Shiner, R (on the application of) v HM Revenue & Customs

LORD JUSTICE STANLEY BURNTON: This is an application for permission to apply for judicial review of what is described by the claimants as the decision of HM Revenue and Customs in a letter dated 18 August 2008. The proceedings relate to legislation which effects the taxability of income derived from a partnership established abroad.

The partnerships in the present case are established in the Isle of Man, a jurisdiction which itself is outside the EU, however, the substance of the complaint concerning the letter of 18 August 2008, and the legislation to which it refers and on which it is based, is that it brings into tax liability income derived, at least originally, from a foreign partnership in a manner which is burdensome, to use a neutral term, in such a way as to conflict with the provisions of the EU Treaty concerning the freedom to transfer capital, and in particular the provisions of Article 56.

Article 56 is itself subject to the provisions of Article 58, and for present purposes Article 58 is concerned with measures which are intended to address tax avoidance schemes by nationals or residents of the country legislating against such schemes. The legislation in this case was introduced in 2008 and, on the case of the defendant, it did no more than to make clear what had originally been intended and possibly, on one view, originally enacted so far as liability for such an application was concerned. However, the provision in question, section 58 of the Finances Act 2008, is expressly and overtly retrospective in its effects, and it is its retrospectivity which is the subject of attack in these proceedings.

Both of the claimants entered into transactions, the effect of which was to create partnerships in the Isle of Man. The recipients of income from those partnerships are a trustee or trustees apparently in the Isle of Man, but the claimants are entitled to income under those trusts. What is said on behalf of the Revenue is that these are typical tax avoidance schemes, the object of which is to subject income arising out of businesses or transactions in the United Kingdom to a lower rate of tax by rendering them subject to the tax regime of a jurisdiction where rates of tax are significantly lower than in this country, and taking advantage of double taxation agreements which preclude this country from taxing such revenue as if it were United Kingdom revenue, arising in the United Kingdom and payable to a United Kingdom resident.

As I have already indicated, the critical attack so far as the legislation is concerned is to its retrospectivity. The claimants, considering that they were not liable to tax on the income which they were entitled to receive from the trust which was the partner of the partnership created in the Isle of Man, have, as I understand the matter, submitted tax returns in accordance with the law as they understood it to be, and perhaps as it was genuinely understood to be before the enactment of the Finances Act 2008, the retrospective legislation, section 58 of the Finances Act 2008 having been passed and given royal consent. There was then the letter dated 18 August, to which I have referred, to which I must now turn.

Before doing so however, it is right to summarise the bases of the attacks on the legislation, albeit that they are limited to retrospectivity which would bring added liabilities to the claimants in this case. There are essentially two bases of attack on the legislation and its retrospectivity. The first is that it does not comply with the requirements of the EU Treaty. It is said that it does not do so because it is a general application, it is not in its terms limited to tax avoidance transactions, nor in its terms is it limited to those who have control of foreign partnerships under which the relevant income arises. Moreover, the retrospectivity is unfair and it therefore does not comply with the requirements of proportionality and necessity as interpreted by the European Court of Justice under the applicable provisions of the Treaty. Those contentions are issues in the present proceedings.

The first issue which has to be determined may be regarded as one of delay, one of jurisdiction, one of abuse of process, but ultimately those are all descriptions to be applied to a central issue. That is whether the substance of these proceedings is an attack on the lawfulness under European Law and under the European Convention on Human Rights, to which I shall refer shortly, of section 58. If that is the challenge, these proceedings are well out of time. However, if these proceedings are in substance, as they are set out in the claimants' grounds, to be an attack on the decision, so called, in the letter of August 2008, then these proceedings, although not brought very promptly, were brought just within the 3 month limit beginning with that letter. So the question arises, what are the grounds for bringing this claim? If it is an attack in substance on the legislation then it is out of time, and certain considerations arise so far as that is concerned. In addition, if it is in substance an attack on the validity and compatibility of the legislation, then what is the effect of the letter to which I have referred of August 2008? It is, as I have already stated, referred to as a decision letter by HM Revenue and Customs. On the other hand, it is said on behalf of the Revenue to be no more than an intimation to the tax payers of the effect of the legislation. If it is no more than an intimation of the effect of legislation, then it is not a decision in any real sense. It could, and no doubt would in due course, be followed by communications or decisions which would have legal effect, such as the issue of a closure notice or notices or the making of jeopardy assessments which are referred to in the letter. If such decisions are made by the Revenue and duly served, then there will be statutory rights of appeal to the Commissioners, and now to the first tier of the Tax Chamber, with possible rights of appeal to the Upper Chamber in due course. It is well established that where the substance of a claim is one which can be referred to by the Commissioners, under the statutory scheme in the appeals, in tax matters, generally speaking, in the absence of exceptional circumstances, this court should refuse jurisdiction so that those decisions can be challenged through the statutory scheme established by Parliament. It is for that reason that I say that questions of delay, the substance of the claim, and the like, come together, if the substance of the claim is the validity of the legislation. These proceedings are late and there is no decision having legal effect on the part of the Revenue which could, and certainly should, be the subject of judicial review proceedings. In due course if the Revenue wish to take their claims further they will have to take steps which can be, and will be down as the subject of the appeals from the statutory system.

On the other hand, if the substance of the claim relates to the letter dated 18 August 2008, the claim is in time and the position of the claimants in relation to these proceedings is very different.

