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England and Wales High Court (Administrative Court) Decisions
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Cite as:  EWHC 1283 (Admin)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| UK Uncut Legal Action Ltd
|- and -
|Commissioners of Her Majesty's Revenue and Customs
Goldman Sachs International
Goldman Sachs Services Ltd
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
James Eadie QC and Gemma White (instructed by General Counsel and Solicitor to HM Revenue and Customs) for the Defendant
The Interested Parties were not represented
Hearing dates: 2nd May 2013
Crown Copyright ©
Mr Justice Nicol :
The Litigation and Settlement Strategy grounds of challenge
"Settlement by Agreement
13. Settling disputes by agreement allows both HMRC and our customers to avoid the expense and delay of litigation and so agreed terms for settlement should always be sought before going to litigation. However, settlement terms must be consistent with the reasons for undertaking an enquiry in the first place, which are to influence taxpayer behaviour positively and to challenge behaviours that contribute to the tax gap [the tax gap is the gap between tax which is due and that which is paid]. The guidance below indicates what represent sufficient settlement terms.
14. General Principles
- Deal with each dispute on its own merits. Do not enter into "package deals", in which a range of issues are settled for a single payment that is not subdivided amongst individual disputes.
- Some disputes have an all-or-nothing character, involving a single point of law that would be decided one way or the other by the courts, with no middle ground. Such disputes should be settled on all-or-nothing terms: do not split the difference or offer any discount for an agreement not to litigate.
- Do not undercharge tax, interest or penalties in the interest of quick settlement, even if doing so would provide a good return on time spent on the case. Always consider whether settlement terms do enough to promote positive customer behaviour and deter non-compliance.
15. In avoidance cases
- If our advice is strong, do not accept settlements for less than 100% of the tax and interest due." [emphasis in the original]
Other grounds of challenge to the decision of 9th December 2010 to approve the earlier agreement
"Chris can you let me know what, if anything, is wrong with the following analysis please.
When we met GS on 19/11 LBS laid out the issues under consideration. No indication was given to GS or me that the issues could not be resolved there and then from an HMRC/Business Tax/LBS perspective. GS said any settlement would have to be cleared by Esther in the States. Steve Bunson as global head of tax had flown in from NY to keep Mike under control and to settle matters if possible.
There was no suggestion that GS was within HRCP or subject to HRCP processes.
You and I at least are very familiar with the HRCP processes.
Each issue was considered individually. On some issues GS were much stronger than Richard, you or I had previously realised.
When we looked at the NICs issue I remembered that there had been a significant weakness in our technical position on interest. Mike acknowledged that and you recalled the issue but none of us could remember the detail. I recall (now) a major firm of accountants saying we had been very commercial with the settlement proposal but they had not spotted the weakness. Steve suggested that we move on interest in return for them conceding 100% of NICs. That is what we ended up doing. I am looking for the 2005 legal advice.
Richard, you and I withdrew to consider a settlement proposal and came up with proposals which I called 7 items. LBS did not mention need for governance review (which Melanie and I always do even when we are settling HRCP cases as Commissioners).
Steve said he would recommend that GS sign up to Code but this was in no sense part of a package.
Early the following week you spoke to Freda about the possible need for a governance process and later you told me you had done so and that you saw going through HRCP governance as something of a formality. GS signed up to the code on a conditional basis which at my request you asked them to make unconditional. They did so. GS were not told there was no guarantee matters could be settled.
On 26 November Freda told me that HRCP governance was being extended to cases involving £100 million TUC. That seemed very sensible. Did Freda know that the settlement with GS had been without reservation?
The HRCP programme board rejected the planned settlement of the NICs issue on the basis that interest should have been charged from 2005. You spoke to MH at GS who went off the deep end at the suggestion they should pay interest. He left me a message - I was in India – alleging extreme bad faith on your part. He repeated this when I spoke to him on Monday.
I have asked Anthony Inglese to look at any legal issues here, particularly the 2005 advice.
My concern is not so much the decision of the HRCP programme board but rather the referral after GS had been made a without reservation offer. The technical issue on interest is yet to be resolved but if we were mistaken there is precedent for HMRC accepting an HRCP settlement offer which included "relief" for a mistake by a senior member of the Dept.
I will talk to MH on Friday with a view to creating an opportunity for you to talk to him, if that is possible. If that gets us nowhere I will speak to Steve and, if necessary, see him in the US when I am there in early January.
The risks here are major embarrassment to the ChX, HMRC, the LBS, you and me; not least if GS withdraw from the Code."
"he would always want to assist [Mr Hartnett], but not if this were 'unconscionable'. He referred to the difficulty all those present at this meeting were having in justifying a settlement without an interest element."
