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Counsel for HMRC opened her case by looking at the wide powers given to the Commissioners for Revenue and Customs for the collection and management of tax, and in particular to CRCA 2005, s 9, which allowed them to do anything necessary, expedient, incidental or conducive to the exercise of their function, reports Mike Truman.
Taxpayers were given rights, such as a right to confidentiality, but no-one else was given any rights.
She therefore submitted that the commissioners had a wide degree of discretion on how to get the best return for the Exchequer, and that HMRC’s practice of dealing with agents was an exercise of that managerial discretion.
Although not raised during the argument, the skeleton reasoning for Christopher Lunn & Co (CLAC) had included an argument founded on the taxpayers’ charter. She pointed out that the ‘unusual language’ of the legislation in CRCA 2005, s 16A refers only to standards and values ‘to which [the Revenue] will aspire’, so it cannot be argued that the charter confers enforceable rights on taxpayers.
This was an exceptional situation; in the corporate memory of HMRC they only knew of one other agent whose status had been terminated, and he had already been convicted of tax offences. There were, therefore, no set procedures for termination. The absence, however, did not give rise to a legitimate expectation that agent status would continue indefinitely.
Counsel submitted that the requirements of natural justice varied significantly with the particular context. Her leading case was ex parte Doody [1994] 1 AC 531, from which she derived the principles that the rules of natural justice had to be applied in context rather than by rote, that they would normally require an opportunity to make representations either before a decision was made in order to influence or afterwards in order to possibly overturn it, and that there was ‘very often’ a requirement to disclose the gist of the evidence on which the decision-maker would rely or had relied, but not the full details.
The primary relationship HMRC had was with taxpayers; there was no separate legal relationship with agents. The taxpayer simply asked the Revenue to deal with the agent and the department did so; agents did not have to meet any criteria.
This could be contrasted with schemes elsewhere in the world where registration was more formal and could be lost. These were more like licensing schemes; the UK’s system was not. HMRC’s internal guidance emphasised that the department reserved the right to deal with the taxpayer directly at any time.
CLAC’s loss of agent status would not mean the firm lost its livelihood, since the only matters from which it was excluded were the actual filing of returns and dealing with HMRC directly in correspondence. The judge, however, questioned whether it was practical to compete in a competitive industry (the size of which still seemed to surprise him) without agent status.
Over night, the Revenue had provided additional information about the process of getting clients and their agents onto the department’s system. A 64-8 could be processed for an existing agent in 24 hours, with the information showing up throughout the HMRC systems in 72 hours.
A ‘filing only’ authorisation could be given faster. Clients changing accountants would not, therefore, take six weeks to be processed. Reinstating CLAC as an agent would, however, involve issuing a new agent number, which could take some weeks.
Counsel disputed the assertion that HMRC had effectively abandoned the 31 January self assessment deadline for CLAC clients; the issue had concerned a ‘glitch’ affecting a small number of clients who had not been able to file returns themselves. The ability to include provisional or estimated figures on returns was open to all taxpayers.
She then went through the evidence that had been submitted to the court in writing about the way the commissioners came to their decision. The commissioners were aware that 31 January was approaching, and they wanted to tell CLAC clients in time for them to find a new agent should they want to do so. Offering a four-week period for representations from CLAC before the decision was made would have been too much of a delay.
However, if clients were not given the opportunity to move accountant, there was a real risk that, yet again, fraudulent returns might be submitted for clients, which would be subject to a much higher degree of scrutiny and investigation, which might mean higher fees for the taxpayers. Clients would have been denied the opportunity to take a proper view of their affairs.
The criminal investigation team had found compelling evidence of fictitious and fraudulent accounting, affecting most, if not all, of CLAC clients. The scale and deliberation made it different from other cases, and the full extent was, at that time (October/November) emerging on a daily basis.
The commissioners therefore concluded that their duty to manage the collection of tax meant that they had to act now, and not wait until the criminal case was concluded.
CLAC clients in touch with the civil investigation team were in a state of great uncertainty. CLAC was advising clients who raised queries that all its practices were above board, including the retrospective use of companies and retrospective allocation of expenses and income. The firm said it had advice from solicitors to support this; advice said by counsel for HMRC to be ‘possibly apocryphal’.
The idea that the commissioners could have issued a ‘minded to revoke’ letter and then invited submission of representations before confirming it would only have been practical if the clients had been told at the same time that HMRC were, at least for the time being, not going to treat CLAC as an agent.
This was the suggestion that its status could be ‘suspended’, but because this was such an exceptional situation, the system did not recognise a suspended status: you either were the agent for the client or you were not.
The commissioners had considered delaying, but thought this would take months, because they had been advised that judicial review would have been sought of the intention to terminate CLAC’s agent status. The responsibility to the taxpayers outweighed the responsibility to the firm, and therefore the decision was taken to terminate immediately and with a blanket ban.
In answer to the question from CLAC as to why its status had not been terminated earlier, counsel for HMRC explained that assertions of legal professional privilege had prevented the department from accessing the information on the firm’s seized computers. Each individual, company and partnership had a separate file for each year, and they were stored in envelopes, with between 25 and 70 envelopes in each of 600 boxes. Only when a representative sample had been examined could a decision be taken.
It was not true that most of the work would have been done by November. In common with many firms, CLAC experienced a rush of clients submitting information for returns in December and January, as evidenced by billing.
Clients would often have enough information to allow a new accountant to submit their return, and if not, then CLAC could be asked for it. Clients would need to move quickly, but it was not impossible. They could also choose to submit the returns themselves, or to get advice about accounts already submitted.
