DECISION
1.
This appeal raises the question whether HMRC were entitled, in the
circumstances of this case, to raise assessments, for VAT under s 80(4A) of the
Value Added Tax Act 1994 (“VATA”), and for interest under s 78A VATA. The
dispute is not on whether the supplies in question were indeed taxable
supplies, on which in the normal course VAT would have been chargeable, but
whether the assessments are precluded by what the Appellant, Southern Cross
Employment Agency Limited (“Southern Cross”), says was a binding agreement with
HMRC in April 2010 compromising a claim for repayment of VAT, and associated
interest, made by Southern Cross on 30 March 2009, which resulted in payment to
Southern Cross of the sum of £637,296 and interest of £734,232.
2.
The claim made by Southern Cross was a Fleming claim under s 80 VATA for
repayment of sums paid by way of VAT in the years 1993 to 1997 together with
statutory interest. The supplies in question were those of dental nurses made
by Southern Cross. The basis of the claim at that time was that the supplies
were exempt. It was later determined, however, that supplies of that nature
were indeed taxable (see Sally Moher v Revenue and Customs Commissioners
[2012] STC 1356). Southern Cross accepts for the purpose of this appeal that
its supplies were taxable at the standard rate.
3.
The appeal resolved itself around three main issues, and an alternative
argument on the part of Southern Cross. The three main issues are:
(1)
Did Southern Cross and HMRC enter into a binding compromise agreement?
(2)
If the parties did enter into a compromise agreement, was that agreement
ultra vires because HMRC had no power to enter into such an agreement
with Southern Cross?
(3)
If there was a valid compromise agreement, was HMRC entitled under s
80(4A) and s 78(1) VATA to make the assessments under appeal to recover the
sums paid?
Leaving aside the alternative argument, Southern Cross
has to succeed on all three of these issues if it is to be successful in this
appeal
4.
If Southern Cross fails to succeed on any of the main issues, it puts
forward an alternative argument that HMRC acted unlawfully in exercising a
discretion in making the assessments.
The facts
5.
There was no dispute on the underlying facts. We had a bundle of
documents and an unchallenged witness statement of Mr Kieran Smith, a senior
manager in the VAT department of Crowe Clark Whitehill LLP. At the relevant
time Mr Smith was a manager in the predecessor firm of Horwath Clark Whitehill,
and in that capacity was involved in the March 2009 claim by Southern Cross.
As Mr Smith’s witness statement was unchallenged, we accept it so far as it
relates to factual matters. Where, however, Mr Smith expresses a view on a
matter which falls to us to determine, whilst we accept as a fact that he held
that view at the material time, we will reach our own conclusions on a
consideration of the evidence as a whole.
Background
6.
On 18 July 2001 Horwath Clark Whitehill (“HCW”) wrote to HMRC
on 18 July 2001 setting out the background to the supplies by Southern Cross of
dental nurses to dental practices, along with an analysis of the law, and
seeking HMRC’s confirmation that the supply of dental nurses by Southern Cross
as principal was exempt from VAT under Item (2) and Note (2) of Group 7 of
Schedule 9 VATA.
7.
HMRC replied on 2 August 2001 confirming that those supplies by Southern
Cross were exempt.
8.
In consequence, in 2001 Southern Cross made a number of voluntary
disclosures for periods between 1998 and 2000 that were, at that time, within
the statutory limitation period. Correspondence around those disclosures
indicates that there was a question of pricing, which must (and this is
confirmed by Mr Smith’s evidence) have related to whether the claim should be
restricted to the extent that it would unjustly enrich Southern Cross (s 80(3)
VATA).
9.
Payment in full in respect of those voluntary disclosures and claims by
Southern Cross was made in 2004. In accepting all the then outstanding claims,
HMRC said, in a letter to HCW dated 21 May 2004:
“I am still of the opinion that your clients [sic]
comments do indicate that not all VAT was absorbed otherwise prices would have
exactly matched those of Temp Dent and other competitors and turnover would not
have been affected. However I do not doubt that prices were set with the
company’s competitors in mind. The difference is therefore perhaps
insignificant in the context of the overall amount of VAT incorrectly charged.”
The 2009 claim
10.
Following the acceptance by HMRC that the three-year limitation period
that had been introduced with retrospective effect on 18 July 1996 was
unlawful, and the introduction of a transitional period for claims made before
1 April 2009, HCW submitted the claim for repayment of sums paid by way of VAT,
and interest, in periods between 1973 and 1997, on the basis that the supplies
of dental nurses had been treated as standard-rated but should have been exempt.
The claim was made by letter dated 30 March 2009 which referred to the 2001
correspondence and to the payment by HMRC of the 2001 claim.
11.
In its letter HCW acknowledged that, due to the historical nature of the
claim, primary records were not available. The claim was accordingly based on
Southern Cross’s accounts for the relevant period and information retained
since 2001. Certain standard-rated supplies, in relation to permanent
placements, were taken into account, both as respects output tax and input tax
recovery, and input tax was restricted in relation to the supplies now
classified as exempt.
12.
In a letter of 2 December 2009, which had followed certain other
correspondence and telephone conversations with HCW, Mr Barry Knight, a VAT
officer for HMRC, wrote to Mr Smith of HCW raising the issue of unjust
enrichment in relation to the claim. It was suggested that Southern Cross
would have passed the VAT it had charged onto its clients.
13.
Mr Smith replied on 9 December 2009, disputing the basis of the
suggested unjust enrichment, and referring to a technical argument, based on the
earlier 2001 claim and the statement in HMRC’s Business Brief 05/09 to the
effect that unjust enrichment would not be applied to claims made before 26 May
2005, that the unjust enrichment defence would not have been available to HMRC
in any event, even though the 2009 claim had been made after that date, because
of the illegality of the three-year cap.
14.
Mr Knight’s reply of 10 January 2010 took issue with the points raised
by Mr Smith on unjust enrichment. He concluded:
“It seems that there is doubt whether your client
would benefit by being wholly or partly unjustly enriched if the repayment of
the claim of 30th March 2009 was made in full. In view of this
doubt, and in the light of my comments above, perhaps you could demonstrate how
your client suffered a loss as result of passing the VAT on for the period of
this claim. I would be happy to meet to discuss this further.”
In relation to the argument based on the illegality of
the three-year cap, Mr Knight wrote separately on 21 January 2010 to say that
the March 2009 claim would be treated as a new claim, and thus outside the
scope of the Business Brief.
15.
A meeting took place on 29 January 2010 between Mr Smith, Mr Knight and
Mr Knight’s manager, Ms Senaka Attygalle. Following the meeting, Mr Knight wrote
to Mr Smith on 16 February 2010. He explained that he had been looking at past
papers, as a result of which he had concluded that Southern Cross’s main
competitors were, for most of the period of the claim, accounting for VAT in
the same manner as Southern Cross itself. That would mean that, to that
extent, Southern Cross could not be said to have suffered a loss. Southern
Cross would therefore, at least to an extent, be unjustly enriched by the
payment of the claim.
16.
Mr Smith responded on 9 March 2010. He set out a detailed rebuttal of
the conclusions reached by Mr Knight, asserting that VAT-free competition had
existed in the period before 1996, and that those competitors therefore had a
significant VAT advantage. The letter argued that this meant that Southern
Cross’s profits were reduced by having to charge VAT, and that there was no
difference between the current claim and the 2001 claim that had, after
consideration of unjust enrichment, been accepted by HMRC.
