High Court dismisses investors' judicial review challenge to the legality of APNs in Rowe and Others v HMRC

07 August 2015

The eagerly awaited judgment of the Administrative Court (Mrs Justice Simler) in Nigel Rowe and Others v HMRC[1], was handed down last Friday.

The case concerned a judicial review challenge by a number of investors to the legality of Partner Payment Notices ("PPN's") (a variant of accelerated payment notices ("APNs")) issued by HMRC under new powers contained in Finance Act 2014 ("FA 2014"), which require the payment of sums representing disputed tax in advance of resolution of the underlying dispute.

The Court dismissed the claimants' challenge. 


Nigel Rowe and Alec Worrall were nominated as lead cases from a group of investors all of whom participated in film production arrangements established by Ingenious Media Plc.

The claimants were members of partnerships which were set up to carry on trades of producing films.

Losses were incurred by the partnerships and those losses were allocated to the individual partners who sought sideways loss relief by offsetting their losses against other income and gains in the year of the loss, or by carry back of the loss to the earlier year, or both.

The underlying substantive tax dispute is currently being litigated before the First-tier Tribunal ("FTT") and the judicial review proceedings did not concern the merits of those appeals.

The Legislation

The FA 2014, gave HMRC the power to require taxpayers, in certain circumstances, to pay a sum representing the tax in dispute in advance of the dispute being determined by an independent tribunal or court. Such accelerated payments are demanded by HMRC in Accelerated Payment Notices ("APNs"), or in the case of partnerships, in PPNs.

As there is no right of appeal against PPNs or APNs, they can only be challenged by way of judicial review proceedings.

The Arguments

HMRC's case, in summary, was that the exercise of their discretion in issuing PPN's to the claimants was in accordance with the express language and purpose of the relevant legislative provisions contained in FA 2014.

The claimants, in contending that the PPN's were unlawful and of no effect, relied on the following five main grounds:

1.  Breach of the principles of natural justice;

2.  Ultra vires;

3.  Breach of legitimate expectation;

4.  Unreasonable/irrational;

5.  Breach of Article 1 of the First Protocol ("A1P1") and Article 6 of the European Convention on Human Rights ("the Convention").

The Court's Decision

Ground 1 – Natural Justice  

The claimants' contended that in exercising their statutory discretion, HMRC must take into account all relevant considerations, ignore all irrelevant considerations and comply with the principles of fairness and natural justice. This was not done in the present case. The "post-decision" reconsideration rights provided by the legislation are limited; the grounds on which representations can be made are too restrictive, involving no opportunity for any examination of the merits; and the internal review is accordingly insufficient. It was argued that, in effect, discretion was operated as a rule by HMRC.   

The question for decision was whether the common law required the imposition of any additional non-statutory obligations on HMRC to explain the basis for the asserted liability and provide the taxpayer with a proper opportunity to rebut such claims before the PPN is issued. 

In the view of the judge, Parliament had specifically addressed procedural fairness and prescribed a procedure whereby there is a right to make representations before any payment obligation arises. Moreover, the PPN's did not deprive the claimants of their statutory right to challenge the underlying tax liability by way of appeal to the FTT.

The mechanism by which representations can be made to HMRC (extending to the statutory basis for the PPN and the amound) is, in the view of the judge, adequate to ensure that fairness is preserved. This allows representations to be made challenging the rationality of the designated officer's determination. 

Ground 2 – Ultra Vires

HMRC can issue a PPN if Conditions A to C are met. Condition B is that the return or claim, or as the case may be, appeal is made on the basis that a particular tax advantage results from particular arrangements. The claimants submitted that Condition B, contained in Schedule 32, paragraph 3(3), FA 2014, was not satisfied.

The judge rejected the claimants' argument that Condition B can only be satisfied for current year and not carry-back or stand-alone claims because those latter claims result from the separate claim made by the individual partner and not from the increase or reduction in the income or loss in the partnership return. In her view, claimants who received a repayment and those who received a set-off were in the same economic position. Both received a tax advantage whether the share of losses was used in a carry back claim or in a current year claim. Parliament defined "tax advantage", in section 201 FA 2014, to encompass both relief from tax as well as repayment of tax. Accordingly, Parliament intended the PPN to operate regardless of the mechanics in which a taxpayer obtains the tax advantage.

