Howarth v HMRC [2019] EWCA Civ 747

WTLR Issue: Autumn 2019 #176





The Appellant was the settlor of a family trust based in Jersey which, following the merger of two companies, held shares in TeleWork Group plc. Ordinarily a capital gains tax charge would arise on the disposal of the shares but, on the basis of legal advice, it was suggested that this could be avoided if new trustees were appointed before the disposal in a jurisdiction which had no capital gains tax and a double taxation treaty with the UK. In June 2000 the Jersey trustees retired in favour of new trustees resident in Mauritius, in August 2000 the shares were sold in the course of a floatation on the London Stock Exchange and in October 2000 the Mauritian trustees retired in favour of new trustees resident in the UK. Ten years later the Court of Appeal, by a majority, ruled in favour of HMRC in Smallwood v Revenue & Customs Commissioners – in that case, as in the present, relief had been claimed under the double taxation treaty between Mauritius and the UK. Article 13(4) provided for capital gains tax to be taxable ”only in the Contracting State of which the alienor is a resident” and the tax payers’ argument that this had to be read as fixing the date of disposal as the reference point for the determination of residence was rejected. Article 4(3) provided that the residence of a corporate entity which was resident in both states was deemed to be ”the Contracting State in which its place of effective management is situated” and this had to be applied in relation to the period up to and including the sale of the shares during which the Mauritian company remained the trustee. For this purpose the ”place of effective management” was the place where the key management and commercial decisions necessary for the conduct of the entity’s business were in substance made (i.e. where the real top-level management of the trustee occurred rather than the day to day administration of the trust). On the facts of the case, there was a scheme of management of the trust which went above and beyond the day to day management exercised by the trustees for the time being and the control of it was located in the UK. The Finance Act 2014 (”FA 2014”) and introduced ”follower” and ”accelerated payment” notices with a view to addressing tax avoidance: A follower notice imposed a penalty if the taxpayer did not take steps to counteract or surrender a tax advantage and an accelerated payment notice required upfront payment of the disputed tax. On 13 May 2016 approval was given to the issue of a follower notice based on a submission which stated that in Smallwood the Court of Appeal had found that the need to ensure that the sale of shares took place during the Mauritian trusteeship and then that the UK trustees took their place meant that the place of effective management of the trust was not Mauritius but necessarily in the UK and that Hughes, LJ had found that the place of effective management was necessarily in the UK as the inevitable consequence of the tax scheme. On 24 June 2016 the Respondent sent a follower notice to the Appellant in terms which merely concluded that corresponding reasoning applied to the circumstances and implementation of the tax arrangements in his case. At the same time an accelerated payment notice required payment of £8,786,288.40 by 27 September 2016. The Appellant issued a claim for judicial review challenging the giving of the follower and accelerated payment notices. Sir Ross Cranston dismissed the claim in a judgment dated 23 May 2018. The Appellant appealed.

Held (allowing the appeal):

Section 206 of FA 2014 provided that a follower notice must (inter alia) explain why HMRC considers the judicial ruling in question meets the requirements of Section 205(3); namely that such a ruling is relevant to the chosen arrangements if (a) it relates to tax arrangements, (b) the principles laid down, or reasoning given, in the ruling would, if applied to the chosen arrangements, deny the asserted advantage… and (c) it is a final ruling. There were two issues as to the interpretation of this legislation. In the first, it was argued that the introduction of the word ”reasoning” in paragraph (b) had the effect of narrowing the scope of the legislation. This was rejected. ”Principles laid down” and ”reasoning given” were separate and alternative concepts, and both were relevant. HMRC was not constrained to have regard only to the ratio decidendi of the case but could take into account other reasoning found in the ruling. As to the second issue, the word ”would” in paragraph (b) did not require no more than that HMRC consider that the principles of reasoning are more likely that not to result in the advantage being denied. The use of the conditional tense, as a matter of language, required HMRC to be of the opinion that the principles or reasoning in the ruling will deny the advantage. That implied a substantial degree of confidence in the outcome.

The Appellant’s case was based, firstly, on the contention that HMRC had misdirected themselves in certain respects when deciding to give him the follower notice and, secondly, that the notice in any event failed to satisfy the requirements of Section 206 of FA 2014.