17.
In his letter of reply dated 26 March 2010, Mr Knight commented that it
seemed to him that there was agreement that, to the extent there was VAT-free
competition in Southern Cross’s market for the relevant period, the company
would have suffered loss by having charged VAT. He distinguished the earlier
2001 claim on the basis that it was clearer in the period covered by that claim
that Southern Cross had suffered VAT-free competition. In view of the fact
that the competition comprised businesses making supplies on both an exempt and
standard-rated basis, Mr Knight made the following proposal:
“On the basis of the preceding points I suggest, on
a ‘without prejudice’ basis, that we come to a compromise solution. Without
sufficient information and given the date of the period of the claim it is
difficult to suggest quite what this would amount to. I would, however,
propose that 50% of the claim is due.”
18.
There then followed an email exchange between Mr Knight and Mr Smith.
On 1 April 2010, Mr Smith wrote to Mr Knight to enquire what the effect of Mr
Knight’s proposal was in financial terms. He said:
“In order for our client to make a decision in
respect of the offer in your letter of 26 March can you please provide me with
the total payment (VAT plus interest) that would be made to [Southern Cross],
as if the claim was paid on the date of your response.”
On 6 April 2010 Mr Knight replied with the relevant
figures.
19.
Having taken the instructions of Southern Cross, Mr Smith wrote again to
Mr Knight on 14 April 2010. He made the initial point that HCW remained of the
opinion that Southern Cross would not be unjustly enriched by full payment of
the amount claimed. He went on:
“However, in order to attempt to bring this to a
conclusion speedily our client is willing to negotiate.”
Mr Smith continued by saying that HMRC had “agreed” to
pay 50% of the VAT plus interest but had offered no rationale for the 50%
restriction that had been applied. He then made a different proposal:
“Given that the evidence obtained by The
Commissioners in the course of this exercise indicated that competitors were
applying VAT to their margin (commissions), we propose that in order to reach
settlement we treat the claim as if all competition was applying VAT to the
margin throughout the period of the claim.
If we treat the industry margin as being that
obtained by [Southern Cross] for the period of the original claim … which was
26%, our client would be willing to restrict its original claim by this amount.
In conclusion, [Southern Cross] would accept a
proposal from HMRC to repay 74% of the VAT plus interest but does not accept
that payment of the claim in full would result in [Southern Cross] being
unjustly enriched.”
In this respect, at this stage, we would only comment
that we consider that the first reference in the second paragraph of this
passage must mean the 2001 claim, but that the second reference was clearly
intended to refer to the claim at issue, namely the 2009 claim.
20.
Mr Knight replied on 29 April 2010 as follows:
“I can confirm that the Commissioners will accept
that 74% of the claim of £861,212 will be repaid. The VAT repayment will
amount to £637,296.60 and together with the appropriate interest … I will
arrange for authorisation of this sum next week.”
Following this payment was arranged to be made, and Mr Knight
confirmed this in a letter to Mr Smith on 5 May 2010. Neither the letter of 29
April 2010 nor that of 5 May 2010 contained any offer of a review or any notice
of a right to appeal to the Tribunal.
Change in HMRC’s position
21.
It was shortly afterwards, on 23 July 2010, that Mr Knight wrote again
to Southern Cross, through HCW, to explain that he had been advised by
colleagues in VAT policy that the claim should not have been paid. As Mr
Knight explained the position, as part of a wider review HMRC had received
legal advice to confirm that supplies of staff are not care or medical care,
and that HMRC’s published guidance at that time amounted to an “informal
concession” that had been in place since 1973. However, because Southern Cross
had charged VAT on its supplies in the relevant period they had been correct to
do so and so could not avail themselves retrospectively of the “concession”.
The letter notified Southern Cross of the assessments to recover the incorrect
payment of VAT and statutory interest made on the same date. Both the decision
letter and the notification of assessments contained notice of Southern Cross’s
right to a review and its right to appeal.
22.
A request for a review was made by HCW on 19 August 2010. The
conclusion of the review was contained in a letter to Southern Cross dated 28
September 2010, which referred to the 2009 claim as having been considered by
Mr Knight and “following lengthy correspondence was finally settled” in the
sums paid. The review made the following points:
(1)
The “ruling” given in August 2001 reflected HMRC’s view at that time.
(2)
On conducting a later review of concessions, HMRC received legal advice
that supplies of staff were not “care” or “medical care”. The published
guidance at that time therefore amounted to an “informal concession”.
(3)
Southern Cross had been right to charge VAT on its relevant supplies in
the relevant period. The returns were correct in law and adjustment was not
appropriate.
(4)
Mr Knight had made an error in processing Southern Cross’s claim as he
had not been aware of the detailed legal advice received by HMRC’s policy unit.
(5)
No retrospective application of the “concession” was allowable as there
was no error of law in charging VAT on the supplies.
(6)
There had been no overpayment of output tax in law, and a claim under s
80 VATA was not appropriate. The amounts paid to Southern Cross had therefore
been paid in error.
(7)
The assessments would be upheld in full.
The review letter included notice of the right of
Southern Cross to appeal to this Tribunal.
Appeal
23.
The appeal was made by notice of appeal dated 22 October 2010. It is
that appeal that is now before us.
Issue (1): Was there a compromise agreement?
24.
It is Southern Cross’s case that the payment of an amount in respect of
repayment of VAT and associated interest made by HMRC to Southern Cross was
made in consequence of a binding agreement that compromised the claim of
Southern Cross. Not so say HMRC. The process which led to the payment being
made was nothing more than a standard process of assessment of a claim,
involving a genuine attempt to ascertain what, if anything, was due to the
taxpayer. There was no agreement to pay more than HMRC considered was due, and
no agreement on the part of Southern Cross not to make a further claim or to appeal
to the Tribunal.
25.
To determine this question, we must apply ordinary principles of contract
law. Mr Mantle referred us in this connection to the judgment of the Court of
Appeal in R (on the application of DFS Furniture Co plc) v Customs and
Excise Commissioners [2003] STC 1. In that case, after HMRC had decided to
defer accepting a voluntary disclosure made by DFS, and following an appeal to
the VAT tribunal, DFS had written to the commissioners on 11 November 1996,
following a tribunal decision to this effect, to state that there was no basis
in law for further delay. After the High Court had reached a similar decision,
DFS had on 20 November 1996 written further to the commissioners. On 22
November 1996 HMRC had issued a business brief stating that agreed claims that
had been deferred would be paid, but reserving the right of recovery if
Parliament approved the three-year cap. The payment to DFS was authorised, and
this was confirmed by HMRC to DFS in a telephone conversation of 25 November
1996 and in writing on 26 November 1996.
26.
Subsequently, the three-year cap was approved, and HMRC assessed DFS,
which paid the amount assessed. On a judicial review of the decision of HMRC
not to repay that amount to DFS, Moses J (as he then was) in the High Court ([2002]
STC 760) concluded that there had been an agreement between HMRC and DFS to
settle the appeal by DFS to the tribunal, and that since the settlement had the
effect, under s 85 VATA, of a judicial determination, HMRC were not entitled to
claw back the repayment under the equivalent statutory provisions to what is
now s 80(4A).
27.
