City Shoes (Wholesale) Ltd & Ors v Revenue And Customs, Court of Appeal - Civil Division, March 02, 2018, [2018] EWCA Civ 315

Resolution Date:March 02, 2018
Issuing Organization:Civil Division
Actores:City Shoes (Wholesale) Ltd & Ors v Revenue And Customs

Neutral Citation Number:[2018] EWCA Civ 315

Case No: C1/2016/1074




[2016] EWHC 107 (ADMIN)

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 02/03/2018






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Mr Keith Gordon & Ms Ximena Montes Manzano (instructed by Sharpe Pritchard LLP) for the Appellants

Mr Timothy Brennan QC & Mr Akash Nawbatt QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

Hearing date: 5 December 2017

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Lord Justice Henderson:


1. The central issue on this appeal is whether the Commissioners for Her Majesty's Revenue and Customs (``HMRC'') acted with such conspicuous unfairness as to amount to an abuse of power when by decisions dated 14 August 2014 (``the Decisions'') they curtailed the benefits available under the so-called Liechtenstein Disclosure Facility (``the LDF'') to the nine claimants in these judicial review proceedings, in relation to certain employee benefit trust (``EBT'') arrangements which they had operated and which were under investigation by HMRC.

2. The claimants were all advised by the same firm of chartered accountants, BDO LLP (``BDO''), and had applied for registration under the LDF on various dates between 30 August 2013 and 18 November 2013. The applications were all ``put on hold'' by HMRC, pending the outcome of an internal review by HMRC of the manner in which the LDF had in practice come to be operated since its introduction in August 2009. BDO were informed of the existence of this review on 31 July 2013, before the dates on which the claimants made their applications to be registered.

3. By the Decisions, which were signed by Geoff Lewis, an Assistant Director in HMRC's Specialist Investigations Offshore Co-Ordination Unit, the claimants were informed as follows:

``That review has now been completed. As no changes have been made to criteria for entering the LDF your client will be allowed to register if they choose to proceed with their application. However, all of the changes that are being made to the criteria for being eligible for the LDF's full favourable terms will apply to your client.

In relation to your client, there was at the time that they applied to enter the LDF an ongoing enquiry into their EBT arrangements which began more than 3 months earlier. It therefore follows that they will not be able to access the full favourable terms offered by the LDF in relation to their EBT arrangements. To be clear, the full favourable terms that will not be available are those that can lead to a reduction to the amount paid to HMRC. These are:

· A 10 per cent fixed penalty on the underpaid liabilities (for periods to 5 April 2009)

· Assessment period limited to accounting periods/tax years commencing on or after 1 April 1999

· The option to choose whether to use a single composite rate of 40 per cent or to calculate actual liability on an annual basis (or for some years after 2008/09, a Single Charge Rate)

There will be no restrictions on access to the limited favourable terms:

· assurance about criminal prosecution

· single point of contact for disclosures

I appreciate that you and your client may be disappointed with this news. I am willing to meet with you to discuss this matter and clarify any issues...''

4. The terms of the Decisions reflected the Fourth Joint Declaration issued on the same day, 14 August 2014, by HMRC and the Government of Liechtenstein announcing restrictions to the LDF in certain cases, including those:

``where the issue being disclosed has already been subject to an intervention that started more than three months before the date of application''

The Declaration went on to say that, in such cases, ``the person making the disclosure will not be eligible for the shorter limitation period, the fixed penalty or the composite rate option under the LDF.'' The effect of the Decisions was thus to preclude the claimants from relying on the principal benefits of the LDF in relation to their EBT arrangements.

5. BDO were unable to persuade HMRC to modify their stance adopted in the Decisions, so on 12 November 2014 the claimants began proceedings seeking judicial review of the Decisions. Permission was initially refused on paper by Rose J, who understood the claims to be based solely on alleged breach of the claimants' legitimate expectations. At an oral renewal hearing, however, on 10 March 2015, permission was granted by Collins J, who expressed the view that the case turned not on any question of legitimate expectation, but on whether it was fair for HMRC to act in the way that they did, and in particular by failing to give any prior notice of their intention to withdraw the specified favourable treatment under the LDF. Collins J therefore required the claimants to amend their grounds in order to rely on unfairness, in accordance with the well-known principles expounded by the Court of Appeal in the Unilever case (R v Commissioners of Inland Revenue ex parte Unilever plc (1996) 68 TC 205, [1996] STC 681).