In any case, counsel for HMRC found it ‘interesting’ to hear from CLAC’s counsel that the possible representations the firm might have made. If it had intended to make constructive proposals, why had it not done so in response to the letter terminating its status, when it had instead simply stated it intended to challenge the decision by judicial review?
She submitted that these were purely hypothetical suggestions to improve the firm’s case, and which it had no real intention of putting forward.
While the difficulty of running a concurrent civil and criminal investigation was certainly a factor, it was not the only, or even the primary, concern. That was the impact on revenue and the impact on the CLAC clients.
Counsel for the firm had tried to imply that HMRC had considered only a small sample of clients. This was not true. All of the CLAC clients’ affairs would be scrutinised, and the vast majority would be interviewed by civil investigations staff. The Revenue had found 1,850 separate cases of inflated accountancy fees, which had not subsequently been adjusted.
It was true that the original recommendation to the commissioners was to terminate CLAC’s status as agent in respect of accounts and returns submitted prior to 22 June. This was not, however, the recommendation of the criminal investigators; it had come from a meeting of the heads of all the main HMRC departments concerned.
Counsel for CLAC had also read too much into the statement that there was no evidence of fraud post-22 June 2010. The point was that at the time the statement was made no returns had been submitted since then. They did not, at that point, know whether the fraudulent returns would continue. If they did, the clients would be penalised.
While it was possible that the court, if asked to make the decision, might have made a different one; that was not the test. The question was whether the decision was one which the commissioners were allowed to make: had they met their minimum legal duty?
The assertion that no details of the case against it had been given to CLAC was simply wrong. It had been arrested on 22 June for offences including cheating the public revenue and false accounting. The questions that were put to the firm, and which it refused to answer, indicated some of the main areas of concern, such as inflated accountancy fees.
HMRC had in any case provided details on numerous past occasions as the investigations had developed (some 450 returns reviewed over a period of six years, with 98% showing falsely claimed expenditure), and CLAC had never given adequate reasons for its practices. It had not acted constructively; it had instead challenged the Revenue’s good faith.
At some time since the previous day, counsel for HMRC had clearly been briefed on the problem of work in progress, and seemed to find it outrageous that if she wrote an opinion on the last day of her accounting year, she had to include the income for it in her accounts for that year even though she might not get paid until six months later ‘if at all’. (We’ll let that pass, except to point out that the tax isn’t due for at least ten months.)
She started the afternoon session by explaining that, in the case of CLAC clients, there was a suspicion that WIP was included simply as a device to bring forward income against which expenses could be claimed, and to give legitimacy to the accounts.
These and other areas in which there were problems in the overwhelming majority of accounts investigated had been put in writing to CLAC during April 2009. In the same letter it was pointed out that constructive suggestions had been made to resolve the difficulty, such as CLAC carrying out a full review of past returns (which the firm had interpreted as a threat or blackmail), and an offer of a meeting and/or that it should commission an independent review of its work, both of which were refused. In the light of this there was no alternative but to continue widening the scope of the investigation.
A summary of the allegations had been given to the CLAC partners on arrest, and examples of accountancy fees higher than those charged were given, including one in which there appeared to be a false invoice issued in an attempt to explain the irregularity in the accounting fees provision.
A client of CLAC had given a witness statement, saying he had been told that, if he was on holiday and met a business colleague with whom he had discussed business, or if something that happened had given him an idea for a piece of work, part of the cost of the holiday could be claimed as an expense. DVDs purchased or rented could be claimed as research.
He also said CLAC had made a number of false statements about his case in a letter to HMRC.
There was a widespread practice of charging fixed accountancy fees in the accounts, which were higher than those actually billed, including a manuscript note against an entry in one client’s records for £345 paid to ‘show £980’.
There were fictitious use of home expenses, personal expenses reclassified as business expenses, and manipulation at the end of a trading period of income between a sole trade and a company.
In addition, there were problems with CLAC’s own tax affairs. Its work in progress had been challenged, and the fact that many of its staff members claimed to be self-employed or to work through personal service companies had also been investigated. It appeared from later comments from both counsel that some CLAC staff members had given witness statements to HMRC.
In answer to the claim that CLAC may not have understood the importance of HMRC’s concerns, counsel for the department read out sections from the first Taxation article about the firm and from two posts on TVWatercooler.org, including one in which a client of CLAC had been reassured by the firm that the accounts were correct, and then told by an accountant asked for a second opinion that the accounts contained serious errors. While some of the issues seemed arcane to outsiders, it was clear that those in the profession fully understood the implications.
Running out of time, counsel for HMRC dealt briefly with some of the legal issues, referring the judge to her skeleton argument. She contended that ‘legitimate expectation’ only arose when there was a well-established practice or a specific promise, neither of which was present in this case.
So far as reasons were concerned, the commissioners were under no statutory or common law duty to give reasons, but had set out the reasons for their decision in brief.
The case law required each to be looked at in context, and that here was that it was not a case in which the decision would seem to be so aberrant that reasons were needed to explain it.
Even if reasons were required and the brief reasons given were not sufficient, the disclosure in the judicial review case meant the claimants now had ‘exhaustive’ knowledge of the reasons, and no point would be achieved in granting judicial review.
Even if the claimants were to succeed, the claim that HMRC should start dealing again with CLAC would be inappropriate; the correct decision then would be to quash the original decision and ask the commissioners to make a new one.
After some brief rebuttals, the evidence concluded and the judge reserved his decision, saying he would give a judgment as soon as possible.