The Court of Appeal allowed the appeal of the commissioners, finding
that the letter of 11 November 1996, read in context and according to its
ordinary and natural meaning, did not make any offer to the commissioners,
which was capable of acceptance by them, so as to lead to a concluded agreement
to settle the pending appeal. The letter was not worded as an offer nor as an
invitation to agree that the decision under appeal was invalid and to treat it
as discharged or cancelled. In the absence of such an offer or invitation, no
oral acceptance had been possible on 25 November 1996 or at any other time. In
the absence of an offer and an acceptance, there had been no meeting of minds
and no agreement, either within the meaning of s 85 or at common law.
28.
In the High Court, at [58], Moses J, in describing the appropriate test
for establishing whether an agreement had been reached, referred to what Lord
Keith of Kinkel had said in Scorer (Inspector of Taxes) v Olin Energy
Systems Ltd [1985] STC 218 in the context of settlements under s 54 of the
Taxes Management Act 1970 (“TMA”):
“The situation must be viewed objectively, from the
point of view of whether the inspector’s agreement to the relevant computation,
having regard to the surrounding circumstances including all the material known
to be in his possession, was such as to lead a reasonable man to the conclusion
that he had decided to admit the claim which had been made.”
29.
Although deciding the question differently, the Court of Appeal adopted
the same approach. In his judgment Mummery LJ, with whom Keene and Laws LJ
agreed, held (at [42]) that the absence of an offer and acceptance meant that
there was no meeting of minds, and that was fatal to DFS’s case. In making
this finding, Mummery LJ agreed with the observations of Jonathan Parker J in Schuldenfrei
v Hilton (Inspector of Taxes) [1999] STC 821, at [44], that:
“… the notion of parties having ‘come to’ an
agreement plainly implies not merely that they are of the same mind in relation
to a particular matter, but also that their minds have met so as to form a
mutual consensus, and that that meeting of minds, that mutual consensus, has
resulted from a process in which each party has to some extent participated.
On that footing it is, in my judgment, both legitimate and helpful (as both
sides have accepted) to approach the question whether the Revenue and the
taxpayer have made a s 54 agreement in the instant case by applying common law
principles of offer and acceptance.”
30.
It is, as Mummery LJ pointed out at [43], possible that an agreement to
settle a claim or an appeal may be inferred from the conduct of the parties and
from the surrounding circumstances, relying, for example, on a refund followed
by a withdrawal of an appeal. But those events need not be referable to a
prior agreement between the parties; there may be a non-contractual
explanation, as was the case in DFS itself, where the Court of Appeal
found that the true explanation for the refund was that it was made in
consequence of a unilateral reversal by the commissioners of the deferral
policy that had been declared unlawful. The refund was made by the
commissioners without the need to come to an agreement with DFS to settle the
appeal.
31.
There are, of course, differences between this case and the facts of the
cases we have referred to. Olin Energy Systems and Schuldenfrei
were cases concerning s 54 TMA, and DFS with the analogous VAT
provision, s 85 VATA. Each of those provisions operates only in the context of
an outstanding appeal, and is concerned with the effect of an agreement on the
appeal itself. Although both include provisions requiring certain formalities
in the case of agreements not in writing to be complied with before the section
is to apply, neither prescribes what is required for an agreement to be
reached. The sections are concerned with the effect of an agreement, once
made, and not with the making of an agreement itself.
32.
Accordingly, the particular statutory context of those cases does not
affect the application of the principles they describe to the issue of whether
a compromise agreement was reached between Southern Cross and HMRC, in a case
where no appeal had at the relevant time been made by Southern Cross. That is
the issue with which we are concerned at this stage. The effect of any such
agreement as regards HMRC’s powers to recover by assessment is a matter for
Issue (3).
33.
With these principles in mind, we turn to the submissions of the parties
on the facts. Both Mr Mantle and Ms Simor relied on the language in the
correspondence we have outlined. Mr Mantle submitted that HMRC’s letter of 26
March 2010 amounted to either an offer to Southern Cross or an invitation to
treat by HMRC. He argued that HCW’s letter of 14 April 2010 amounted to a
counter-offer to HMRC by Southern Cross, or an offer to settle the claim in
return for payment of 74% of the principal amount claimed, together with
statutory interest on that sum, and that this offer was accepted by HMRC in its
letter dated 29 April 2010, which expressly accepted the proposal made by
Southern Cross.
34.
Mr Mantle submitted that there had been a meeting of minds to form a
mutual consensus that 74% of the claim, but no more than that percentage, should
be payable by HMRC to Southern Cross. He based this submission on the language
used in the correspondence, arguing that:
(1)
HMRC’s letter of 26 March 2010 referred to the parties coming to a
“compromise position” and stated that discussions should be “without
prejudice”, a term appropriate to negotiations with a view to settlement. It
did not suggest a limited compromise on any technical or specific point, but an
overall compromise on the basis that 50% of the claim was due from HMRC.
(2)
In Mr Smith’s email of 1 April 2010, he referred to “the offer in
[HMRC’s] letter of 26 March”. The reply, by email from Mr Knight, did not
dissent from the use of that description.
(3)
HCW’s letter of 14 April 2010 expressly referred to Southern Cross being
“willing to negotiate”, and being prepared, despite maintaining that Southern
Cross would not be unjustly enriched by full payment of the claim, to negotiate
“in order to attempt to bring this to a conclusion speedily”. Southern Cross,
by that letter, plainly offered to accept payment of 74% of the principal
amount clamed plus statutory interest to bring about a mutually agreed
settlement of its claim.
(4)
HMRC’s response in their letter dated 29 April 2010 is clear and
expressly made in the language of offer and acceptance: “[HMRC] will accept
that 74% of the claim of £861,212 will be repaid … together with the
appropriate interest …”
35.
Mr Mantle submitted that both the pattern of the correspondence and the
specific wording used in it was consistent with an intention to compromise and
conclude a compromise agreement, but not with a unilateral voluntary decision
on the claim by HMRC.
36.
Mr Mantle also emphasised the absence, in the relevant correspondence,
of notification to Southern Cross of any right of statutory review under s 83A VATA,
or any right of appeal under s 83G. This, he argued, was consistent only with
there having been a binding compromise agreement in respect of the claim; the
offer of a statutory review would have been required if the failure on the part
of HMRC to pay the claim in full had been a unilateral decision of HMRC.
37.
Ms Simor submitted that there was in this case no compromise agreement.
What took place was nothing more than the standard process of assessment
involving an attempt on the part of HMRC to ascertain what was due to a
taxpayer as a matter of law. There was no agreement to pay more that was due;
nor was there any agreement on the part of Southern Cross not to make a further
claim for the amount not paid, or to litigate the issue.
38.
Ms Simor argued that, contrary to the submissions of Mr Mantle, a fair
reading of the correspondence was that Southern Cross had made a claim, and
that HMRC had acceded to it in part. It was about HMRC establishing the
entitlement of Southern Cross, and it was irrelevant what Southern Cross
believed the process to be. Ms Simor submitted that the correspondence
supported this conclusion, arguing that:
(1)
The proposal made by Mr Knight in his letter of 26 March 2010 was
neither an offer nor an invitation to treat. That letter was concerned with
what was due to Southern Cross, having regard to the available defence (in s
80(3) VATA) of unjust enrichment. The proposal for a compromise position was
itself expressed as a proposal that 50% of the claim “is due”.