"Additionally, and without affecting the free-standing force of our concern about the effects of Goldman's withdrawal from the code in terms of their future tax behaviour, I was concerned that withdrawal would have embarrassed the Chancellor, who had announced on 30th November 2010 that the top 15 banks including Goldmans had signed up to the Code."
"For completeness, and in view of UK Uncut's grounds for judicial review, I emphasise that my own personal reputation played no part in our decision. While we discussed our disappointment that individuals within HMRC had overlooked governance processes, the embarrassment and reputation of those individuals was not something we considered relevant to our decision whether to stick with the 19 November settlement. As I have said, we were concerned about the mistake made by HMRC in relation to governance and Goldmans' justifiable perception of bad faith on the part of HMRC. Throughout my career the general approach of UK tax administration has been to honour its settlements even where a mistake has been made. This particular settlement had been agreed between senior people within HMRC and Goldmans, who could justifiably expect HMRC to comply with that settlement agreement. For the reasons I have explained we considered that it would not have been in the broader interests of HMRC and taxpayers generally to reject the settlement."
"HMRC's relationship and reputation with Goldman Sachs was a key consideration for the reasons I have explained above. I would also have been conscious that going back on the settlement and provoking a dispute with Goldman Sachs had the potential to damage HMRC's reputation more widely thereby making other customers more reluctant to reach agreement with HMRC. The 'reputation and standing of officials' of HMRC was not a factor we considered when reaching our decision."
"the overall settlement reached was reasonable considering all the circumstances. Had the only issue been settling the employer's NICs liability and charging related interest, he would not have viewed the settlement as a reasonable one. However, when the settlement is viewed as one settlement covering six issues, including the interest issue, it was reasonable. The alternative to reaching a settlement would have been to litigate all the issues. Sir Andrew Park noted that the Department might have secured a better outcome had all the issues gone to litigation, but equally, they might have done worse. He also cites the other benefits of reaching a settlement, which cannot be evaluated in monetary terms but are nevertheless important. These include normalising the relationship between [Goldman Sachs] and the Department."
"2.17 All the disputed tax issues in each settlement were settled on their own terms, and there were no payments that were not allocated to a specific issue.
2.18 The definition of a package deal in the Litigation and Settlement Strategy does not prohibit settling an issue as part of a settlement of multiple issues on different terms than would be considered if the issue was settled by itself. For example, the settlement with [Goldman Sachs] is reasonable only in the context of being a settlement of several issues at once. Sir Andrew Park considered that had the National Insurance Contributions (NICs) and interest been the only issues, the settlement would not have been reasonable.
2.19 The Department updated the Litigation and Settlement Strategy in July 2011, and added the requirement that each disputed issue should be considered on its own merits. The guidance accompanying the 2011 version of the strategy explains that this rules out the Department conceding one issue in return for the taxpayer conceding another. This fits better with an external perspective of a package deal. However, the reality is that once the Department and a taxpayer enter a process to resolve multiple issues at once, interdependency is created between these issues and the outcome for individual issues may be different when settled in a package with other issues.
Splitting the difference
2.19 …In the settlement with [Goldman Sachs], Sir Andrew Park found that the interest on employer's NICs could be viewed as a separate tax issue so settling without the interest was not splitting the difference."
i) In approving the settlement on 9th December Mr Hartnett took account of immaterial considerations, namely:-a) the professional embarrassment of himself and the other officials at the 19th November 2010 because of the mistakes they had made;b) the embarrassment which would have been caused to the Chancellor if Goldman Sachs withdrew from the Tax Code because he had recently praised the agreement of 10 big banks (including Goldman Sachs) to sign up to the Code;c) the damage to HMRC's relationship with Goldman Sachs if the 19th November agreement was re-opened;This is said to be irrelevant because Goldman Sachs should not be entitled to benefit from what was said to be a previously difficult and aggressive relationship with the Revenue.d) the damage to HMRC's reputation in the wider community if the 19th November agreement was reopened;This is said to be irrelevant because large firms and tax professionals would already know that the Programme Board had to approve large settlements and there would be no surprise that HMRC wished to correct errors, collect interest and comply with the Litigation and Settlement Strategy. Thus re-opening the agreement would be likely to enhance rather than damage HMRC's reputation. In any case, other large firms would know that the doctrine of legitimate expectations would provide legal backing to promises made by the Revenue if there was no good reason to resile from them.e) Goldman Sachs' threat to withdraw from the Tax Code.This was irrelevant since, [as Mr Hartnett recorded in his email], signing up to the Code was in no sense part of a package. Other banks could not expect favourable treatment as a result of agreeing to abide by a voluntary and unenforceable statement of general principles.
ii) Because the settlement was not a proper exercise of HMRC's functions, there was a breach of its duty under s.5(1) of the Commissioners for Revenue and Customs Act 2005 placing a responsibility on it for the collection and management of the revenue.
iii) There was a breach of the principle of equality. HMRC failed to treat like cases alike when comparison is made between this case and those of the other companies who adopted the same arrangement but who settled with the Revenue in 2005.
