Analysis
Facts
DS and IS were at all material times resident in the UK for tax purposes and were beneficially entitled to the income from MOH, an English property development company of which they were the shareholders and directors. On advice, they used a tax avoidance scheme that took advantage of the provisions of the 1955 UK-Isle of Man double tax treaty (DTT). These provisions exempted the industrial or commercial profits of an Isle of Man (IOM) enterprise, which could include a partnership, from UK tax unless it was engaged in trade or business in the UK through a permanent establishment.
The following events occurred:
- 1) IS established the IS Settlement, an IOM settlement, under which he was entitled to an interest in possession, with A Ltd, an IOM resident company, as trustee. IS transferred £10 to A Ltd, to hold on the trusts of the IS Settlement.
- 2) DS established the DS Settlement, with P Ltd, an IOM company, as trustee and under which DS was entitled to an interest in possession. DS transferred £10 to P Ltd to hold on the trusts of the DS Settlement.
- 3) The trustees, A Ltd and P Ltd, formed a partnership that borrowed funds to acquire a UK investment property from MPD Ltd, a UK company of which DS and IS were directors. The site was developed using MOH and the profits were distributed by the partnership to the trustees and then paid to IS and DS as trust income.
- 4) IS and DS submitted tax returns for each of the relevant years of assessment, claiming an exemption from income tax, based on the DTT.
- 5) In August 2008 HMRC denied that IS and DS were entitled to the benefit of the DTT by reason of the retrospective effect of s858(4) Income Tax (Trading and Other Income) Act 2005, as amended.
- 6) In November 2008, IS and DS launched a ‘pre-emptive strike’ by applying for permission to apply for judicial review of HMRC’s decision to apply the retrospective effect of the legislation for the relevant years of assessment, seeking a declaration that it was incompatible with Art 56 of the EC Treaty (now Art 63 of the Treaty on the Functioning of the European Union). In July 2011, the Court of Appeal dismissed the claim for judicial review ([2011] EWCA Civ 892) and in February 2012 the Supreme Court refused permission to appeal.
- 7) In June 2012 HMRC issued closure notices under s28 TMA 1970, amending the self-assessment tax returns for the relevant years of assessment. IS and DS lodged appeals to the closure notices.
- 8) HMRC applied to the First-tier Tribunal for an order striking out the appeals, so far as they relied on a breach of Art 56, contending that the point was res judicata, as between IS and DS and HMRC, or alternatively that it was an abuse of process because IS and DS were seeking to re-litigate a point that had already been decided against them. Furthermore, they argued that the appeals on this issue had no reasonable prospect of success because the First-tier Tribunal was bound by the principle of stare decisis to follow the Court of Appeal’s decision on the claim for judicial review. The First-tier Tribunal:
- a. decided that the matter was not res judicata on the basis of issue estoppel, as the Crown had not been a party to the claim for judicial review; and
- b. struck out the Art 56 case, both as an abuse of process and because it was bound to follow the Court of Appeal’s decision.
- 9) On appeal, the Upper Tribunal:
- a. rejected stare decisis as a proper basis for the strike out order (there was no cross-appeal by HMRC against this part of the decision);
- b. upheld the decision of the First-tier Tribunal that for IS and DS to rely once again on the Art 56 arguments would amount to an abuse of process; and
- c. decided that the First-tier Tribunal did have power to strike out an appeal on this ground.
Held:
On appeal to the Court of Appeal with the permission of the Upper Tribunal:
- 1) The First-tier Tribunal had power under its rules to make an order striking out some of the grounds of appeal as an abuse of process:
- a. the First-tier Tribunal was a statutory tribunal with no inherent jurisdiction, existing to perform the functions conferred on it by the Tribunals, Courts and Enforcement Act 2007 (the 2007 Act) and other statutes and its powers were to be found in the 2007 Act and the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the 2009 Rules), made under the power conferred by s22 of the 2007 Act.
- b. the power contained in r8(3)(c) of the 2009 Rules was wide enough in its terms to include a strike out application, which, if successful, would result in the First-tier Tribunal concluding that the relevant part of the appellant’s case could not succeed; and
- c. the power of regulation by the First-tier Tribunal of its procedure under r5(1) of the 2009 Rules could also be said to include a power to strike out.
- 2) The principles of res judicata and abuse of process applied to the appeal of IS and DS (Caffoor v Commissioner of Income Tax, Colombo [1961] 2 All ER 436 distinguished).
- 3) The payment of £10 to each trustee was unconnected with the funding of the IOM partnership structure; it was a transfer to trustees to be held on the trusts of a settlement and not a ‘movement of capital’ within the meaning of Art 56.
- 4) There was no discriminatory treatment in the present circumstances as between a taxpayer that has taken judicial review proceedings and one that has not, nor between an investment of capital in UK partnership and an investment in a foreign partnership.
The appeal was struck out, with the result that the amended assessment governed the tax payable.
<![CDATA[ JUDGMENT PATTEN LJ: [1] The appellants are the shareholders and directors of Mark Oliver Homes Yorkshire Ltd (MOH) which is a residential property developer specialising in the construction of affordable homes. The appellants have at all material times been resident in the UK for tax purposes and have been beneficially entitled to the income …Continue reading "Shiner v The Commissioners for HM Revenue & Customs [2018] WTLR 649"
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