(2)
The letter from HCW dated 14 April 2010 was neither a counter-offer, nor
an offer. It described both the proposal made by HMRC, and Southern Cross’s
own proposal as an agreement or proposal by HMRC to “repay”, and not to
settle. In suggesting that the amount due could be calculated by reference to
the industry margin to which competitors could be treated as having applied
VAT, HCW, in saying “our client would be willing to restrict its original claim
by [the relevant industry margin of 26%]”, was using the language of claim,
rather than of settlement.
(3)
HMRC’s letter of 29 April 2010 was not an acceptance of a compromise,
but an acceptance that 74% of the claim would be repaid. This again
significantly used the language of claim rather than of compromise.
(4)
None of the correspondence uses language of full and final settlement,
and there is nothing to prevent a further claim by Southern Cross. The absence
of such language is strongly indicative, if not determinative, of a conclusion
that this was not a compromise agreement but an agreement to pay what was
properly due.
39.
Ms Simor argued that an agreement would require consideration, and that
there was in this case no consideration in any sense. HMRC were not paying
less that what was due to Southern Cross, and Southern Cross was not giving
anything up.
40.
As regards the matter of the absence of the offer of a review or the
notification of rights of appeal, Ms Simor argued that this was consistent with
the restriction of Southern Cross’s claim to the amounts that were paid. As
HMRC had paid those modified claims in full, there would have been no need to
offer a review or refer to any appeal rights. In any event, submitted Ms
Simor, the failure on the part of HMRC to include such language would be
nothing more than a breach of its statutory duties, and would not indicate that
a compromise agreement had been entered into.
41.
In our view, the correspondence and the course of dealing between
Southern Cross and HMRC amounted to a compromise agreement by which the
original claim of Southern Cross was compromised to the lesser amount of 74%,
with the intention that this agreement would be binding on both parties.
Although there was no express language of full and final settlement, that was
the effect of what was agreed. We agree with Mr Mantle that the language of
the correspondence supports this analysis. We consider that the proposal made
by Mr Knight in the letter of 26 March 2010 was an offer to settle at 50%,
capable of acceptance by Southern Cross, that the 74% proposal made in HCW’s
letter dated 14 April 2010 was a counter-offer, and that this offer was
accepted by HMRC by the letter from Mr Knight of 26 April 2010.
42.
With respect to the elegantly expressed contentions of Ms Simor, we do
not consider that the correspondence can support a conclusion that this was
simply a case of HMRC seeking to ascertain the amount properly due. It is
plain that such particularity would have eluded both HMRC and Southern Cross.
There was no clear evidence of the effect of competition on the issue of unjust
enrichment. Mr Knight’s proposal that the claim be paid as to 50% can only be
regarded as an unscientific attempt to reach a compromise, and the
counter-proposal of Southern Cross as an offer to settle at an amount based on
a proxy for evidence that was not available to calculate a correct amount.
43.
Nor do we consider that the fact that the area of disagreement, and
those of compromise, was centred on the potential effect of a defence of unjust
enrichment, and not on the question whether the supply was standard-rated or
exempt, can prevent there being established an agreement settling the whole
matter of Southern Cross’s entitlement and HMRC’s liability. In any
negotiation there are bound to be areas of initial concurrence as well as areas
of dispute. What matters is not the particular area of dispute which may
itself be compromised or conceded, but whether in the circumstances taken as a
whole there has been a meeting of minds that the question of liability (whether
liability of the taxpayer to pay or liability of HMRC to repay) has been
settled. On the facts of this case we have concluded that there was such a
meeting of minds, and that it was a meeting of minds on the whole question of
liability to pay.
44.
In our view the agreement reached between HMRC and Southern Cross
compromised the original claim of Southern Cross. It is evident from the
correspondence that Southern Cross did not accept, as a matter of law, that the
amount due to it should be reduced on the basis of unjust enrichment, but that
in spite of that position it was willing to accept a reduced amount. In our
view Southern Cross agreed to give up 24% of its original claim in order to
achieve a settlement; that was consideration for the agreement on the part of
HMRC to pay that reduced amount. The agreement was in full and final
settlement, and it was not necessary for there to have been express wording to
that effect. There was, as a result, no scope for Southern Cross to make a
further claim in the same respect, or to appeal to the tribunal in relation to
the 24% of the original claim that was unpaid.
45.
We accept that the absence of notification of an offer of review or a
right of appeal is equally consistent with the payment in full of an amended,
and reduced, claim as it is with the making of a compromise agreement. However,
we do not consider that the references to the claim, particularly that by HWC
in its letter of 14 April 2010 which referred to a willingness to restrict the
original claim, negate the presence of a compromise agreement. In our view,
the restriction of the claim to 74% of its original amount was not a
recognition of the correct amount of the claim, but was a mechanism to give
effect to the compromise put forward by Southern Cross were it to be (as it
was) accepted by HMRC. It was the means to effect the agreement that was
reached, and does not detract from the existence of that agreement.
46.
We find therefore, in relation to issue (1), that the payment made by HMRC
to Southern Cross was made pursuant to a compromise agreement entered into by
them.
Issue (2): Was the compromise agreement void as being outside the powers of
HMRC?
47.
HMRC are responsible for the collection and management of revenue,
including VAT (s 5 of the Commissioners for Revenue and Customs Act 2005). By
para 1, Sch 11 VATA, HMRC are responsible for the collection and management of
VAT.
48.
The extent of such powers has been described, by Lord Diplock in IRC
v National Federation of Self-Employed and Small Businesses Ltd [1981] STC 260, at p 269b-c, as conferring a “wide managerial discretion as to the best
means of obtaining for the national exchequer from the taxes committed to their
charge the highest net return that is practicable having regard to the staff
available to them and the cost of collection.” Any exercise by HMRC of their
powers, or refraining from exercising those powers, other than for reasons of
good management would be ultra vires.
49.
The power of HMRC to enter into back duty agreements was confirmed by
the Court of Appeal in IRC v Nuttall [1990] STC 194. In that case an
investigation into the tax affairs of the taxpayer was concluded by an
agreement relating to unpaid income tax for certain past years. The taxpayer
undertook to pay a certain sum in return for the Revenue taking no proceedings
in respect of income tax, penalties or interest. The taxpayer subsequently
sought to argue that the agreement was ultra vires as it was entered
into by the Revenue in excess of its statutory powers. The Court of Appeal
held that the power to enter into such agreements, even in the absence of
assessment and appeal, was a power necessary for the carrying into operation of
the relevant statutory legislation.
50.
In his judgment, at p 203b, Ralph Gibson LJ made it clear that the
commissioners have no power to agree to take a smaller sum for tax than is
lawfully due on the information available to the commissioners. They can,
however, make a decision in their management functions as to the extent of the
information they can reasonably expect to get and then make an agreement on
that basis as to the tax payable. Ralph Gibson LJ went on, at p 203h, to
accept the submission of counsel to the Crown that where a sum is agreed to be
paid under a contract of compromise, the commissioners are bound by that
contract and cannot in respect of the year or years covered by the contract
pursue any claims to tax, interest or penalties. The sum payable under the
contract can only be recovered by proceedings at law for debt.
51.
In the same vein, Bingham LJ said, at p 205b, that although a power to
make agreements with taxpayers for the payment of back duty was to be exercised
with circumspection and due regard to the Revenue’s duty to collect the public
revenue, if in an appropriate case the Revenue reasonably considers that the
public interest in collecting taxes will be better served by informal
compromise than by exercising the full rigour of its coercive powers, such
compromise would fall well within its powers of care and management.
