Archive for month: May, 2022

When enough is enough – the First-Tier Tribunal issues guidance on estoppel.

May 27, 2022/in Uncategorized /by Jonathan

Introduction

In Telent Technology Services Limited v HMRC [2022] UKFTT 00147 (TC), the Appellant was Telent Technology Services Limited (“Telent Services”). The Appellant had appealed against HMRC’s refusal to repay VAT of £1,312,309. On 14 October 2021, HMRC conceded the substantive issue in dispute, but applied to strike out part of the appeal on the basis that the Appellant was estopped from recovering VAT of £855,754. The Appellant disagreed, and counter-argued that HMRC were themselves estopped from making the strike out application.

The facts

In 2014 another group company, Telent Ltd, informed HMRC that it had been recovering input tax on fees paid to investment advisers. On 17 November 2014, HMRC issued Telent Ltd with an assessment to recover VAT for the periods 11/10 through to 05/14, in the sum of a sum of £1,146,598.93 (“the Assessment”). On 10 September 2015, following a statutory review, Telent Ltd appealed the assessment to the Tribunal (“the Assessment Appeal”). In March 2016, the Assessment Appeal was withdrawn.

Later that year, Telent Ltd changed its professional advisers to PriceWaterhouseCoopers LLP (“PwC”). On 30 September 2016, PwC made a claim in the name of Telent Ltd to recover VAT on the investment management services of £1,312,309 for periods 08/12 to 08/16 (“the Claim”). HMRC refused the Claim by writing to Telent Services, the new representative member of the Telent VAT group. Telent Services appealed that refusal to the Tribunal. There was, therefore, an overlap between the two appeals (“the Overlap Period”), i.e. 08/12 to 05/14.

In July 2021, HMRC informed PwC that they were minded to concede the substantive issue, but also said “Telent is procedurally barred” from recovering the VAT for the Overlap Period, and inviting settlement on that basis. The parties failed to agree, and HMRC applied for the Tribunal to strike out of the part of the appeal relating to the Overlap Period; they conceded the remaining part of the appeal.

HMRC’s strike out application rested on Value Added Taxes Act 1994 (“VATA”), s 85(1) and (4), which state that where a person has withdrawn its appeal, the parties are deemed to have agreed that “the decision under appeal should be upheld without variation” and the Tribunal is deemed to have determined accordingly. HMRC argued that, when Telent Ltd withdrew the Assessment Appeal, the parties were deemed to have come to an agreement with HMRC that input tax on the investment management services for periods 08/12 to 05/14 was not allowable, and the Tribunal was deemed to have determined that this was the case. As a result, there had been a judicial determination that the VAT was irrecoverable, and the principles of cause of action estoppel, issue estoppel and/or abuse of process prevented relitigation. HMR rested its arguments on three key points of law; cause of action estoppel, issue estoppel and abuse of process. The Appellant raised estoppel against HMRC.

Cause of action estoppel

A ‘cause of action estoppel’ operates where a party brings a new appeal with an identical cause of action involving the same subject matter as has been determined in an earlier appeal. It was common ground that the subject matter of the Assessment Appeal was in all respects identical to that in the Overlap Period.

Issue estoppel

This operates where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided.

Abuse of process

This applies where a party “is misusing or abusing the process of the court” by making a claim in relation to the same subject matter as has previously been decided. HMRC contended that, where cause of action estoppel applies, there is also abuse of process unless there is a relevant exception.

The FTT’s decision

The First-tier Tribunal upheld HMRC’s arguments, as advanced by its Counsel Mr. Elliott, on all grounds.

HMRC estoppel

The Appellant argued that HMRC had over a period of time acquiesced in the Appellant bringing the Claim for the full amount. Its Statement of Case, issued on 25 May 2018, did not include any submission that the Appellant’s withdrawal of the Assessment blocked the part of the Claim relating to the Overlap Period. It was not until 15 July 2021 that HMRC took the point. In response to this argument, HMRC pointed out that the Appellant had agreed, on 26 October 2021, that HMRC could amend their Statement of Case to reintroduce the jurisdictional issue arising from the Overlap Period; if the Appellant considered HMRC were estopped from doing so, it should have objected to the amendment of the Statement of Case, but had not done so. It was thus too late for the Appellant to raise this issue.