The judge also rejected the claimants' arguments that the PPNs specified an amount that was not "understated partner tax" because no tax could ever bcome "due and payable" on the carry back claims because HMRC had not opened enquiries into those claims and that was the only means by which HMRC could seek recovery of repaid tax.

The claimants relied upon the Supreme Court decision in Cotter v HMRC[2] in support of their contentions. However, the judge decided that, as a matter of judicial comity, she should follow the Upper Tribunal ("UT") decision in The Queen (Jorge Manuel De Silva) and Another) v HMRC[3]. In De Silva, the judge concluded that an enquiry into the partnership return for the year of loss, because it gave rise to a deemed enquiry into each partners' returns under section 12AC(6) TMA 1970, was sufficient to challenge any claims for loss relief flowing from such a loss (whether sideways or carry back). The deemed enquiry into each relevant partner's self-assessment return identifying his share of the loss claimed was an appropriate and sufficient means of challenging the loss relief utilised by the partner, both by way of sideways relief or as a carry back claim to the earlier year.

Ground 3 Legitimate Expectation 

The claimants contended that because HMRC did not open enquiries into their carry back claims under paragraph 5, Schedule 1A, TMA 1970 and instead met the carry back repayment claims at the time, they reasonably assumed that they could postpone payment of any disputed tax until their appeal had been determined at first instance. In other words, they had accrued section 55 TMA 1970 postponement rights based on HMRC's conduct, and the PPN's breached their legitimate expectation that those accrued rights would continue until the underlying appeals had been determined.

This ground was rejected by the judge who said that it was only in an exceptional case that a claim that a legitimate expectation had been defeated would succeed in the absence of a clear and unequivocal representation. In rejecting the claimants' arguments, the judge said at paragraphs 94-95:

 "First there is simply no evidence of a practice that was so unambiguous, so widespread, so well-established and so well-recognised as to carry within it a commitment to the claimants of continued treatment in accordance with it. Even if HMRC made "carry back" repayment claims in circumstances where it was open to HMRC not to do so, this did not prevent HMRC from opening (either then or subsequently) actual or deemed …  s.9A TMA enquiries into those losses contained in partner returns to challenge the efficacy of the tax planning … simply because the claimants received a set-off or a repayment of tax did not give rise to any expectation that this was conclusive. Rather as they accept they "understood that the relief claimed could be disputed if enquired into". The position in relation to the tax represented by the repayment remained open to challenge, and there is no evidence of anything said or done by HMRC to suggest otherwise. 

since the new powers are contained in primary legislation, even if the claimants could have identified an expectation, based upon previous legislation or the practice adopted by HMRC, this cannot give rise to a common law right, enforceable in the Courts, constraining Parliament's constitutional power to enact primary legislation which changes the previous position: see Wheeler v Office of the Prime Minister [2008] EWHC 1409 (Admin), per Richards LJ at [41]. Once FA 2014 came into force following the democratic processes entailed in the passing of primary legislation, no common law "legitimate expectation" could trump that legislative power."

The judge was also of the view that a statutory discretion must be exercised consistently with and not run counter to, the primary legislation. The relevant legislation, on its face, makes it clear that it was intended to apply to existing as well as post-enactment arrangements. 

Ground 4 – Irrationality

The nub of the claimants' contention under this ground was that the discretion to issue PPN's was treated by HMRC as a rule so that there was in fact no exercise of discretion by HMRC and no consideration was given to the reasonableness of giving a notice to an individual on the particular facts of his case. Instead, the issue of APNs/PPNs is being carried out by HMRC on an "industrial scale".

The claimants' submission was, in effect, that HMRC had adopted an approach whereby there was a presumption that participants in tax planning would receive a notice and it was simply a question of when they would do so rather than whether they should receive a notice.