Furthermore, Parker LJ, at p 200h, observed that:
“If there is a power to enforce there must also
necessarily be a power for good consideration to accept some lesser sum. The
Revenue of course have no power to refrain from collecting tax which is due,
but these agreements are all made in a situation where the actual tax
recoverable has not been quantified.”
52.
The case of Al Fayed and others v Advocate General for Scotland (representing the Inland Revenue Commissioners) [2004] STC 1703, in the Court
of Session, concerned the validity of forward tax agreements. It was held that
there was no power for the Revenue to contract with a taxpayer as to his future
liability. In his judgment, the Lord President (Lord Cullen of Whitekirk)
summarised the position as regards the Revenue’s powers generally, in the following
terms (at [69]):
“The authorities clearly show that the
respondents have a managerial discretion, and that there are circumstances in
which they have power to enter into an agreement with the taxpayer for the
payment of a sum of money in respect of the taxpayer's tax liability, even
where it may be said that they have foregone the collection of some part of the
total amount of tax which was due. They can properly take into account the
extent of the information which is likely to be obtainable, and the difficulty
involved in identifying the extent of the exact sum which is due.”
53.
The Lord President went on to reject an argument for the claimants based
on other practices of the Revenue, including those in relation to back duty
agreements. In that regard, he said (at [76]):
“A back tax agreement relates to a situation in
which the taxpayer has already incurred the tax liability, but its amount has
not been determined. Fundamental to the legality of such an agreement is that
the respondents have the power to require the taxpayer to pay what is due. As
an alternative means to the same end they are regarded as having the power, in
the exercise of their managerial discretion, to enter into a contract with the
taxpayer for a payment in satisfaction of that liability. In that context they
have power to arrange a compromise with the taxpayer, taking into account such
factors as may be relevant.”
54.
Finally, in considering extra-statutory concessions, the Lord President,
at [78] – [80], said that the authorities made it plain that it is not lawful
for the Revenue to make a concession where to do so would be in conflict with
their statutory duty. Thus, as Lord Templeton had said in Preston v
IRC [1985] STC 282, 291, the Revenue could not bind themselves in advance not
to pursue their statutory duty at a later date. Even if forward tax agreements
were not ultra vires, such an agreement would on its terms be ultra
vires unless it ensured that no sum was payable under it unless it was a
genuine and realistic approximation of the actual liability of the taxpayer.
55.
The case of R (on the application of Wilkinson) v IRC [2006] STC 270, in the House of Lords, was concerned with the extent to which the care and
management powers of the Revenue under s 1 TMA enabled the Revenue to grant an
extra-statutory concession. It was held that the discretion given to the
Revenue by the TMA enabled them to formulate policy in the interstices of tax
legislation, dealing pragmatically with minor or transitory anomalies, cases of
hardship at the margins or cases in which a statutory rule was difficult to
formulate or its enactment would take up a disproportionate amount of
parliamentary time. The powers could not be construed so widely as to enable
the commissioners to concede, by extra-statutory concession, an allowance (in
that case it was the widow’s bereavement allowance that did not extend to
widowers) which Parliament could have granted but had not granted, and on
grounds not of pragmatism in the collection of tax but of general equity
between men and women (see, per Lord Hoffmann, at [21]).
56.
The discretion inherent in HMRC’s duty of management was also alluded to
by Lord Wilson in R (on the application of Davies and another v Revenue and
Customs commissioners; R (on the application of Gaines-Cooper) v Revenue and
Customs Commissioners [2011] STC 2249, in the Supreme Court, cases which
concerned published Revenue guidance on the meaning of “residence” and
“ordinary residence”. At [26] Lord Wilson said:
“The primary duty of the Revenue is to collect taxes
which are properly payable in accordance with current legislation but it is
also responsible for managing the tax system: see s 1 of the Taxes
Management Act 1970. Inherent in the duty of management is a wide discretion.
Although the discretion is bounded by the primary duty (see R (on the
application of Wilkinson) v IRC [2005] UKHL 30 at
[21], [2006] STC 270 at [21],
[2005] 1 WLR 1718 per Lord Hoffmann), it is lawful for the Revenue to make
concessions in relation to individual cases or types of case which will, or
may, result in the non-collection of tax lawfully due provided that they are
made with a view to obtaining overall for the national exchequer the highest
net practicable return: see IRC v National Federation of Self-Employed and
Small Businesses Ltd [1981] STC 260 at 268,
[1982] AC 617 at 636 per
Lord Diplock. In particular the Revenue is entitled to apply a cost-benefit
analysis to its duty of management and in particular, against the return
thereby likely to be foregone, to weigh the costs which it would be likely to
save as a result of a concession which cuts away an area of complexity or
likely dispute.”
57.
More recently, in R (on the application of UK Uncut Legal Action Ltd)
v Revenue and Customs Commissioners [2013] STC 2357, the claimant, a
campaign group, challenged a decision of HMRC to enter into a settlement
agreement, and a subsequent decision to ratify that agreement, under which HMRC
agreed to forgo any interest on unpaid NICs. The agreement had been made under
the mistaken impression that there was a barrier or potential barrier to HMRC
recovering interest. At a subsequent meeting to approve the settlement, HMRC’s
High Risk Corporates Programme Board retrospectively approved all the elements
of the agreement, except the concession to forgo interest. The taxpayer took
the view that there had been a concluded deal, and that HMRC could not resile
from the agreement. The agreement was then approved and endorsed by two
commissioners.
58.
For the claimant it was argued that the alleged agreement breached HMRC’s
Litigation and Settlement Strategy. In the High Court, Nicol J rejected that
argument. In doing so, however, he referred (at [37]) to what he regarded as
fundamental problems with the original agreement, including the
misunderstanding of HMRC’s representatives as to the legal position regarding
interest. This gave rise to the need for there to be a further decision, and
it was the final decision by the two HMRC commissioners that was operative.
These were factors that were outside the scope of the Strategy (see [38]).
59.
There was no contention on the part of the claimant that the agreement
did not give taxpayers value for money. The commissioners had believed that
was the case, and this had been confirmed in a report by the Comptroller and
Auditor General, following advice from a retired High Court judge. The waiver
of interest could not be regarded as an over-generous approach to one taxpayer
which correspondingly increased the burden on all other taxpayers (see [41]).
60.
It is accepted that if the compromise agreement was ultra vires,
or outside the powers of HMRC, then it will be void. We therefore need to
decide whether, in the context of HMRC’s management powers, and the discretion
afforded to HMRC by those powers, the agreement reached between HMRC and
Southern Cross went outside the boundaries of those powers and that discretion.
61.
Ms Simor argued that, if there was an agreement in this case, it was one
that was based on a mistake of law. Contrary to what Mr Knight had thought at
the relevant time, Southern Cross was not as a matter of law entitled to
payment of any part of its claim. That had been confirmed in Moher, and
was accepted by Southern Cross. Furthermore, Mr Knight had also been unaware
of the view taken by HMRC at the relevant time, based on legal advice. A
mistake renders an agreement unlawful, and the good faith of the parties is
irrelevant.
62.