The Defendants' response
i) The 19th November agreement did not infringe the Litigation and Settlement Strategy, as Sir Andrew Park and the NAO concluded. In any case, the Strategy provided general principles rather than bright line rules. It was not appropriate to consider it like a statute.
ii) In any case, the 19th November agreement was overtaken by the decision on 9th December. The situation confronting the Commissioners by that stage was out of the ordinary. It was not one to which the Litigation and Settlement Strategy had any application.
iii) Furthermore, it was necessary to have regard to the nature of this litigation. This was not a situation where a taxpayer, who had negotiated with the Revenue on the basis that it would abide by its published policy, complained of a departure. The Claimant's interest in the application for judicial review was that of taxpayers generally. They would have been affected by a departure from the policy if it meant that the Revenue collected less tax as a result and a greater burden was thereby cast on the general body of taxpayers. However, the decision on 9th December was that overall it was more advantageous to adhere to the 19th November agreement rather than to resile from it. Sir Andrew Park and the NAO considered that the 19th November agreement was a reasonable one and the decision to endorse it was right. Ms Simler QC, on behalf of the Claimant, had specifically said in the course of the hearing that there was not a rationality challenge to the Commissioners' judgment. That being so, I could not conclude that the general body of taxpayers had been harmed by these agreements.
iv) Mr Hartnett and Ms Dawes specifically denied in their witness statements that the 9th December decision had taken into account the professional embarrassment of Mr Hartnett or any other HMRC official. There had been no application to cross examine either Mr Hartnett or Ms Dawes. In those circumstances, I should proceed on the basis that their evidence was correct.
v) The Defendants accepted that any embarrassment to the Chancellor of the Exchequer was not a matter which should have been taken into account by Mr Hartnett. However, his witness statement made clear that this was an independent reason for the decision which was made on 9th December. Ms Dawes made no mention of it. Disregarding that factor, Sir Andrew Park and the NAO considered that the 9th December decision was the right one. On all the evidence, I should conclude that the decision would inevitably have been the same even without this immaterial consideration.
vi) As for the damage to the Revenue's relationship with Goldman Sachs if the 19th November agreement was not ratified, the consequences of Goldman Sachs withdrawing from the Tax Code and the wider reputational damage to HMRC if it tried to withdraw from the 19th November agreement, these were all matters for the Commissioners to weigh in their discretion. It was a general principle of administrative law that (save where Parliament prescribed certain matters which either had to be or could not be taken into consideration) it was for the decision-maker to decide what was a relevant consideration. The inclusion of a factor in the decision-making process would only be unlawful if it was irrational for it to be regarded as relevant. I could not conclude that was the case with any of these matters which the Claimant criticised the Commissioners for taking into account.
vii) Parliament had given the Commissioners a discretion as to how to best manage the collection of taxes. The Courts had interpreted this as a very broad discretion. There was no illegality in the decision to proceed with the settlement with Goldman Sachs.
viii) The principle of equality operated at a high level of generality. In particular, it could give rise to no illegality unless, at least, the two cases said to have been treated differently were materially the same and there was no other justification for different treatment. The position of Goldman Sachs in 2010 was simply different from that of the other taxpaying companies who settled in 2005.
Litigation and Settlement Strategy grounds:
"In summary, the review will focus on three issues: the reasonableness of the settlement, whether we followed our own rules, and whether lawyers were used appropriately. Amyas reminded me that he himself was at one time a tax partner (as an accountant) and dealt with many significant issues without legal support. I reminded him that in our organisation most tax work was undertaken by 'tax inspectors' and other tax officials, many of whom had a more detailed knowledge of tax provisions than some of our lawyers although that was not to be taken as any criticism of our lawyers. Amyas has been insistent that Andrew Park tackle the cases one at a time. He also told me that he has made clear to the NAO that his expectation is that nothing of substance will be found in the review." [emphasis added]
Irrelevant consideration: Mr Hartnett's personal embarrassment
"The risks here are major embarrassment to the ChX, HMRC, the LBS, you and me, not least if GS withdraw from the Code."
She argues that Mr Hartnett and Mr Davidson (to whom the email had been addressed) had made major errors in the meeting on 19th November and Mr Hartnett was quite right that resiling from the agreement with Goldman Sachs would have been a major embarrassment for all the people he mentioned. It was inevitable that this would feature in his thinking on 9th December when he had to decide whether or not to proceed with the agreement.
"It is a convention of our litigation that in general the evidence of a witness is accepted unless he is cross examined and is thus given the opportunity to rebut the allegations made against him. There may be an exception where there is undisputed objective evidence inconsistent with that of the witness that cannot sensibly be explained away (in other words the witness's evidence is manifestly wrong)… The general rule applies as much in judicial review proceedings as in other litigation, although in judicial review, it is relatively unusual for there to be cross examination of witnesses."
