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Taxation disputes

For an overrview on tax disputes and appeals against a decision of tHM Revenue & Customs, see Disagree with a tax decision on the GOV.UK pages.

Formal appeals to the Tax Tribunal are dealt with in Appeal to the tax tribunal

It may be possible to ask for a decision to be reviewed rather than make a formal appeal.

The complexity,expense and unpredictability of challenging the HMRC through the court system is well illustrated by the recent case reports below.

What’s New items on this topic [go to the What's New page or archive for the full item]:

06/07/2015

Appeals and appeals and appeals

Subject: Law, Lawmakers and Lawyers. Taxation

Source: British and Irish Legal Information Institute (BAILII)

 

The Supreme Court gave its judgement in the case of Anson v Commissioners for Her Majesty's Revenue and Customs [2015] UKSC 44 on 1 July 2015. The case arose out of assessments to income tax by HMRC upon George Anson who was resident but non-domiciled in the UK for UK tax purposes. Broadly speaking, ‘residence’ in UK tax terminology is the place where an individual is treated as normally living, and ‘domicile’ is where his permanent home is (the exact meaning depends on UK tax laws as interpreted by case law and subject to double tax treaties).

Mr Anson’s tax status meant that he was liable to UK income tax on his UK sourced income and on foreign income remitted to the UK. He was non-resident in the US for US tax purposes, but was liable to US federal and state taxes on his US sourced income. Mr Anson was a member of a Delaware limited liability company, and as such he was liable to US federal and state taxes on his share of the profits. Mr Anson remitted the balance to the UK, and was therefore liable to UK income tax on the amounts remitted, subject to any double taxation relief which might be available.

HMRC decided that Mr Anson was not entitled to any double taxation relief, on the basis that the income which had been taxed in the US was not his income but that of the limited liability company. The income in question arose as long ago as the seven UK tax years running from 6 April 1997 to 5 April 2004. Mr Anson challenged the decision of HMRC before the First-Tier Tax Tribunal (FTT). The FTT basically upheld Mr Anderson's claim that he was entitled to relief from UK income tax under the terms of the UK/US double tax treaty (see: [2010] UKFTT 88 (TC)).

HMRC appealed the decision of the FTT (which consisted of two members) to the Upper Tribunal (consisting of one High Court judge) which reversed the decision of the FTT (see: [2012] UKUT 59 (TCC) (16 February 2012).

Mr Anson then appealed to the Court of Appeal in respect of the issues concerning relief from double taxation. The court (consisting of three Appeal Justices) refused the appeal (see: [2013] EWCA Civ 63). Mr Anson appealed to the Supreme Court which, after (unusually) two hearings, agreed with the original decision of the FTT and therefore upheld the appeal.

This meant that Mr Anson was finally successful in his challenge to the decision of HMRC in respect of income which he had earned between 11 and 18 years previously. 11 highly qualified judges were involved in this appeal process, four of whom disagreed with the arguments of Mr Anson. Mr Anson had to engage the firm of Ernst & Young and a team of barristers in order to defeat HMRC. We do not know the amount of costs incurred by each side but they must have been very considerable. It takes a very determined and wealthy taxpayer to contest a decision of HMRC in these circumstances.

[Original text of the case report supplied by BAILII gratefully acknowledged. Crown copyright: contains public sector information licensed under the Open Government Licence v3.0
Legaleze is solely responsible for the above text which is a summary only and the full report should be read.]

 

06/07/2015

Appeals and appeals and appeals

Subject: Law, Lawmakers and Lawyers. Taxation

Source: British and Irish Legal Information Institute (BAILII

Commissioners for Her Majesty's Revenue and Customs (Appellant) v Pendragon plc and others (Respondents) [2015] UKSC 37

Accountancy firm KPMG designed an “an elaborate scheme” [in the words of Lord Sumption in the Supreme Court] in order to reduce the value added tax (VAT) payable on demonstrator cars used by retail distributors for test drives and other internal purposes. A car distributor would in the normal course of business buy new cars for use as demonstrators and pay VAT on the full amount of the sale price. The distributor would then recover the VAT ’input tax’ by setting it off against the ‘output tax’ for which the distributor was accountable on its taxable supplies.

The object of the KPMG scheme was to ensure that companies in the distributor's group were able to recover input tax paid on the price of new cars acquired as demonstrators from manufacturers, while avoiding the payment of output tax on the price at which the car was ultimately sold second-hand to a consumer.

The KPMG scheme was designed to exploit certain technical exceptions in the relevant VAT legislation. It involved five prearranged steps described by Lloyd LJ in the judgment of the Court of Appeal in this case; see [2013] EWCA Civ 868

Pendragon plc and its group companies (Pendragon) are the largest car sales group in Europe. They used the KPMG scheme on two occasions, once in November and December 2000 and again in February and March 2001. The effect of the KPMG scheme was to enable Pendragon to sell demonstrator cars second-hand under the margin scheme in circumstances where VAT had not only been previously charged but fully recovered. The result was that no net charge to VAT was ever suffered, except on the small or non-existent profits realised on the resale.

HM Revenue & Customs (HMRC) challenged the legal validity of the scheme and sought to recover the VAT which Pendragon had avoded. HMRC accepted that at a purely technical level, the KPMG scheme worked in the sense that the transactions envisaged in the prearranged steps satisfied all the statutory conditions for exemption from VAT. However, VAT law in the UK is based upon European Union legislation. EU law has adopted the principle of ‘abuse of law’, a concept derived from civil law jurisprudence, which is unknown to English common law. HMRC claimed that the scheme was ‘abusive’ and imposed upon Pendragon VAT assessments and misdeclaration penalties.

Tax cases are generally heard by the First-Tier Tribunal (Tax Chamber) in favour of the present appellants. In this case, the Tribunal decided that the KPMG scheme was not abusive: [2009] UKFTT 192 (TC). HMRC appealed this decision to the Upper Tribunal which considered that the scheme was abusive and that the First Tier Tribunal had gone wrong in law; see [2012] UKUT 90 (TCC) (15 March 2012)

Having won in the First-tier Tribunal and lost in the Upper Tribunal, Pendragon appealed to the Court of Appeal which restored the decision of the First Tier Tribunal [2013] EWCA Civ 868. The leading judgment was given by Lloyd LJ who carefully examined the KPMG scheme and its component transactions. He considered that the First Tier Tribunal's conclusion depended on an essentially evaluative exercise and that it had been entitled to find as it did. The Court of Appeal therefore allowed the appeal and restored the decision of the First-tier Tribunal.

HMRC was not satisfied and made the final appeal to the Supreme Court. In that court’s leading judgment, Lord Sumption considered that the KPMG scheme had ‘exploited’ the VAT legislation which had been designed to prevent double taxation on the consideration for goods. He concluded that in that respect the KPMG scheme was contrary to the EU policy underlying the margin scheme and that it was an abuse of law.

Thus Pendragon succeeded in its case before 2 judges in the First-tier Tribunal over 8 days and before 3 judges in the Court of Appeal over 3 days, but lost in the Upper Tribunal before 2 judges over 6 days and finally in the Supreme Court before 5 Supreme Court Justices over 2 days.

[Original text of the case report supplied by BAILII gratefully acknowledged. Crown copyright: contains public sector information licensed under the Open Government Licence v3.0
Legaleze is solely responsible for the above text which is a summary only and the full report should be read.]

[Page created: 11/07/2015]

 

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