We accept that a mistake may, depending on the circumstances, render an
agreement outside the powers of HMRC, and thus as void. We do not consider
that UK Uncut can be relied on by Mr Mantle as indicating to the
contrary. It is clear from the judgment of Nicol J that the original decision
to enter into the agreement, based as it was on mistake, particularly as
regards the ability to recover interest, was not the operative decision. The
operative decision was that ratifying the agreement, at which stage the
commissioners knew the correct position as regards interest.
63.
We do not consider, however, that the lack of knowledge of Mr Knight as
to the advice received by HMRC, or HMRC’s own view on the issue of the correct
VAT treatment of the relevant supplies, amounts to a mistake such as to render
the action taken by Mr Knight in reaching a compromise agreement with Southern
Cross outside the powers of HMRC. Although it has turned out that Southern
Cross had no entitlement to the VAT it had claimed, that conclusion is reached
with the benefit of hindsight. Moher had not been decided at the time
the agreement was made; different views of the law were held at that time.
64.
Ms Simor submitted that HMRC cannot settle a case (or make a payment in
response to a voluntary disclosure) where HMRC has no liability to the taxpayer.
She argued that it would be a manifestly unlawful exercise of HMRC’s powers for
it to make a payment to a taxpayer in order to avoid litigation in
circumstances where it did not believe that the taxpayer had even an arguable
entitlement to that money or that there was any risk that the tribunal would
find such an entitlement.
65.
We do not accept that argument, either as a matter of principle or by
reference to the facts of this case. On the question of principle, it is clear
that the discretion of HMRC in the exercise of their powers of management is a
wide one, albeit bounded by their primary duty to collect taxes that are
properly due. Concessions may be made that result in non-collection of tax
lawfully due provided that they are made with a view to obtaining overall for
the national exchequer the highest net practicable return. That has been shown
to be the case, not only in relation to concessions, but more generally in the
case of back duty agreements, again provided that HMRC do not agree to take a
smaller sum for tax than is lawfully due on the information available to them.
HMRC may, however, make a decision in the exercise of their management
functions as to the extent of the information they can reasonably expect to get
and then make an agreement on that basis as to the tax payable. Although HMRC
have no power to refrain from collecting tax which is due, it does have the
power to compromise where the actual tax recoverable has not been quantified.
66.
In our judgment the agreement reached between HMRC and Southern Cross
falls into this category. At the material time there was no clarity as to the
correct VAT treatment of the supplies in question. HMRC may have had a view
that Mr Knight was not aware of, but that view was evidently not universally
shared. The agreement that was made was a genuine and realistic approximation
of the actual amount due to Southern Cross, made after detailed discussion and
negotiation, and in the absence of available information that showed that the amount
was not due. Following Moher, Southern Cross accepts that it was not
entitled as a matter of law to the repayment, but that does not render unlawful
an agreement made at a time when that position had not been determined.
67.
We do not consider that an agreement that was made with a view to
reaching a genuine and realistic approximation of the amount due, whether to
HMRC or to the taxpayer, can be rendered unlawful if, in the event, it is later
discovered that the deal was not a good one for HMRC. Were that to be the case,
and leaving out of account special cases such as those where the taxpayer has
withheld information from HMRC, it would render HMRC’s power to compromise
claims virtually worthless. There is, as the cases demonstrate, a clear public
interest in HMRC being able to resolve the tax position of a taxpayer without
resort to enforcement powers, provided that they do so within the boundaries of
the management powers vested in them.
68.
In this case, for the reasons we have given, we conclude that the
compromise agreement made between HMRC and Southern Cross was within those
boundaries, and accordingly was not outside the powers of HMRC or ultra
vires. It was therefore, we find, a valid compromise agreement.
Issue (3): Given a valid compromise agreement, did HMRC nonetheless have
power to assess to recover the amount repaid?
69.
The assessments under appeal were made, in the case of the principal
amount, under s 80(4A) VATA, and in the case of interest under s 78A(1).
70.
So far as is material, s 80 provides:
(1) Where a person—
(a)
has accounted to the Commissioners for VAT for a prescribed accounting period
(whenever ended), and
(b)
in doing so, has brought into account as output tax an amount that was not
output tax due,
the Commissioners shall be liable to credit the
person with that amount.
…
(4A) Where—
(a)
an amount has been credited under subsection (1) or (1A) above to any person at
any time on or after 26th May 2005, and
(b)
the amount so credited exceeded the amount which the Commissioners were liable
at that time to credit to that person,
the Commissioners may, to the best of their
judgement, assess the excess credited to that person and notify it to him.
71.
Section 78A(1) makes analogous provision with respect to interest:
(1) Where—
(a)
any amount has been paid to any person by way of interest under section 78, but
(b)
that person was not entitled to that amount under that section,
the Commissioners may, to the best of their
judgement, assess the amount so paid to which that person was not entitled and
notify it to him.
72.
Section 78, so far as is material, provides:
(1) Where, due to an error
on the part of the Commissioners, a person has—
(a)
accounted to them for an amount by way of output tax which was not output tax
due from him and, as a result, they are liable under section 80(2A) to pay (or
repay) an amount to him,
…
then, if and to the extent that they would not be
liable to do so apart from this section, they shall pay interest to him on that
amount for the applicable period, but subject to the following provisions of
this section.
73.
The question, therefore, is one of statutory construction. So far as s
80(4A) is concerned, the issue is whether the principal sum paid to Southern
Cross “exceeded the amount which [HMRC] were liable … to credit” to Southern
Cross. The same issue arises in respect of s 78A(1). The question there is
whether Southern Cross was entitled to the interest under s 78, which in turn,
by s 78(1)(a), is resolved around the same question of whether HMRC were liable
to pay the principal sum to Southern Cross. As the question is the same in each
case, and in common with the way in which the argument was presented to us, we
shall refer only to s 80(4A).
74.
If s 80(4A) is to be construed as entitling HMRC to make an assessment
based purely on the liability in law to make the repayment of VAT to Southern
Cross, then it would follow that the assessment would be valid. Although at
the time the repayment was made to Southern Cross the strict legal position was
open to doubt that was only subsequently resolved by Moher, the result
is that at the time of the repayment Southern Cross was not as a matter of VAT
law entitled to it (as it had correctly accounted for VAT on the relevant
supplies) and HMRC were not liable as a matter of VAT law to credit Southern
Cross. The question is whether s 80(4A) should be construed such that the
liability to repay must also take into account the effect of the compromise
agreement.
75.
In submitting that the question of liability to repay for s 80(4A)
purposes should take account of the compromise agreement, Mr Mantle sought to
derive support from two cases which have considered whether, in given
circumstances, the conditions of s 80(4A) (or earlier statutory provisions to
the same effect) are satisfied.
76.
The first case is R v Customs and Excise Commissioners, ex parte
Building Societies Ombudsman Co Ltd [2000] 892 (“BSOC”). That case
was another which arose out of the introduction of the three-year cap on
claims, and the unlawful deferral of repayments and consequent payments made
pending the introduction of the cap. One issue was whether there had been a
determination of the taxpayer’s appeal by the VAT tribunal, by means of a
consent order. The Court of Appeal held that there had, and that this had
determined HMRC’s liability to repay. The question then was whether the
amended s 80, and the introduction of the clawback provisions now found in s
80(4A), could apply where there had already been a judicial decision as to the
amount of HMRC’s repayment liability.
77.