The FTT agreed with HMRC. In the Tribunal’s view:

99 ‘In my judgment, a party can change its view of the law at any time subject to the other party having a fair opportunity to respond. In other words, as Mr Elliott said, it is a matter of case management. In Tower M’Cashback v HMRC [2011] SC19 (“Tower”) at [15], Lord Hope endorsed the following passage from Henderson J’s judgment when that case was decided by the High Court:

‘There is a venerable principle of tax law to the general effect that there is a public interest in taxpayers paying the correct amount of tax, and it is one of the duties of the commissioners in exercise of their statutory functions to have regard to that public interest…For present purposes, however, it is enough to say that the principle still has at least some residual vitality in the context of s 50, and if the commissioners are to fulfil their statutory duty under that section they must in my judgment be free in principle to entertain legal arguments which played no part in reaching the conclusions set out in the closure notice. Subject always to the requirements of fairness and proper case management, such fresh arguments may be advanced by either side, or may be introduced by the commissioners on their own initiative.’

Statutory interpretation

The FTT agreed with HMRC that the effect of VATA s.85(4), read with subjection (1), was that the Tribunal had made a prior judicial determination that the VAT for the Overlap Period was not recoverable.

S.85 provides:

(1) ‘Subject to the provisions of this section, where a person gives notice of appeal under section 83 and, before the appeal is determined by a tribunal, HMRC and the appellant come to an agreement (whether in writing or otherwise) under the terms of which the decision under appeal is to be treated

(a) as upheld without variation, or

(b) as varied in a particular manner, or

(c) as discharged or cancelled,

the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, a tribunal had determined the appeal in accordance with the terms of the agreement.

(2)-(3) …

(4) Where (a) a person who has given a notice of appeal notifies HMRC, whether orally or in writing, that he desires not to proceed with the appeal; and

(b) 30 days have elapsed since the giving of the notification without HMRC giving to the appellant notice in writing indicating that they are unwilling that the appeal should be treated as withdrawn,

the preceding provisions of this section shall have effect as if, at the date of the appellant’s notification, the appellant and HMRC had come to an agreement, orally or in writing, as the case may be, that the decision under appeal should be upheld without variation…’

Section 85(4) and (1) thus both include deeming provisions. When an appeal is withdrawn, the parties are deemed to have “come to an agreement…that the decision under appeal should be upheld without variation”, and a tribunal is then deemed to have “determined the appeal in accordance with the terms of the agreement”.

In HMRC’s submission, when the Assessment Appeal was withdrawn:

(a) the Appellant was deemed to have come to an agreement with HMRC that input tax on investment management services for the periods 11/10 through to 05/14 was not allowable;

(b) the Tribunal was deemed to have determined this was the case;

(c) there had thus been a (deemed) prior judicial determination that the input tax for the Overlap Period was not recoverable.

In the Appellant’s submission, the effect of the deeming provisions was only that the particular assessment which had been appealed was upheld without variation, but that was all. There had been no prior judicial determination that the input tax for the Overlap Period was not recoverable, and it was therefore possible for the Appellant to make a claim to recover the same input VAT for the same periods of account, for the same reason.

The FTT agreed with HMRC. Under subsection (1), if the parties settled their appeal then it was clear that there could be no relitgation of the same issues. There was no reason why the same should not apply to a case where the Appellant withdrew its appeal.

Cause of action estoppel

The FTT held that HMRC were correct in relying upon cause of action estoppel and said:

186 ‘In Arnold v National Westminster Bank plc [1991] 2 AC 93 at 104 (“Arnold”), Lord Keith explained cause of action estoppel as follows (emphasis added): “Cause of action estoppel arises where the cause of action in the latter proceedings is identical to that in the earlier proceedings, the latter having been between the same parties or their privies and having involved 39 the same subject matter. In such a case the bar is absolute in relation to all points decided unless fraud or collusion is alleged, such as to justify setting aside the earlier judgment. The discovery of new factual matter which could not have been found out by reasonable diligence for use in the earlier proceedings does not, according to the law of England, permit the latter to be reopened… Those principles were considered and reaffirmed in Virgin Atlantic v Zodiac UKSC [2013] UKSC 46 (“Virgin”)…

191 The Assessment Appeal and the Overlap part of the Claim Appeal have identical subject matter and are between identical parties or their privies. Those are the conditions set out in Arnold for cause of action estoppel to apply.’