6. There is a dispute between the parties, to which I will need to return, about the steps which were then taken by the claimants to amend (and later re-amend) their statement of facts and grounds, but in due course the application came on for substantive hearing before Whipple J on 12 and 13 November 2015. By that stage, the grounds for review were pleaded in terms of ``manifest unfairness'', and it was contended that HMRC's decision not to register the claimants' applications, and ``to deliberately prevent them from enjoying the benefits (available to others in the same position) of the full favourable terms'' of the LDF, was manifestly unfair and amounted to an abuse of power for a number of reasons which were then set out. The parties were represented by the same counsel as have appeared before us, Mr Keith Gordon leading Ms Ximena Montes Manzano for the claimants, and Mr Timothy Brennan QC leading Mr Akash Nawbatt (now also QC) for HMRC.

7. In her full and careful reserved judgment, handed down on 26 January 2016, Whipple J dealt in turn with the four aspects of conspicuous unfairness which she understood to be relied on by the claimants, together with some associated criticisms of HMRC's decision-making process. She rejected all of the claimants' arguments, and therefore dismissed the application for judicial review. The neutral citation of her judgment is [2016] EWHC 107 (Admin), and it is reported as R (on the application of City Shoes Wholesale Limited) v Revenue and Customs Commissioners at [2016] STC 2392.

8. Permission to appeal to this court was refused by the judge and by Gloster LJ on the papers, but was granted at an oral renewal hearing by Patten LJ on 24 January 2017. He granted permission on all grounds, but on the express basis that the argument would be ``principally directed to the discrimination issue'', in respect of which Mr Gordon submitted to him that the judge had misunderstood the claimants' argument and had based her analysis on too narrow a comparison with other categories of taxpayers.

The appellants

9. The appellants are four of the original claimants, namely City Shoes (Wholesale) Limited, Jato Dynamics Limited, Shu & Company Limited and Daniel Katz Limited. The pleadings and evidence in support of the judicial review application are singularly uninformative about the precise nature of the EBT arrangements which they had undertaken and were under investigation by HMRC. The statement of facts and grounds merely says that on various dates between 6 November 2002 and 8 December 2010 the claimants ``entered into an employee options arrangement as advised by BDO'', and that in giving this advice ``BDO had sought the advice of leading tax counsel''. It is well known, however, that EBT arrangements of various kinds have been widely used as vehicles for tax avoidance schemes, typically designed to enable companies to remunerate their employees through arrangements involving the use of third parties and offshore trusts in a way that it was hoped would avoid liability to income tax and national insurance contributions (``NICs''), while enabling the company to obtain an immediate deduction in computing its profits for the money so expended. Part 7A of the Income Tax (Earnings and Pensions) Act 2003, headed ``Employment Income Provided Through Third Parties'', was inserted by the Finance Act 2011 in order to combat a number of schemes of this nature. Earlier versions of the legislation have given rise to leading cases such as MacDonald v Dextra Accessories Ltd [2005] UKHL 47, [2005] STC 1111, UBS AG v Revenue and Customs Commissioners [2016] UKSC 13, [2016] 1 WLR 1005, and RFC 2012 plc v Advocate General for Scotland [2017] UKSC 45, [2017] 1 WLR 2767. But by no means all of the schemes have been litigated, and Mr Gordon told us that the schemes adopted by the present claimants were all as yet untested in the tax tribunals.

10. Although counsel's skeleton argument in support of the appeals said that the relevant schemes did not involve EBTs at all, but HMRC had ``treated them as if they did'', Mr Gordon explained at the start of his oral submissions to us that the schemes involved share options and an offshore trust, and had some generic similarity to those in the UBS case. I think we may safely infer, therefore, that the schemes were ones of the general nature which I have indicated, designed to provide indirect remuneration to employees while escaping the liability to income tax and NICs which direct remuneration through the payroll would normally entail. If the claimants were unhappy about...

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