As to the first ground, it was argued that HMRC misunderstood and overstated the significance of Hughes LJ’s judgement in Smallwood. The submissions which were made before the decision to approve the follower notice had indeed stated that Hughes, LJ found that the place of effective management was necessarily in the UK as the inevitable consequence of the tax scheme whereas he had actually been saying no more than that the Special Commissioners had been entitled to arrive at that conclusion. Hughes, LJ explained that the taxpayer could succeed only if the Special Commissioners reached a conclusion of fact which was simply not available to them and thus made an error of law. In the circumstances, HMRC had overstated Hughes LJ’s judgement in Smallwood and so misdirected themselves. Furthermore, it had already been found that HMRC must be of the opinion that the principles or reasoning in the ruling in question would deny the relevant advantage; not merely that they were more likely than not to do so and, in the circumstances, it could be inferred that HMRC had further misdirected themselves when deciding to approve the follower notice. It followed, therefore, that the Appellant’s appeal should be allowed and both the follower notice and accelerated payment notice should be quashed.

As to the second ground, it was accepted that the follower notice failed to satisfy the requirements of Section 206 of FA 2014 and therefore was deficient because the conclusion referred to did not explain why HMRC considered that the ruling in Smallwood met the requirements of Section 205(3); it was in generic terms and said nothing specific about why the real top-level management of the Mauritian trustees was believed to be in the UK. The notice needed to give more information about why, in the particular circumstances of this case, the real top-level management was thought to be in the UK. However, the deficiency of the notice was not fatal to its validity as Parliament could not fairly be taken to have intended that total invalidity should result from any irregularity, regardless of the extent of the default and the seriousness of the consequences. This was by no means the case of wholesale or egregious non-compliance, the taxpayer was well aware of the background to HMRC’s thinking about the arrangements he had effected and there was no reason to suppose that he had been caused any prejudice. In those circumstances, the follower and accelerated payment notices would not have been quashed for failure to comply with Section 206 of FA 2014.

LORD JUSTICE NEWEY [1] ”Follower” and ”accelerated payment” notices were introduced by the Finance Act 2014 (”FA 2014”) with a view to addressing tax avoidance. A follower notice renders the recipient liable to a penalty if he does not take steps to counteract or surrender a tax advantage. An accelerated payment notice requires up-front payment …
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Counsel Details

Giles Goodfellow QC and Ben Elliott (Pump Court Tax Chambers, 16 Bedford Row, London, WC1R 4EF, tel 020 7414 8080, e-mail instructed by Levy & Levy (Suite 121, Stanmore House, 28A Church Road, Stanmore, HA7 4AW, tel 0208 958 9700, e-mail for the Appellant.

Timothy Brennan QC and Christopher Stone (Devereux Chambers, Devereux Court, London, WC2R 3JH, tel 020 7353 7534, e-mail instructed by General Counsel and Solicitor to HM Revenue and Customs (Custom House Annexe, 20 Lower Thames St, London, EC3R 6EE, tel 0300 200 3300) for the Respondents

Cases Referenced

  • Blue Sphere Global Ltd v Revenue & Customs Commissioners [2009] EWHC 1150 (Ch)
  • Edwards (Inspector of Taxes) v Bairstow [1956] AC 14
  • Kittel v Belgium; Belgium v Recolta Recycling SPRL [2008] STC 1537
  • Lee and Bunter v Revenue & Customs Commissioners [2017] UKFTT 279 (TC)
  • Mobilx Ltd v Revenue & Customs Commissioners [2010] EWCA Civ 517
  • North Somerset DC v Honda Motor Europe Ltd [2010] EWHC 1505 (QB)
  • R (Broomfield) v HMRC [2018] EWHC 1966 (Admin)
  • R (UNISON) v Lord Chancellor [2017] UKSC 51
  • R v McLaughlin [2018] NICA 5
  • R v Soneji [2006] 1 AC 340
  • Secretary of State for the Home Department v SM (Rwanda) [2018] EWCA Civ 2770
  • Smallwood v Revenue & Customs Commissioners [2010] WTLR 1771, [2010] EWCA Civ 778
  • UBS AG v Revenue & Customs Commissioners [2016] UKSC 13

Legislation Referenced

  • Finance Act 2014, ss 204-208, 214, 219 & 226