Issue estoppel

The FTT stated:

194 ‘In Arnold at p 105, Lord Keith defined issue estoppel as follows: “Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to reopen that issue.”

196 ‘In Virgin at [22(3)], Lord Sumption formulated that exception as follows: “Except in special circumstances where this would cause injustice, issue estoppel bars the raising in subsequent proceedings of points which (i) were not raised in the earlier proceedings or (ii) were raised but unsuccessfully. If the relevant point was not raised, the bar will usually be absolute if it could with reasonable diligence and should in all the circumstances have been raised……’

The FTT agreed with HMRC that it could rely on issue estoppel. All elements of Lord Keith’s definition were present: the Claim had made on the basis that the input VAT on the investment management services in periods including 8/12 through to 05/14 was recoverable, and this was the self-same issue for the self-same periods as had been the subject of the deemed judicial determination of the Assessment Appeal. The recoverability of that VAT was plainly “a necessary ingredient” in the cause of action. By virtue of VATA s 85(4) a final judicial decision had therefore been made by a court of competent jurisdiction; and

Abuse of process

The FTT stated:

‘225 The principle of abuse of process was first crystallised in Henderson v Henderson (1843) 3 Hare 100, and was restated by Lord Bingham in Gore Wood at page 31 as follows……..The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter….

The Appellant is barred by cause of action estoppel from proceeding with the part of the Claim which relates to the Overlap Period. As a result, it is unable to argue that there was no abuse of process. Even were I to be wrong on cause of action estoppel, so that a more flexible approach were to be possible, the absence of any factual or legal new point means that relitigation would be an abuse of process.’

Conclusion

Estoppel is a useful weapon in the armoury of both HMRC and the taxpayer; in certain circumstances the Courts will step in so as to prevent a party from changing its mind where it has previously acquiesced in a particular course of action; or relitigating points which it has taken on a past occasion. It is something that a taxpayer should always be mindful of when pursuing an appeal.

Leading QC owed no duty of care to participators

May 11, 2022/in Uncategorized /by Jonathan

In a recent case David McClean and Others v Andrew Thornhill QC [2022] EWHC 457 (Ch), the High Court decided that a leading QC did not owe a duty of care to participators who lost £40m in a failed film tax avoidance scheme upon which he had provided counsel’s opinion.

The facts

The claimants were members of one or more of three limited liability partnerships (“LLPs”), formed for the purpose of participation in the distribution of films. Participation in the LLPs was marketed to potential investors on the basis that they would be entitled to tax relief against their income or capital gains for trading losses that the LLPs were anticipated to make (the “Tax Benefits”).

The three LLPs were Scotts Atlantic Distributors LLP (“SAD1”); The Second Scotts Atlantic Distributors LLP (“SAD2”); and The Third Scotts Atlantic Distributors LLP (“SAD3”).

SAD1 opened for subscriptions on 24 January 2003 and closed on 4 April 2003. SAD2 opened for subscriptions on 27 October 2003 and closed on 4 April 2004. SAD3 opened for subscriptions on 27 October 2003 and closed on 5 April 2004.

The three Schemes were promoted by Scotts Private Client Services Limited, (“Scotts”).

The defendant, Andrew Thornhill QC (“Mr Thornhill”) was and is an eminent and experienced barrister specialising in tax. He was engaged to provide advice on the tax consequences of the Schemes to Scotts (in the case of SAD1) and to Scotts and the LLP (in the case of SAD2 and SAD3).

Mr Thornhill provided various opinions, including an opinion dated 28 January 2003 in relation to SAD1 (the “SAD1 Opinion”) a short form opinion dated 20 October 2003 in relation to SAD2 and SAD3 (the “SAD2/3 Short-form Opinion”) and a long form opinion dated 27 February 2004 in relation to SAD2 and SAD3, in materially similar terms to the SAD1 Opinion (the “SAD2/3 Long-form Opinion”).

