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KEY POINTS
- Is there a difference between ‘care and management’ and ‘collection and management’?
- HMRC’s duty to act fairly.
- The impact of the Wilkinson case.
- Is the equitable liability practice still lawful?
- Would you like to sign the online petition?
Tax law is full of couplets that trip off the tongue. For example: ‘wholly and exclusively’, ‘just and reasonable’, ‘error and mistake’.
One such phrase was formerly found in TMA 1970, s 1(1); that provided as follows:
‘Income tax, corporation tax and capital gains tax shall be under the care and management [my emphasis] of the Commissioners of Inland Revenue …’
In 2005, when the Commissioners for Her Majesty’s Revenue and Customs were established, the phraseology was changed. The Commissioners for Revenue and Customs Act 2005 (CRCA 2005), s 5(1) provides that:
‘The Commissioners shall be responsible for:
(a) the collection and management [my emphasis] of revenue for which the Commissioners of Inland Revenue were responsible before the commencement of this section …’
‘Revenue’ is defined to include all taxes, duties and National Insurance contributions (s 5(4)).
Goodbye care, hello collection?
It might appear from a comparison of the old TMA 1970, s 1(1) with the new CRCA 2005, s 5(1)(a) that, whereas the Inland Revenue cared about tax, HMRC only collect it.
However, as with much of tax law, X does not always mean X.
Tucked away, close to the end of CRCA 2005, is a provision that is intended to define the phrase ‘collection and management’ in this context. CRCA 2005, s 51(3) provides that:
‘A reference… to responsibility for collection and management of revenue has the same meaning as references to responsibility for care and management.’
In other words, HMRC’s duties with regard to the direct tax system are the same as the former Inland Revenue’s. Furthermore, both phrases could be found in the Inland Revenue Regulation Act 1890.
What does it mean?
If we work on this basis, we can therefore consider old case law to glean the meaning of the phrase ‘care and management’ and deduce the present-day role of HMRC.
The phrase appears to have made an early entry in the Tax Cases (the case of Menzies (1875 to 1883) 1 TC 148), although there is no commentary on its meaning.
However, it appears that the first relevant judicial commentary on it comes in the special commissioners’ decision in the case of Vestey v CIR [1980] STC 10 (followed in quick succession by the judgments of Walton J).
In the first, Walton J famously stated:
‘One should be taxed by law, and not be untaxed by concession’.
When the case proceeded to the House of Lords, Lord Edmund-Davies explicitly challenged the Revenue to justify the legal basis of their practice of issuing extra-statutory concessions.
Notwithstanding this criticism, however, the practice continued for another quarter of a century until the Wilkinson case (see below).
In R v HM Inspector of Taxes, ex parte Fulford-Dobson [1987] STC 344, McNeill J explained that, for as long as the Revenue continued to publish a code of concessions ‘which applied indifferently to all who fall or can bring themselves within its scope’, taxpayers would be entitled to rely upon them.
Managerial discretion
‘Care and management’ was again considered by the House of Lords in the case of CIR v National Federation of Self-Employed and Small Businesses Ltd [1981] STC 260.
That case concerned a challenge by the National Federation to the Inland Revenue’s decision to waive the previous compliance failures of newspaper workers (‘Fleet Street casuals’) in exchange for full compliance in future.
In the Lords, Lord Diplock was alone among the panel to accept that the National Federation had the right to bring the case in the first place.
He would nevertheless have dismissed the National Federation’s claim on the basis that the Revenue’s conduct was within its management powers:
‘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.’
This was echoed in CIR v Nuttall (1992) 64 TC 548 by Bingham LJ, who accepted that, in cases where ‘the Revenue reasonably considers that the public interest in collecting taxes will be better served by informal compromise with the taxpayer than by exercising the full rigour of its coercive powers’, there would be no question of such a compromise being outside their wide managerial discretion’.
Conversely, a ‘forward tax agreement’, in which a person agrees to pay a fixed sum to cover future tax liabilities, was recently held to be unlawful according to Lord Justice-Clerk Gill inAl Fayed & Ors v Advocate General for Scotland (representing the Inland Revenue Commissioners) [2004] STC 1703.
‘[The Revenue] are not in a commercial market place operating an extra-statutory system of levying money on the basis that if that money were not paid, there would be a possibility that they could lawfully assess the individual to tax.’
In R v CIR, ex parte MFK Underwriting Agencies Ltd & Ors [1989] STC 873, Judge J interpreted the then Inland Revenue’s duty as ‘[to] administer the taxation system in the way which in its judgment is best calculated to achieve the primary statutory duty’ being ‘to collect taxes which are properly payable in accordance with current legislation’.
A duty to act fairly
Nevertheless, HMRC are under a duty to act fairly. In the case of R v CIR, ex parte Preston [1985] STC 282, Woolf J expressed his provisional view that a taxing power should not be applied, without the exercise of some discretion, ‘if [the Revenue] come to the conclusion that it would be unreasonable, arbitrary and unfair [not] to do so’. (That decision was reversed by the Court of Appeal and House of Lords on other grounds.)
The Preston case was referred to in R v CIR, ex parte Unilever plc [1994] STC 841. That was an example of a case where the application of the strict letter of the law would have given the Revenue ‘a large windfall’, a result which the High Court judge accepted ‘would not in my judgment achieve justice’, a conclusion subsequently followed by the Court of Appeal.
