Contentious Tax Review

In this Quarterly Review, which is based on an article that was first published in Tax Journal, we look back on last year and review a number of important decisions that caught our eye, with a particular focus on interesting procedural and jurisdictional issues that the tax tribunals and courts considered over the past 12 months. They include decisions on anonymity in tax appeals, cross-examination in judicial review, and the consequences of failing to comply with tribunal directions.

2024 Recap 

2024 was a busy year in the tax world driven, in part, by a new government and a number of significant and some would argue controversial changes introduced in the Autumn Budget, in particular, in relation to IHT. Those changes have already generated a substantial amount of dissatisfaction and protest amongst different sections of the taxpaying community, some of which will inevitably play out in disputes that come before the tax tribunals and courts in due course. Coupled with a significant funding boost for HMRC, an intention to recruit five thousand additional compliance and debt management staff, the modernisation of HMRC's IT and data systems to improve productivity, and a renewed focus on closing the so-called 'tax gap', this suite of changes is likely to foreshadow increased pressure on limited judicial resources during the course of 2025 and beyond.

As to those pressures, and while it remains to be seen what the final figures for 2024/25 will reveal, the latest statistics¹ show that in the first quarter of 2024/25 (i.e. April to June 2024), the First-tier Tribunal (FTT) had 3,825 receipts, an increase of around 30% on the first quarter of 2023/24. In contrast, the FTT made 4,304 disposals in the first quarter of 2024/25, a decrease of roughly 17% on the first quarter of 2023/24. As at 31 March 2024, the FTT's open caseload stood at a staggering 51,189 cases!

A similar picture is found in the Upper Tribunal (UT), although, as one would expect in relation to an appellate jurisdiction, the numbers are less significant. Nonetheless, in the first quarter of 2024/25, the UT had 113 receipts, an increase of more than 230% on the first quarter of 2023/24. In contrast, the UT made 46 disposals in the first quarter of 2024/25, a decrease of around 41% on the first quarter of 2023/24. As at 31 March 2024, the UT's open caseload stood at 152.

Information for the general courts is not as readily accessible. However, publicly available data indicates that 150 judicial review claims involving HMRC were lodged during the course of last year,² which suggests that judicial review remains an important legal remedy for taxpayers in dispute with HMRC. 

Against this backdrop, we discuss below a selection of interesting decisions that caught our eye, in which various procedural issues were considered that may be of interest to taxpayers and their advisers alike.  

Decisions of the tax tribunals

Costs 

Litigation costs are a perennial concern for taxpayers, and a number of important decisions in recent years have clarified different aspects of the costs regime for tax appeals. In March 2024, the UT added to that body of case law with its decision in The Executors of the Estate of Peter John Linington and The Trustees of the Kent Trust v HMRC [2024] UKUT 00070 (TCC), which considered the circumstances in which the UT should grant a protective costs order (PCO). The appellants in that case were given permission to appeal a decision of the FTT concerning arrangements entered into by Mr Linington which were intended to reduce the amount of IHT that would be payable on his death.

Before the UT, the appellants applied for a PCO so that they would not be liable for HMRC’s costs if the appeals were dismissed. In refusing the application, the UT considered the criteria set out in R (Corner House Research) v Secretary of State for Trade & Industry [2005] EWCA Civ 192, finding that the appeal did not raise issues that were of general public importance or that the public interest required to be resolved, and that, in reality, it was of no concern to the appellants that the issues being determined might assist in providing clarity to other taxpayers who entered into similar arrangements. The appellants therefore had no real interest in the outcome of the appeal apart from a substantial private interest as the beneficiaries of the estate. In such circumstances, the UT agreed with HMRC that the general body of taxpayers should not be exposed to irrecoverable costs in HMRC defending the appeal if the appeal was unsuccessful, noting the general tax paying public would baulk at such a suggestion. 

Although PCOs are rare in tax appeals, in the right circumstances, they can provide a useful mechanism whereby a person of limited means is able to pursue a public interest tax appeal without running the risk of having to pay HMRC's unaffordable costs should they be unsuccessful. The decision in Linington provides some helpful guidance on what the right case might look like.  A PCO might also be appropriate in judicial review proceedings against HMRC where a point of general public interest is to be determined. 

Compliance with case management directions

In June 2024, the FTT issued its decision in HMRC v Elite Management Consultancy Ltd and Another [2024] UKFTT 00567 (TC), in which HMRC's application was struck out because of its failure to comply with case management directions. 

HMRC had applied for an order that certain arrangements known as the “enhanced umbrella scheme” were “notifiable arrangements”, within the meaning of section 306(1), Finance Act 2004. HMRC contended that the arrangements were notifiable as a tax avoidance scheme under the disclosure of tax avoidance schemes regime.

The case management directions required HMRC to provide an authorities bundle to both the respondent taxpayers and the FTT not later than seven days before the hearing. The direction was made on an 'unless' basis, noting that a failure to comply would, amongst other things, result in the proceedings being struck out. HMRC filed and served the authorities bundle just after 7pm on the due date, and the respondents subsequently made an application to the FTT that HMRC's application should be automatically struck out due to HMRC's failure to comply with the deadline stipulated in the directions. In opposing the application, HMRC contended, amongst other things, that the proceedings had not been automatically struck out as HMRC had not been in substantive breach of the directions, there had been no prejudice to the respondents, and the overriding objective applied such that a strike out for missing a deadline by two hours would be disproportionate. 