The schemes were promoted to investors via Information Memoranda (IM) which explained the tax consequences of the schemes, based on Mr Thornhill’s opinions. At no time did Mr Thornhill directly engage with any of the claimants.

The schemes failed with HMRC refusing to allow the tax reliefs claimed. The claimants settled with HMRC and then sought to claim £40m from Mr Thornhill on the grounds of negligence, i.e. he was in breach of a duty of care owed to them in providing the opinions and in endorsing the IMs.

In the High Court

The High Court dismissed the claims. In the Court’s view, Mr. Thornhill owed no duty of care to the claimant investors. The IM clearly advised that potential investors must consult their own tax advisers on the tax aspects of the schemes and that no investor could subscribe to the schemes without first warranting that they had relied only on the advice of, or had only consulted with, their own professional advisers.

In the Court’s judgement, the claimants were not Mr. Thornhill’s clients. His client was the scheme promoter, Scots. As a result, the claimants could not reasonably rely on Mr. Thornhill’s advice without making their own independent inquiry and Mr Thornhill could not reasonably foresee that they would rely on his opinion without taking independent advice.

The Court said:

‘Mr Thornhill was undoubtedly one of the leading tax QCs in the country at the time he advised. He accepted that he knew that to be the case. He was not held out (either by himself or by Scotts) as the leading tax expert. It is irrelevant whether, as many of the claimants say, he was described to them by their own advisers as the “top” or the “very best” tax barrister. That is not information which he could have reasonably been aware of. Nevertheless, I accept that he would have appreciated that, given his status as one of the leading tax QCs, his advice was likely to carry more weight.

It does not follow, however, that he should have reasonably foreseen that investors would rely on his opinion without consulting their own tax adviser as they were recommended to do, and as they warranted they had done, in the IM and subscription agreement. Even if he had been the “top” barrister, it is a nonsense to suggest that because he was the best, there would be no point in a potential investor getting their own advice. There were plenty of advisers (barristers, solicitors and financial advisers) who specialised in tax schemes such as the Schemes, and who could have provided investors with their own independent advice. Any such adviser would additionally have the benefit of Mr Thornhill’s opinion – not so they could rely on his advice, but so that they had the benefit of seeing what he had advised when they came to give their own advice. This is what I understood Mr Thornhill to mean when he said that he expected that his advice would assist potential investors’ own advisers. That acknowledgment by him is not to be equated with an acknowledgment that he believed investors or their advisers would rely on his advice.

The fact that Mr Thornhill’s advice (in particular as to whether the LLP was trading) was given in unequivocal terms, while relevant to the question of breach, has no relevance to the reasonableness of potential investors ignoring the recommendation and warranty in the IM and subscription agreement as them consulting their own tax advisers.’

The Court also find that, even if Mr. Thornhill did owe the claimants a duty of care he had not breached that duty.

‘That was not, however, the role expected of Mr Thornhill, even if he owed a duty of care to the claimants in respect of the advice he gave. The claimants were not his clients. In circumstances where no advance clearance from the Revenue could be obtained, the promoters of the Scheme sought the view of an eminent tax QC on the question whether the Scheme would achieve the Tax Benefits. That was what Mr Thornhill did. The nature and content of an appropriate warning by an adviser to their client is fact specific, and will depend on matters such as the terms of the instructions and the adviser’s knowledge of the client’s circumstances, sophistication and existing understanding of the issues. Mr Thornhill would have been aware, for example, that his actual clients, Scotts, were themselves highly sophisticated and likely to have been fully aware from their experience in promoting tax avoidance schemes of the issues to which they gave rise, and the risks associated with them. In contrast, not only were the investors not Mr Thornhill’s clients, but he knew nothing about their individual circumstances, other than that they were likely to be high net worth individuals and that they had been warned to take (and warranted that they relied only on) their own advice.’

It will be interesting, given the large sums involved, to see whether this case goes further. In the meantime, the case will no doubt act as a discouragement to the large number of investors who feel aggrieved that they have been mis-sold tax schemes.