UK Uncut Legal Action Ltd v. (1) Commissioners of Her Majesty’s Revenue and Customs (HMRC) and (2) Goldman Sachs – read judgment
Tax avoidance has hit the news again, with Apple currently facing questions from the US Senate about its exploitation of Irish company law loopholes and David Cameron writing to offshore tax havens to push for more transparency over tax rules. As it happens, the High Court has just handed down a ruling in a case which raises many of the same issues.
The campaign group UK Uncut brought a judicial review claim against HMRC. They argued that it was unlawful for HMRC to reach a confidential settlement in 2010 with the investment bank Goldman Sachs over a multi-million pound unpaid tax bill arising out of a failed tax avoidance scheme.
Mr Justice Nicol held that HMRC’s decision was not unlawful, but criticised the actions of HMRC officials and HMRC have acknowledged that the manner in which the settlement was agreed involved several mistakes.
On 19 November 2010 there was a meeting between HMRC and Goldman Sachs (GS) to discuss a number of long running disputes about tax avoidance schemes operated by GS. Among these was an issue as to whether GS was required to pay National Insurance Contributions (NICs) in consequence of an arrangement they had with some of their employees.
A related question was whether, if NICs were payable, Goldman Sachs should also pay interest on the outstanding contributions.
The arrangement which GS had entered into with their employees was one which a number of other companies had also adopted.
HMRC had engaged in a similar dispute with them.
However, all the other companies had settled with HMRC in 2005 on terms that they would pay 100% of the claimed NICs, but no interest. GS alone continued to contest liability.
David Hartnett, one of the HMRC Commissioners, was at the meeting and his understanding was that agreement was reached on all issues.
In particular, GS promised to pay 100% of the NICs and HMRC promised to forego any interest.
HMRC accepted that their representatives made mistakes at this meeting.
First, Mr Hartnett was under the impression that there was a barrier or potential barrier to HMRC recovering interest on the unpaid NICs.
This was not in fact the case.
He had not consulted the lawyers litigating the matter on behalf of HMRC, and if he had done they would have told him so. Second, internal HMRC procedures required settlements of over £100 million (where the Department was proposing to concede one or more of the issues) to be approved by the High Risk Corporates Programme Board. That was not mentioned at the meeting. Mr Hartnett and the other representatives of HMRC had not appreciated it would be necessary and they should have done.
Mr Hartnett believed an agreement had been concluded on 19 November.
When the Programme Board met on 30 November 2010 it approved (retrospectively) all elements of the agreement with GS exceptthe concession to forego interest.
When GS was told about this, they were ‘agitated’, to use Nicol J’s word (given investment bankers are not exactly renowned for either their relaxed attitude to money or good manners, this is probably a euphemism for ‘flew into an almighty rage’).
They said that they believed that they had an agreement with HMRC which it could not go back on.
The arrangements within HMRC allow the Commissioners to act through two of their number.
On 9 December 2010 Mr Harnett met with another Commissioner, Melanie Dawes. They decided to approve and endorse the 19 November settlement agreement with GS.
The settlement wasdisclosed by an HMRC whistleblower in 2011, which led to hearings by the House of Commons Public Accounts Committee and subsequently this claim being brought.
UK Uncut argued that the settlement was unlawful because it was contrary to HMRC’s own Litigation and Settlement Strategy, which was its published policy.
They also argued that HMRC took into account irrelevant considerations in approving the settlement, namely:
- Mr Hartnett’s own professional embarrassment and that of other HMRC officials.
- The embarrassment to the Chancellor of the Exchequer if GS pulled out of a voluntary banking tax code (GS threatened to do so if the settlement was not binding, and George Osborne had just trumpeted the fact that all major banks had signed up to the code).
- The damage to HMRC’s relationship with GS.
- The damage to HMRC’s reputation in the wider community.
UK Uncut had two other arguments:
(i) because the settlement was not a proper exercise of HMRC’s functions, it was in breach of its statutory duty; and
(ii) HMRC failed to treat GS in the same way as the other companies who settled their disputes in 2005.
However, the first of these depended on the other arguments succeeding, and the second was not pursued at any length.
Mr Justice Nicol held that the settlement was not contrary to the Litigation Strategy (agreeing with the National Audit Office, who had also reviewed it and reached the same conclusion).
As for the irrelevant considerations challenge, he held that Mr Hartnett and Ms Dawes had denied taking their own professional embarrassment into account and in the absence of cross-examination of Mr Hartnett he had to accept this was true.
HMRC admitted that embarrassment to the Chancellor was an irrelevant consideration, but Nicol J accepted its argument that the same decision would have been made even if that had not been taken into account.
Finally, the judge held that it is for the decision-maker to decide what factors are relevant or irrelevant, unless statute specifically dictates a factor must be considered or not considered, or the decision-maker’s view was irrational.
In Nicol J’s judgment it was not irrational for HMRC to take into account the other considerations above and therefore the settlement was not unlawful.
Nicol J concluded with some fairly barbed understatement:
“The settlement with Goldman Sachs was not a glorious episode in the history of the Revenue.”
As well as highlighting again the mistakes which HMRC had already admitted he also expressed concern that no contemporaneous note was taken of the agreement on 19 November 2010, which led to great uncertainty about what exactly had happened. However, he distinguished between maladministration and illegality.
Although HMRC made mistakes, and it was correct for the court to have granted UK Uncut permission to challenge these, the mistakes did not amount to outright unlawfulness.
There is also a sense in this judgment that the outcome may well have been different if the subject-matter had been different.
The courts are perhaps more used to taking apart decisions of other government departments, such as the Home Office, even where these involve a significant exercise of discretion.
They are also used to dealing with tax matters where the question is one of nitty-gritty statutory interpretation.
However, being invited to declare a discretionary tax settlement unlawful is a much less common occurrence.
Tax policy is a core executive function in which the courts are loath to intervene, especially where it involves an issue as controversial as a long-running tax avoidance scheme by a much-maligned investment bank.
Nicol J quoted from the Fleet Street Casuals case, in which the House of Lords emphasised that the Revenue has a very wide managerial discretion in reaching agreement with individual taxpayers, and held that the relevance of HMRC’s reputation with GS or others were:
“quintessentially questions to be decided by the Commissioners themselves“.
Had this been an immigration or housing case, maybe the mistakes would have amounted to illegality.
As it was, UK Uncut will have certainly succeeded in making HMRC think very carefully about future settlements, but didn’t quite get this one held unlawful.