In rejecting HMRC's arguments, the FTT noted that Rule 12 of the FTT Rules required the authorities bundle to have been served by 5pm, such that the automatic strike out provisions in Rule 8(1) were engaged. In the view of the FTT, the mandatory strike out left no room for the application of the overriding objective which, while of crucial importance when exercising any form of judicial discretion, did not impinge upon Rule 8(1) because there was a clear distinction between the situation of an automatic strike out (where the FTT loses jurisdiction pending a successful application for reinstatement) and the situation where the FTT has jurisdiction and is considering relief from sanctions. Accordingly, the FTT concluded that HMRC's application was automatically struck out at 5.01pm on the compliance date stipulated in the relevant direction. 

While the outcome in this case might appear harsh, given the relatively minor nature of HMRC's breach, it serves as an important reminder that cases can be won or lost on procedural points as well as substantive arguments and reinforces the importance of strict compliance with case management directions, especially those that have been issued on an 'unless' basis.

Witness evidence

Perhaps not unexpectantly, HMRC applied for reinstatement in Elite Management, and a decision issued by the FTT in the context of those proceedings has itself provided some useful guidance on an interesting procedural point. HMRC had requested that its application for reinstatement be determined on the papers without an oral hearing. However, the application was accompanied by a witness statement from a solicitor in HMRC’s Solicitor's Office, and the respondents argued, not unreasonably, that it was therefore appropriate that the application be determined at an oral hearing so that HMRC's witness evidence could be tested in cross-examination.

In its decision in HMRC v Elite Management Consultancy Ltd and Another [2024] UKFTT 00905 (TC), the FTT noted that, in the absence of the tendering of the witness statement, it would have had no hesitation in ordering that the reinstatement application should be dealt with on the papers having regard to considerations such as cost, speed, proportionality, and the fact that the legal principles were well known and did not require oral submissions. However, the FTT noted that it was clear that HMRC considered the witness statement to be relevant to the reinstatement application and that, having offered the statement, it was only right that HMRC's witness was available to be cross-examined on their evidence. In that regard, the FTT was of the view that it would not be in the interests of justice or fair to the witness, for it to infer anything from the statement in the absence of any such cross-examination. Accordingly, the FTT concluded that if HMRC wished to rely upon the witness statement, the witness would have to provide oral evidence and be prepared to be cross-examined on their evidence, which could not be undertaken by a paper hearing. The FTT therefore directed that an oral hearing should be held. 

The FTT's decision reinforces the important principle that a party is entitled to test the evidence of their opponent, including by way of cross-examination of their witnesses. The maintenance of that fundamental principle is no less important in the context of procedural hearings as it is in relation to substantive hearings. 

Anonymity

In November of last year, the UT released its decision in HMRC v The Taxpayer [2024] UKUT 00364 (TCC), which concerned an application by the taxpayer for anonymity. The UT had previously allowed an appeal by HMRC against a case management direction issued by the FTT that preliminary proceedings in the taxpayer's substantive appeal should be heard in private. The direction sought by the taxpayer was that the proceedings and the UT's earlier decision remain anonymised, noting the taxpayer had decided to withdraw his substantive appeal to the FTT and ought to be permitted to retain the existing anonymity. HMRC opposed the anonymity application, as did a number of news outlets as third parties to the litigation. 

The taxpayer contended that, where an individual wished to avoid a loss of privacy in relation to litigation and made an application to ascertain whether they would be entitled to privacy in those proceedings, the very process or procedure of applying for privacy should not cause the privacy to be lost. The taxpayer argued that was the correct approach on the basis it was necessary for the maintenance of the administration of justice and also to ensure the effectiveness of the right to privacy under Article 8 of the Human Rights Act 1998. 

In dismissing the application, the UT referred to the principles set out recently by the High Court in Farley v Paymaster Ltd (1836) t/a Equiniti [2024] EWHC 3883, noting the taxpayer's acceptance that the application for permanent anonymity must be justified as being a “necessary” derogation from the principle of open justice. The FTT observed that the taxpayer had not produced any evidence of potential harm to justify anonymity and confirmed that an application for anonymity was to be determined by a granular assessment of the specific facts of the case under consideration. The FTT also dismissed the taxpayer's argument that rejecting the application would have an undue deterrent effect on all privacy and anonymity applications. 

Given the nature of disputes with HMRC, the cases that come before the courts often involve highly sensitive information concerning a taxpayer's personal and financial affairs that most individuals would not wish to be aired in public. However, it is clear from this decision that the tax tribunals will require clear and cogent evidence justifying exclusion of the principles of open justice and transparency in judicial proceedings. In order to persuade the tax tribunals to grant anonymity, a taxpayer must be able to demonstrate sufficient harm or detriment to themselves, or a third party.      

