it by statute – these do not include the general supervisory jurisdiction of the High Court, and accordingly the FTT is unable to consider general matters of public law. In Boulting, the High Court concluded that as the taxpayer can "be taxed in accordance with the clearance" if he succeeds in his FTT appeal, he had an alternative remedy and therefore permission to bring a judicial review claim should be refused.
If this reasoning is correct, taken to its logical conclusion, it would mean that a taxpayer who is also pursuing a statutory appeal would never be given permission to bring judicial review proceedings on the basis that the FTT can determine their tax position and give them what they seek. With respect to the learned judge in this case, that reasoning is flawed.
The ability to apply for judicial review of a decision taken by HMRC is an important remedy available to taxpayers. As discussed above, judicial review is the main way the courts supervise bodies exercising public functions to ensure that they have acted lawfully. If the High Court declines to apply its supervisory jurisdiction and taxpayers are left without access to public law remedies, the quality of HMRC's decision making is likely to decline. It is important that taxpayers have a forum in which such decisions can be challenged and subjected to judicial scrutiny. As the Supreme Court said in R (on the application of UNISON) v Lord Chancellor [2017] 4 All ER 903 at [66], the constitutional right of access to the courts is inherent in the rule of law. Taxpayers should not be denied this fundamental right.
One solution would be to allow the High Court, in circumstances where a statutory appeal is also being pursued, to transfer an application for judicial review to the Upper Tribunal (which already has limited jurisdiction to consider judicial review proceedings), so that the Upper Tribunal could determine both the judicial review application and the statutory appeal at the same time and in the same proceedings. This would of course mean that the statutory appeal would be heard by the Upper Tribunal rather than the FTT, but this possibility is already provided for in limited circumstances under Rule 28 of the Tribunal Rules (but currently requires the consent of HMRC). An alternative solution, which could have been applied in the instant case, would be to stay the judicial review proceedings pending determination of the statutory appeal.
Both of these solutions would avoid the mischief described above and would avoid the situation where the High Court refuses permission to commence judicial review proceedings because it considers an adequate alternative remedy is available to the taxpayer in the form of a statutory appeal, and in determining the appeal, the FTT is unable to consider any public law challenge.
The judgment can be viewed here.