80% of cases are won by HMRC?16 Sep 2014
It is now common knowledge that the legislation proposed by HMRC in the consultation document; ‘Tackling Marketed Tax Avoidance’ was enacted and forms part of the Finance Act 2014 (FA 2014) with only a few amendments of note. During the legislative progress of the FA 2014, the objection to certain elements of the proposals, in particular the retrospective nature of implementation, should have been heard loud and clear, but instead it fell mostly on deaf ears despite members of the Treasury Select Committee declaring that the retrospective nature of the legislation was ‘a monstrous injustice’.
During the Committee Stage of the legislative process, an evidence session was held with the Treasury Select Committee, in which Jim Harra, (HMRC’s Director General Business Tax) commented, not for the first time, that the logic behind allowing HMRC to issue Accelerated Payment Notices (APNs) and demand upfront payment of disputed tax was that;
‘80% of cases are won by HMRC, so given that four out of five cases are won it is only right that they should hold onto the money in the meantime’.
This is a significant statement made many times by David Gauke along with senior HMRC representatives and was quoted extensively within the ‘Tackling Marketed Tax Avoidance’ consultation process such as it was! So we must assume, must we not, that our Government would only use relevant cases on which to base, and force through, this new legislation particularly when so much damage could be caused by it. So, in the interests of full disclosure we obtained details of the cases from HMRC, which form the basis and justification for this new legislation.
These cases make for interesting reading and whilst admittedly you may already know this if you have looked into this statistic earlier than us, is that the figure of 80%, on which so much has been based, and therefore on which so much depends, is actually based on 32 cases heard during a twelve month period.
We have prepared a summary of the nature of each of these cases and will seek to determine the comparisons if any, between the cases that HMRC have progressed through to Tribunal and those cases that are currently open. Should you wish to familiarise yourself with the cases, you will find a list here along with a brief summary of the facts of the case. For the purpose of this article we have considered the facts in each instance and created the general summary below.
Type of Cases
While the circumstances and transactions in each case inevitably have their differences, there is a clear consistency in the types of case that have progressed through to the stage of litigation.
In 15 of the 32 cases which formed the basis of HMRC’s ‘80% success rate’ it is quite apparent that the transactions involved the artificial manufacture of losses or deductions which the taxpayer could offset against their income or profits. It is evident that in these cases there was little or no commercial purpose for the transactions, and they were simply artificial steps put in place to achieve a tax advantage.
In many of these cases, we would agree that the correct conclusion was reached.
It is, however, particularly disconcerting to see that these cases have been chosen to base and project HMRC’s chances of success in all tax avoidance disputes, especially when you consider that 65,000 DOTAS cases are open and have been for a significant period of time.
It would therefore, we feel, be fair to suggest that HMRC have ‘cherry picked’ the bulk of these cases based on the likelihood of success and publicity attached to each of the ‘celebrity’ appellants concerned.
The statistic that HMRC understandably keeps quiet, is that only 10% of avoidance cases are cherry picked for the tribunal to be heard impartially in public, the remaining 90%, we understand, are either not picked up for enquiry, or are settled in advance of litigation in the courts. Whilst we cannot verify the statistic, if true, this again places the well quoted 80% success rate into doubt, but of course, 80% of 10% or 8% which it infact represents, is not the basis of a compelling argument on which to base and introduce the most divisive piece of tax legislation in most professional living memory.
After reviewing each of the cases listed by HMRC, we were also very concerned to discover that HMRC had included two cases which had little or no focus on tax avoidance at all.
The cases in question are Prudential plc & Anor, R v Special Commissioner of Income Tax & Anor , the point under scrutiny in this case was whether legal privilege extended to professions other than legal, such as accountants and tax advisers and HMRC v Charlton Corfield & Corfield  UKUT 770 under which the core debate concerned HMRC’s ability to issue a discovery assessment to the appellant after the time limit for an enquiry had lapsed. Quite rightly HMRC’s assessment was deemed invalid with both tribunals ruling in favour of the appellants in this case.
Unlike HMRC, we are not one to obscure the bigger picture, and we can confirm that in each of these two cases the appellants were party to tax avoidance arrangements, however, the points of interest did not concern tax avoidance which makes it difficult to reasonably conclude why HMRC would use these cases to form part of the 80% success rate in all avoidance cases.
The claim of an 80% success rate in all tax avoidance cases has been the bedrock upon which HMRC has justified the need for the introduction of APNs and FNs. However, after looking closely at the cases which form this percentage we must conclude that this justification is tragically flawed with a distinct lack of correlation between the arrangements in which the vast number of taxpayers have participated and those cases which progressed to the tribunal stage in the selective period that HMRC used as their statistical base.
As such it appears both unjust and inaccurate to use a relatively small sample of favourable, and in some cases insignificant and irrelevant judgements to support a claim that success will be achieved in 4 out of 5 of the approximately 65,000 open cases. The publication of these cases has done little more than present further questions as to HMRC’s integrity and their ability to apply powers such as the APNs in a fair and justified manner.
Actually, the information to be extracted from these cases is further proof if it were needed that the masters of ‘spin’ have been well and truly taken in by HMRC’s blatant and frankly shocking misrepresentation of statistics to support a wholly unsupportable view of their success rates.