High Court decisions

Correct forum

There were a number of decisions released in 2024 in which taxpayers found themselves in difficulty for having pursued their challenges in the wrong forum. In August, the High Court released its judgment in Austick v HMRC [2024] EWHC 2175 (Ch), which concerned a Part 8 claim brought by the taxpayer seeking declarations that he had no tax liabilities beyond those shown in his self- assessment tax returns for the relevant tax years. The purpose of the claim was to prevent HMRC from recovering a significant proportion of a tax repayment previously made to him that related to losses he claimed to have incurred as a partner in a film scheme partnership. HMRC had enquired into the partnership’s tax return and determined that the losses were significantly less than the amount originally claimed. The taxpayer argued the procedure adopted by HMRC did not give rise to any enforceable liability. HMRC subsequently applied to strike out the taxpayer's claim on the ground that it was an abuse of process because it should have been brought by way of judicial review proceedings. The High Court agreed with HMRC. It was of the view that the taxpayer's challenge to the procedural route followed by HMRC raised an issue of public law that ought to have been pursued by way of judicial review and accordingly struck out the claim. 

Similarly, in HMRC v Labeikis [2024] EWHC 2009 (KB), the High Court considered an appeal by HMRC against a Master's decision refusing its application to strike out a number of Part 8 claims as an abuse of process. The claims challenged the lawfulness of the Loan Charge regime under EU law, and sought declaratory relief to that effect. The Master rejected HMRC's primary argument, finding that, notwithstanding the Autologic principle (that the FTT has exclusive jurisdiction to determine certain types of disputes arising in the administration of the tax system), the subject matter of the claims did not fall within the exclusive jurisdiction of the FTT. The Master accepted HMRC's secondary argument that the claims should have been brought by way of judicial review proceedings, but stayed the claims rather than strike them out. In doing so, the Master was concerned that, as the claimants were outside the 3-month limit for bringing an application for judicial review, the Administrative Court might refuse to extend the time limit for the claims and, in such circumstances, the claimants would be faced with the prospect of bringing fresh Part 7 or Part 8 claims after the date of the UK’s withdrawal from the EU and so be disadvantaged in their ability to seek Francovich damages. HMRC appealed.

The High Court agreed with HMRC. The Master's reasoning and conclusions led inexorably to the overall conclusion that, applying the exclusivity principle in O’Reilly and Mackman [1983] 2 AC 237, the claims should have been struck out as an abuse of process. The Court noted that both the existence of the 3-month time limit in CPR Part 54 and the possibility that the Administrative Court might enforce it, were essential to the operation of the exclusivity principle, and provided no proper basis for departing from the general rule. The Court also observed that there was an inescapable inconsistency between the conclusion, correctly drawn, that the Part 54 procedure and the CPR enabled claims for judicial review to be managed and determined in accordance with EU law and the decision to stay the claims in order to “see what happens in the Administrative Court”. Finally, the Court found that the mere fact the challenge to the Loan Charge was founded upon EU law principles was no justification for disapplying the Autologic principle. The Master was therefore wrong to conclude that to require the claimants to wait and to raise the issues advanced in the Part 8 claims before the FTT, in accordance with the Autologic principle, would fail to give an effective remedy and so conflict with EU law.  

It is important to remember that not all tax disputes have to be determined by the tax tribunals, but the way in which any claim is brought should be carefully considered. The decisions in Austick and Labeikis are two recent examples of the importance of ensuring that such challenges are brought in the correct forum and the consequences for taxpayers when the incorrect forum is chosen can be fatal to their claim.  

Cross-examination in judicial review

In Fluid Systems Technologies (Scotland) Ltd v HMRC [2024] UKUT 00322 (TCC), the UT granted the taxpayer's application to cross-examine an HMRC witness in judicial review proceedings. The claim concerned the lawfulness of HMRC’s decision refusing the taxpayer’s requests for repayment under the Disguised Remuneration Repayment Scheme. One of the challenges raised by the claimants was that the HMRC decision maker had misapplied the requirements of the Scheme, in response to which HMRC tendered a witness statement from the decision maker. The claimants argued that cross-examination was necessary to assist the UT in determining whether or not the decision maker had applied the correct test, pointing out that the documentary evidence contradicted their witness statement. 

The UT noted the general principle that cross-examination is exceptional in judicial review proceedings but that the court retained a discretion to order or permit cross-examination where it was necessary for the fair and just determination of the claim. The UT determined that limited cross-examination was necessary to dispose of the claim fairly and justly because the test the decision maker applied was clearly a material fact on which a finding needed to be reached in order to resolve the claim and because there was an apparent conflict between the documentary evidence and the witness evidence. In the circumstances, the UT held that it was not sufficient for the claimants to be allowed only to make submissions on the relevance and weight of the witness statement and it therefore gave permission for limited cross-examination of HMRC's witness of fact.

 ¹https://www.gov.uk/government/statistics/tribunals-statistics-quarterly-april-to-june-2024/tribunal-statistics-quarterly-april-to-june-2024. 

 ²https://judicial-reviews-app.apps.live.cloud-platform.service.justice.gov.uk/.