The Wilkinson case
Although the use of extra-statutory concessions was severely criticised in the late 1970s, it was only the House of Lords’ decision in the case of R (on the application of Wilkinson) v CIR [2006] STC 270 that prompted a change in attitude. Interestingly, the Lords were not asked to consider the legality of such concessions. Lord Hoffmann, who gave the leading speech, said merely:
‘The commissioners publish extra-statutory concessions for the guidance of the public and Miss Rose drew attention to some which she said went beyond mere management of the efficient collection of the revenue. I express no view on whether she is right about this, but if she is, it means that the commissioners may have exceeded their powers under TMA 1970, s 1 [emphasis added].’
Nevertheless, the hint was finally taken. First, there was a freeze on new extra-statutory concessions being published. Then a team at HMRC set to work to review all of the department’s extra-statutory practices – not merely those that were formally described as extra-statutory concessions – to determine whether they were intra or ultra vires and to consider how to proceed.
A number of practices were identified to be potentially unlawful (on the basis that they exceeded the department’s powers), but were nevertheless of sufficient worth that HMRC wanted to retain them. That could have been done by ensuring that such practices were codified individually in subsequent Finance Acts.
However, Parliament chose a more streamlined approach. FA 2008, s 160 permits HMRC to codify those concessionary practices published before 21 July 2008 that are thought to be unlawful or possibly unlawful.
Equitable liability
There will be few readers who are still unaware of the equitable liability practice. It is the practice under which HMRC will forgo amounts due to them (by way of an assessment or determination) in circumstances where:
- it is strictly too late for the assessment or determination to be appealed against or set aside; but
- the taxpayer can demonstrate that the true amount of tax payable is lower than the amount technically due.
The practice has often proved to offer a ‘get out of jail free’ card to taxpayers facing bankruptcy for amounts that should never have been assessed in the first place.
As one would expect, its main beneficiaries have been unrepresented taxpayers who turn to professional help only at the last minute (see Marathon saga by TaxAid’s Harry Fulton).
During the various consultations that took place post-Wilkinson, the equitable liability practice was not discussed. Was this because it was felt to be within the law?
Or did the team dealing with the Wilkinson fallout simply not know about it?
Or was it a practice that HMRC were happy to retain while it was relatively unknown, but with which they were less comfortable once it was broadcast to the tax profession in the pages of a leading publication?
Whatever the truth, the fact is that the voluminous Budget documentation issued on 22 April included a brief mention that equitable liability would be abolished on 1 April 2010.
Retaining equitable liability
In the subsequent five months, much has been written about the practice. Most practitioners I know have agreed that it should be retained. (Over 500 people have signed an e-petition to this effect.)
At the heart of this campaign is the belief that HMRC should not be entitled to collect more than the right amount of tax, or to use the words of the Inland Revenue (in a Tax Bulletin article in August 1995):
‘… the Inland Revenue may, depending on the circumstances of the particular case, be prepared not to pursue its legal right to recovery for the full amount where it would be unconscionable to insist on collecting the full amount of tax assessed and legally due.’
While there are undoubtedly cases in which an individual might deliberately play the system and duck out of complying with his/her tax obligations in the expectation that equitable liability would come to the rescue, it is my view that HMRC would be well within their rights not to apply the practice in such cases.
However, in the main, I would expect applications for the exercise of the practice to be entirely appropriate.
Mike Truman has previously outlined why the practice should be retained and could be codified using the provisions of FA 2008, s 160. While I agree with what he has said, I would add that there are arguments to suggest that the practice is, in fact, intra vires.
The lawfulness of the practice
It will be seen from the above discussion that HMRC have little freedom to waive tax that is lawfully due.
However, this is different from saying that HMRC may not consciously accept less than the maximum available to them under the law. The distinction is fine, but critical.
Although there are (regrettably) some rough edges, tax is meant to be imposed proportionately. One’s income tax liability increases as one’s income increases; similarly, with capital gains. In the context of inheritance tax, larger chargeable transfers attract more tax than smaller ones, etc.
Estimated assessments and determinations are, by their very nature, different. Even assuming that such assessments and determinations are honestly made according to HMRC’s best judgment, whenever equitable liability would come into play, it is solely because the amount assessed or determined exceeds the true amount of tax.
In other words, the amount being demanded is more than that which Parliament has determined is a proportionate contribution to pay to the Exchequer in view of that person’s income, etc.
In the same way as HMRC are not permitted to accept amounts that are arbitrarily less than the right amount of tax, HMRC should not knowingly demand more.
This argument is reinforced by the European Convention on Human Rights. Tax is an exception to the general rule that the state must not interfere with a person’s property, provided that the amounts sought are in accordance with ‘such laws as [are deemed] necessary… to secure the payment of taxes’.
Again, the focus of any amount to be paid is ‘tax’ and not some amount that has been proved to exceed the correct tax payable in the relevant situation.
Furthermore, it is my view that HMRC’s duties of care and management extend to ensuring that the UK tax system works effectively. To do so, it must have the co-operation of the public and for such co-operation, the public must have a sense that the system is working fairly and not capriciously.
Allowing amounts to be waived so that no more than the right amount of tax is paid (plus any interest and penalties) is simply part of the process of acting fairly.
Conclusion
For the reasons set out above, I would argue that equitable liability is a permitted exercise of HMRC’s discretion. However, while doubts remain, I would suggest that it be codified as permitted by FA 2008, s 160. In either event, the practice should be retained.
Keith M Gordon MA(OXON) FCA CTA is a barrister, chartered accountant and tax adviser. He practises from Atlas Chambers (020 7269 7980). Keith won the chartered tax adviser of the year prize at the 2009 LexisNexis Taxation Awards.