As well as finding that s 80 did not contemplate that the
retrospectivity of the three-year cap extended so far as to permit HMRC to use
the new clawback powers to override a prior judicial decision (see [107]), Rix
LJ, giving the leading judgment in the Court of Appeal, also considered an
alternative argument for HMRC, one not dependent on retrospective effect, based
on similar wording to that in s 80(4A), which raised the question as to what
was the amount HMRC were liable to repay to the taxpayer at the date of
payment. Rix LJ held, at [119], that the judicial decision had established the
amount of HMRC’s liability at that time.
78.
The second case is one that we have already considered, that of DFS.
In this context, however, we are not so much concerned with the judgment of the
Court of Appeal (which overturned the decision of Moses J in the High Court on
the question whether there was an agreement to settle), but to that part of the
judgment of Moses J which considered the effect of an agreement under s 85
VATA.
79.
In the High Court it was accepted by HMRC that if an appeal had been
brought by a taxable person and has been settled by an agreement within s 85
VATA and the conditions of s 85 are satisfied, then by virtue of s 85(1) the
like consequences would ensue as if a tribunal had determined the appeal.
Those consequences were that, as determined by BSOC, HMRC could not rely
on s 80(4A). Moses J held that there was an agreement, and that it fell within
s 85. Accordingly, there was a settlement of the appeal which had the effect
of a judicial determination, and s 80(4A) did not permit HMRC to claw back sums
paid as part of that settlement.
80.
At [61] Moses J explained why his findings would not deprive s 80(4A) of
all effect:
“Section 80(4A) operates whenever there has been a
voluntary payment in response to a claim under 80(2), but sub–s (4A) does not
operate where a payment has been made in settlement of a dispute which has
given rise to an appeal settled within the meaning of s 85. The distinction
finds support at para 106 in BSOC (see [2000] STC 892 at 921–922). It is true
that there was no intervention of a judicial determination as in BSOC,
but s 85 has the same effect as the intervention of a judicial determination.”
81.
The taxpayer in DFS had also argued that it would be sufficient
if there was an agreement to settle at common law, in other words without the
deeming effect of s 85. Moses J declined to determine that point saying only
that: “Whatever my doubts about that submission I have no need to reach any
conclusion. Very different considerations apply if DFS cannot rely on s 85 and
in particular it falls for consideration elsewhere as to whether s 85 ousts or
merely augments the common law rule.”
82.
The effect of an agreement outside s 85 is, of course, is the very
question before us. Mr Mantle submitted that a compromise agreement
compromising a dispute before an appeal should be treated in the same way as a
determination, or deemed determination, of the tribunal. Firstly, he argued,
it is the compromise itself, once made, that governs the legal relationship
between the parties. HMRC became liable to pay the amount agreed in the
compromise. He referred us to Foskett, “The Law and Practice of
Compromise”, Seventh Edition, Chapter 8, p 156:
“The purpose of a compromise is to put an end to the
disputation in which the parties had hitherto been engaged. Such cause or
causes of action as each had, or may have had, prior to the conclusion of the
agreement are discharged and if the compromise is embodied in a consent
judgment those causes of action become merged in the judgment. New causes of
action arise from the existence of the compromises …”
83.
Secondly, argued Mr Mantle, the inevitable consequence is that, once a
valid compromise agreement is made, it is the compromise agreement that
establishes HMRC’s liability, including for the purposes of s 80(4A).
Accordingly, HMRC were liable to pay the amounts of principal and interest to
Southern Cross when the payment was made. This conclusion, Mr Mantle
submitted, was logical and supported by public policy, in not requiring
taxpayers to make appeals in order to establish certainty, in encouraging
settlement of disputes and in permitting HMRC to deal with matters
administratively in exercise of their management powers.
84.
Ms Simor submitted that there was every difference between, on the one
hand, the effect of a judicial determination, and the like effect of a
statutory provision such as s 85, and on the other, a common law agreement.
Both BSOC and DFS had drawn a clear distinction between payments
made pursuant to actual and deemed judicial determinations and other payments.
The context of s 80(4A) and the clear intention of Parliament was that the question
of liability was settled only by judicial decision and not by agreement.
85.
Ms Simor relied in particular on the following passage from the judgment
of Rix LJ in BSOC (at [104] – [106]), where, after remarking that, in
the circumstances of that case, if Government, with the support of Parliament,
wished to execute a policy of retrospective removal of valid claims, then it
must do so meticulously and clearly, he said:
“104. The question remains whether it has done so. I
cannot agree that the revisiting of a payment by the commissioners is the same
thing as the administrative overthrowing of a prior judicial determination.
Against the background of the announcement of 18 July 1996, it is one thing for
the commissioners to say to a taxpayer: 'I agree that as the law now stands I
must repay you six years' overpayment, but when the law has been changed so as
to introduce the new cap retrospectively, I will exercise my rights to recoup
the difference.' But it seems to me that it is quite another thing for the commissioners
to litigate with the taxpayer as to the extent of their liability, to find that
judgment goes against them or to concede that it must, and then seek to say by
administrative fiat that their 'repayment liability' was something else than it
has been judicially determined to be. If Parliament wishes to legislate that
prior judicial determinations can be overthrown in this way, especially in a
statutory context which is all about the making of claims, then in my judgment
it must say so expressly, as it could easily have done.
105. Suppose that, contrary to the facts of this
case, there had been a real possibility of a defence of unjust enrichment being
run. Could it be said that the statute contemplates that a tribunal decision
might be given against the commissioners prior to 4 December 1996 for a
repayment liability of £x, and that the commissioners could thereafter seek to
say that under the terms of amended s 80(3A)–(3C) they were now in a position
to prove that their repayment liability was some different and lesser sum? I
think not.
106. Not only is the whole context of ss 80 and 47
that of claims made rather than judicial determinations delivered, but the
retrospective aspects of s 80(4A) and (4B) are written in terms of the
commissioners' repayment liability at the time of the commissioners' payment.
That makes sense where the commissioners are merely paying a claim without the
intervention of a judicial determination. Where, therefore, the commissioners
have paid a claim after 18 July 1996, they are given the power to recoup that
part of the payment which exceeds their liability under the three-year cap.
Where, however, the amount of the repayment liability has been determined
judicially, it does not follow that the commissioners should be able to recoup
administratively what they have been adjudged liable to pay, nor is there any
logic in focusing on the time of payment as distinct from the time of the
judicial decision.”
86.
Ms Simor described Mr Mantle’s arguments based on BSOC and DFS
as “classic bootstraps” in seeking to extend principles applicable to actual
and deemed judicial determinations to compromise agreements. She argued that
this was a paradigm case where s 80(4A) was intended by Parliament to apply.
HMRC had made a mistake in making the repayment to Southern Cross and had
realised its mistake within a very short period. There was no procedural
prejudice to Southern Cross, as it could have lodged an appeal and sought an
agreement under s 85. It would not be right in the circumstances for Southern
Cross to be allowed to retain a windfall to which it had never been entitled.
87.
In our view, the significance of BSOC and DFS is in
demonstrating, first, that the question of liability to repay is to be examined
at the time of the payment, and not at some later stage when it may be
established that there was in fact a different liability, or no liability at
all, and secondly that “liability” is not confined to what might be discovered
to be the right answer as a matter of law, but can extend to judicial
determinations, or agreements having the like effect under s 85, even though
those might subsequently be shown not to have corresponded to the actual
liability in law.
88.