The S case had a convoluted history. It was linked with the case of Munjaz and the Court of Appeal allowed the appeal ( QB 395), but a further appeal by Munjaz was also successful ( 2 AC 148), but so far as I can see, neither of the higher courts criticised the passage which I have quoted above. In any case, views to a similar effect were expressed by the Court of Appeal in R (MWH and H Ward Estates Ltd) v Monmouthshire County Council  EWCA Civ 1915 at .
Irrelevant consideration: embarrassment to the Chancellor
"67. Where a decision-maker has taken a legally irrelevant factor into account when making his decision, the normal principle is that the decision is liable to be invalid unless the factor played no significant part in the decision-making exercise…
68. Even where the irrelevant factor played a significant or substantial part in the decision-maker's thinking, the decision may, exceptionally, still be upheld, provided the court is satisfied that it is clear that, even without the irrelevant factor, the decision-maker would have reached the same conclusion. Thus in the Simplex case 57 P&CR 306, 326, Purchas LJ approved the following passage in the judgment of May LJ in R v Broadcasting Complaints Commission ex parte Owen  QB 1153, 1177,
'Where the reasons given by a statutory body for taking … a particular course of action are not mixed and can clearly be disentangled, but where the court is quite satisfied that even though one reason may be bad in law, nevertheless the statutory body would have reached precisely the same decision on the other valid reasons, then this court will not interfere by way of judicial review.'
In R (Smith) v North Eastern Derbyshire Primary Care Trust  1 WLR 3315,  (a different) May LJ said this:
'Probability is not enough. The defendant would have to show that the decision would inevitably have been the same and the court must not unconsciously stray from its proper province of reviewing the propriety of the decision-making process into the forbidden territory of evaluating the substantial merits of the decision (emphasis added).'"
Irrelevant considerations: damage to the relationship with Goldman Sachs, damage if Goldman Sachs withdrew from the Tax Code, damage to the wider reputation of HMRC
"(a) the collection and management of revenue for which the Commissioners of Inland Revenue were responsible before the commencement of this section."
"Revenue" includes National Insurance Contributions – see s.5(4).
"In the exercise of these functions the board have 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."
"The primary duty of the revenue is to collect taxes which are properly payable in accordance with the current legislation but it is also responsible for managing the tax system: section 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 (R (Wilkinson) v Inland Revenue Commissioners  1 WLR 1718  per Lord Hoffman), 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: R v Inland Revenue Commissioners v National Federation of Self-Employed and Small Businesses Ltd  AC 617, 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."
Breach of duty under Commissioners for Revenue and Customs Act 2005 s.5
Principle of equality
"The duty of fairness as between one taxpayer and another is clearly recognised in these (and other passages) in the modern case law. Is it a mere moral duty, a matter for policy but not a rule of law? If it be so, I do not understand why distinguished judges allow themselves to discuss the topic: they are concerned with law, not policy. And is it acceptable for the courts to leave matters of right and wrong, which give rise to genuine grievance and are justiciable in the sense that they may be decided and an effective remedy provided by the courts, to the mercy of policy? Are we in the twilight world of 'maladministration' where only Parliament and the Ombudsman may enter, or upon the commanding heights of the law? The courts have a role, long established, in public law. They are available to the citizen who has a genuine grievance if he can show that it is one in respect of which prerogative relief is appropriate. I would not be a party to the retreat of the courts from this field of public law merely because the duties upon the revenue are complex and call for management decisions in which discretion must play a significant role."
Note 1 Goldman Sachs [Back] Note 2 Large Business Service [Back] Note 3 Mike Housden, a representative of Goldman Sachs [Back] Note 4 High Risk Corporates Programme [Back] Note 5 Melanie Dawes, another Commissioner [Back] Note 6 A Code of Practice on Taxation for Banks, issued by HMRC in December 2009 [Back] Note 7 Freda Chaloner, chair of the Programme Board [Back] Note 8 Mike Housden [Back] Note 9 Solicitor and General Counsel to HMRC [Back] Note 10 The Chancellor of the Exchequer [Back]
Note 1 Goldman Sachs [Back]
Note 2 Large Business Service [Back]
Note 3 Mike Housden, a representative of Goldman Sachs [Back]
Note 4 High Risk Corporates Programme [Back]
Note 5 Melanie Dawes, another Commissioner [Back]
Note 6 A Code of Practice on Taxation for Banks, issued by HMRC in December 2009 [Back]
Note 7 Freda Chaloner, chair of the Programme Board [Back]
Note 8 Mike Housden [Back]
Note 9 Solicitor and General Counsel to HMRC [Back]
Note 10 The Chancellor of the Exchequer [Back]