The judge observed that the legislation did not identify the matters to be treated as relevant once the statutory pre-conditions were met, and thus Parliament has conferred a discretion on HMRC to decide what factors to take into account. The judge accepted that the claimants were correct that the approach adopted by HMRC demonstrates that in the overwhelming majority of cases where HMRC consider that the statutory conditions are satisfied, they will exercise their powers by issuing  APN's or PPN's and the question is generally one of when, not whether, they will be given.  However, in the view of the judge, this did not mean that HMRC's discretion had been fettered, or turned into a rule without exception. Given the nature and purpose of the legislation, there is nothing wrong with a general rule that when the statutory criteria are met, the discretion will be exercised by issuing the notice. Accordingly, the judge concluded that there was no irrationality and HMRC's discretion was lawfully exercised. 

Ground 5 – Breach of Convention Rights

The Claimants contended that the decisions to issue PPNs infringed their rights under Article 6 (the right to a fair trial) of the Convention and A1P1 (the right to peaceful enjoyment of property) to the Convention.

The first question to be determined was whether A1P1 was engaged. The legal test to apply is: has there been an interference with the claimants' "possessions". In the view of the judge, the question was whether the money representing the reduced tax liability (or the loss relief claim) held by the claimants pending the determination of the dispute, was an existing asset or possession for A1P1 purposes.


The judge pointed out that the claimants' claims to loss relief had not been established and depended on the application and interpretation of the relevant legislation to the arrangements entered into. Accordingly, in the view of the judge, the claimants had no legitimate interest amounting to a property right that had been interfered with by the PPN's, since it had not been established that the claimants were ever entitled to the tax deductions in the first place.

Although not necessary, the judge went on to consider the question whether there was an unlawful interference with A1P1 rights, and whether any such interference was proportional.

The judge observed that the PPNs were prescribed by law and as the legislation was precise in its terms, sufficiently foreseeable and could not operate in an arbitrary manner, the PPNs were not an unlawful interference with A1P1 rights. With regard to the issue of proportionality, in the judge's view, there was a reasonable relationship of proportionality between the means employed and the aim sought to be realised. There was nothing in the legislation, or its application, that was arbitrary.  The judge concluded, at paragraph 143, that the legislation "clearly falls within the wide margin of appreciation afforded to the democratically elected legislature".

With regard to the retrospectivity of the legislation, the judge accepted that the legislation was retrospective in the sense that it applies to schemes invested in in the past and to appeals already made. However, those elements were apparent on the face of the legislation and understood and recognised by Parliament and it was competent for Parliament "acting within the margin of appreciation", to enact the legislation.

In relation to Article 6 of the Convention, the claimants contended that PPN's were not tax but peremptory demands by HMRC for payment of monies that may or may not in the future give rise to liabilities, that are subject to a penalty regime for non-payment, and therefore they determine civil rights under Article 6 and do not concern liability to tax. The submission was that the claimants had therefore been deprived of a fair and public hearing before the FTT. Alternatively, the PPN's involved a criminal charge because they were a surcharge with a deterrent and punitive purpose, applicable to a definable group, and involving punitive consequences, within the meaning of Jussila v Finland[4].

The judge rejected both arguments. The amounts due under the PPNs were, in substance, payments on account of tax and accordingly the PPNs did not involve a criminal charge. So far as the penalties were concerned, there was a statutory right of appeal to the FTT against any penalty. In any event, the claimants had had access to an independent and impartial tribunal on judicial review. It followed that Article 6 obligations were satisfied.


This is clearly a very disappointing decision for the claimants concerned and the many other taxpayers who have (and will) receive APNs. HMRC were quick to publicise the decision and a press release was issued before the ink was dry on the judgment.

Given that a system of tax incentives was deliberately introduced by Parliament to encourage film investment, it is understandable that the claimants feel aggrieved that HMRC are not only  challenging the underlying arrangements but are also forcing the claimants to pay the disputed tax liabilities up front before the dispute has been determined by the FTT.  

The legislation is controversial as APNs/PPNs can be issued against taxpayers who participated in arrangements before the legislation came into force and there is no right of appeal against the notices.

Given the serious financial affect APNs/PPNs  can have on recipients, it is not surprising that the claimants intend to appeal to the Court of Appeal. Many taxpayers and their advisers will watch developments with interest.

Click here to veiw the full judgment.

[1] [2015] EWHC 2293 (Admin).

[2] [2013] UKSC 69.

[3] [2014] UKUT 0170 (TCC).

[4] [2009] STC 29.

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