The issues between the parties relate not only to the effect of the legislation, but also to the effect of the relevant Treaty provisions, and also, as I understand it, as to whether there may or may not be relevant issues of fact to be determined in due course. Although, if the substance of the claim is an attack on the legislation itself, it may be difficult to see what the relevance of individual facts may be, there is, as I have already mentioned, a claim of incompatibility under the European Convention on Human Rights, specifically Article 1 of the First Protocol, and I shall consider that shortly.

In my judgment, the substance of this claim is a contention that the original legislation, by which I mean section 58 of the 2008 Act, was, and is, in conflict with the provisions of the Treaty, and incompatible with the European Convention on Human Rights. It seems to me that the letter of 18 August 2008 was doing no more than conveying to the tax payers the effects of those provisions. If those provisions take effect in accordance with their terms, and if they are retrospective, certain consequences follow, and those consequences are, in general, set out in the letter. Indeed, that is precisely how the third paragraph of the letter reads. Subsequent paragraphs refer to possibilities of unreasonable delay in submitting the revised self-assessments, and liability for penalties and interest and the like, but it seems to me those all follow necessarily from the provisions of the statute. In those circumstance, it seems to me that the claim is indeed out of time.

Moreover, it seems to me that proceedings of this kind ought to be dealt with in the context of the statutory scheme. There will, in due course, be measures taken by Revenue and Customs of the kind to which I have already referred, and they will be the subject, no doubt, of statutory appeals. This court, in my judgment, should be cautious before taking jurisdiction in a case involving tax liabilities which can, and indeed in my judgment should, be subject to the statutory scheme. I would not, however, castigate these proceedings as an abuse of process.

It seems to me unnecessary so to state, notwithstanding the decision in the House of Lords to which I have been referred, but simply looking at the substance of the claim, it seems to me it is a claim which relates to the legislation itself. So far as the legislation is concerned it could not be said, and is not said as I understand it in the present case, that the tax payers were unaware, or at least that their advisers were unaware, of the enactment in question. It is quite clear to me that transactions such as those which are under scrutiny in this case would not be entered into by tax payers who do not have the benefit of highly specialist advice of a kind which will be aware of pending and actual legislative change.

It is unnecessary, having regard to my conclusion, for me to express any view on the merits of the claim under the Treaty, and it seems to me it would be quite wrong for me to do so. The question however does remain of the claim under the European Convention. There is some distinction between the two claims for this reason: it is quite clear that the tax tribunals must, and will, take into account the actual provisions of EU Treaty law, and will if necessary, if there is any uncertainty as to its effect, make a reference to the European Court of Justice for referred questions to be determined in Luxembourg. However, the tribunals do not have jurisdiction to make declarations of incompatibility. It seems to me however, that the claims under the European Convention are very much subsidiary claims. I say so for these reasons: first, if the claim under the Treaty is established, there will be no retrospectivity effected under English law. In those circumstances, as I understand it, it is not suggest that the legislation is incompatible. Secondly, in deciding whether or not the legislation complies with Articles 56 and 58 of the Treaty, it will be necessary for the court in Luxembourg to consider whether the legislation goes beyond what is necessary and proportionate as a response to what is said to be, and I make no finding as to that, but what is said to be tax avoidance. If Luxembourg determines that the statutory provision in question is indeed a necessary and proportionate response for the purposes of Article 58, it seems to me highly unlikely that Strasbourg would hold, in those circumstances, that the legislation offends Article 1 of the First Protocol.

It seems to me that, in reality, all issues arising in these proceedings will be before the tax tribunals. I am however, troubled by the fact that there is an outstanding application for renewal of the application for permission to apply for judicial review in another case which is shortly to be heard. It seems to me that there is room for some unfortunate inconsistencies if permission is given in that case while refused in the present case. In those circumstances, what I propose to do is to refuse permission in respect of all claims under the Treaty and otherwise, apart from the claim of incompatibility.

I shall determine the question of the grant of permission in relation to incompatibility after judgment has been given in the proceedings to be heard, during the course of this month as I understand it. I shall direct both parties to make written submissions to me in the light of the decision in that case, and I propose then to decide whether to grant permission in respect of that claim, whether to refuse it, whether to stay that claim, in the light of the decision in that case and any submissions that I may receive.

That is the order I propose to make. I hope that is clear.

MR SINGH: My Lord, it is. Can I suggest that on costs, in the light of that direction, that that should be reserved?

LORD JUSTICE STANLEY BURNTON: I can do the costs on paper.

MR SINGH: Yes.

LORD JUSTICE STANLEY BURNTON: Submissions within 7 days of the decision in that case, something like that?

MR SINGH: Yes.

MR MCDONNELL: My Lord, we are in slight difficulty, and subject to instructions I think we would wish to appeal any refusal of permission. In the light of your Lordship's decision just now it is a little unclear whether we have an appealable refusal of permission or not.

LORD JUSTICE STANLEY BURNTON: You certainly do in respect of the Treaty.

MR MCDONNELL: Yes. Thank you my Lord. I do not believe that your Lordship needs to give us permission for that appeal so we will do what we think best.

LORD JUSTICE STANLEY BURNTON: Well, you have the great advantage if you apply to the Court of Appeal that the Court of Appeal would then decide whether or not to take, if it grants permission, to deal with the application for judicial appeal substantively, in which case you will cut out at least one level of decision. Whether this is good or bad depends on your point of view, perhaps.

Anything else I can do for you gentlemen? Thank you very much.