We consider that the authorities draw a distinction, not between
judicial determinations (or agreements treated by s 85 as having the same
effect) and common law agreements outside s 85, but between actual and deemed
judicial determinations and voluntary payments made by HMRC; as we have
described, that was the scope of s 80(4A) referred to by Moses J in DFS,
at [61]. We have found that the payment made by HMRC in this case was not
simply a voluntary payment in response to a claim under s 80. The claim was
the starting-point, but the payment was made because liability to make that
payment had been established under a valid and enforceable compromise
agreement. That agreement was, like the judicial determination described by
Rix LJ in BSOC, at [106], an intervening event which itself created a
liability, in a way that the mere payment of a claim, or payment of part of a
claim, would not. That is the relevant distinction, not as between judicial
determinations and everything else, but between cases where HMRC is liable,
whether under the statute, by judicial determination, deemed judicial
determination under s 85 or a valid and enforceable agreement, to repay an
amount at the date of payment and cases, such a voluntary payment of a claim,
where they are not so liable, because the liability has not arisen as a matter
of law.
89.
That analysis is, in our view, supported by the authorities, which we
discussed earlier in relation to Issue (2), on the power of HMRC to enter into
agreements settling tax disputes. We referred to the submission of counsel to
the Crown in Nuttall, which was accepted by Ralph Gibson LJ at p 203h,
that HMRC are bound by a contract of compromise and cannot for the years in
question pursue any claims to tax, interest and penalties. Ralph Gibson LJ
went on to conclude that s 54 TMA had not abolished the power of HMRC to make
valid enforceable back-duty agreements, holding that there was no such
necessary implication to be derived from the express words of s 54. By the
same token, we do not consider that the language of s 80 (or s 85) can permit
HMRC to raise an assessment in respect of a matter compromised by common law
agreement outside the scope of s 85, and where the liability (of the taxpayer
or HMRC) is enforceable according to the terms of that agreement. For the
reasons we have given, the proper construction of s 80 does not permit such an
assessment.
90.
We conclude therefore that, having regard to the valid and enforceable
compromise agreement between Southern Cross and HMRC under which the payment of
both the principal amount and interest were made, HMRC had no power to assess
to recover the amounts repaid under s 80(4A) or s 78A(1) VATA.
Alternative argument: Did HMRC act unlawfully in exercising a discretion to
make the assessments under s 80(4A) and s 78A(1) VATA?
91.
In view of our conclusions on Issues (1), (2) and (3), we do not need to
determine the alternative argument of Southern Cross, that even if HMRC had
power to make the assessments in this case, they had a discretion to do so (or
not to do so), and that it was unlawful for HMRC to exercise their discretion
to make the assessments. However, in view of the arguments before us, and in
the circumstances we shall describe, it might be helpful if we add a few
observations.
92.
The circumstances are that, as well as instituting the present appeal,
Southern Cross has commenced a judicial review claim in the Administrative
Court of the High Court, on a protective basis. That claim asserts that the
decision by HMRC to exercise their discretion to assess and uphold the
assessments was Wednesbury unreasonable, unfair and an abuse of power.
It is claimed that in the circumstances of the “ruling” of 2 August 2001 and/or
the compromise agreement it was unfair and/or an abuse of power by HMRC to make
and uphold the assessments.
93.
Permission to apply for judicial review was refused on 16 March 2011 by HH
Judge Sycamore (sitting as a Deputy High Court Judge), on the ground that the
appeal to this tribunal afforded an adequate alternative remedy. An
application on the part of Southern Cross to renew its application has since been
stayed pending the release of this decision.
94.
Before us, the parties agreed that, having regard to Revenue and
Customs Commissioners v Noor [2013] STC 998, no question of legitimate
expectation would be argued. This very soon gave rise to difficulty: submissions
on the argued failure of HMRC properly to take account of the “ruling” and compromise
agreement or, as Mr Mantle put it, “compromise position” quickly strayed into
legitimate expectation territory.
95.
That, in our view, demonstrates the limitations of this Tribunal’s
jurisdiction in the circumstances of this case. As Noor has confirmed,
the Tribunal is a creature of statute, and its jurisdiction is defined by
statute. In this case, the relevant statutory provisions are s 83(1)(t) and
(sa) VATA. Whilst there can be no doubt that the jurisdiction under these
provisions extends to the question of construction of s 80(4A) and s 78A(1),
and to findings as to the making and validity of a compromise agreement in
order to apply those sections as so construed to the facts of a particular
case, we do not consider that the VATA provides a jurisdictional base for
examining the lawfulness of the administrative exercise of any power to assess
under those sections. It seems to us that there is a jurisdictional dividing-line,
and that arguments that look to the policy of HMRC and the factors which HMRC
should, or should not, have taken into account in deciding to assess fall,
along with arguments whether HMRC should not have refused to withdraw the
assessments, on the judicial review side of that line.
96.
We should add that, although it was not referred to before us, we have
considered the recent decision of the First-tier Tribunal in Hollinger Print
Ltd v Revenue and Customs Commissioners [2013] UKFTT 739 (TC), where the
Tribunal decided that the wording of s 83(1)(p) VATA in relation to an
assessment under s 73 did give the Tribunal jurisdiction on arguments of
unfairness.
97.
We are not of course bound by Hollinger. But as we have reached
a different conclusion, we consider it appropriate to explain why we have not
been deflected by that decision from our own view in this case.
98.
Unlike the position in Hollinger, there is authority, in the High
Court in Customs and Excise Commissioners v National Westminster Bank plc
[2003] STC 1072, in the context of one of the particular provisions with which
we are concerned in this case, s 83(1)(t), that this Tribunal has no
jurisdiction in relation to the supervision of HMRC’s conduct. Although the
focus in National Westminster Bank was not on an assessment, but on the
refusal of the commissioners to pay a claim under s 80, and the court did not
expressly consider the jurisdiction in s 83(1)(t) over both “an assessment” and
“the amount” of an assessment (similar wording to that in s 83(1)(p) which the
Tribunal in Hollinger regarded as decisive), we regard the tenor of the
judgment in National Westminster Bank as pointing clearly against this
Tribunal having jurisdiction over the exercise of discretion by HMRC in the
making of an assessment under s 80(4A).
99.
As Lord Lane (with whom Lord Diplock, Lord Scarman and Lord Simon of
Glaisdale agreed) said in Customs and Excise Commissioners v J H Corbitt
(Numismatists) Ltd [1980] STC 231, at p 239, clear words would be necessary
to give the Tribunal a supervisory jurisdiction. With respect to the Tribunal
in Hollinger, we do not consider that either s 83(1)(t) of s 83(1)(sa),
notwithstanding the references in those provisions to “assessment” as well as
to “the amount” of the assessment, do provide such clear words.
100. Our conclusion
on each of s 83(1)t) and s 83(1)(sa), therefore, is that the Tribunal does not
have jurisdiction to consider the exercise of discretion of HMRC in relation to
the making of an assessment under s 80(4A) or s 78A(1) VATA.
101. In view of our
conclusion in this respect, our findings on the other issues before us and the fact
of the stayed judicial review proceedings, we do not consider it would be
appropriate for us to comment further on the arguments addressed to us in this
respect.
Decision
102. In light of our
conclusions that Southern Cross has succeeded on Issues (1), (2) and (3), and
for the reasons we have given, we allow this appeal.
Application for permission to appeal
103. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
ROGER BERNER
TRIBUNAL JUDGE
RELEASE DATE: 17 January 2014
