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KEY POINTS
- HMRC terminate agent status of firm without specific notice.
- Judicial review case hears allegations of false accounting.
- All clients subject to investigation and invited to make disclosure.
- HMRC charter only gives standards to which HMRC ‘aspire’ and creates no rights.
Christopher Lunn & Co (CLAC) is a firm of accountants in Crowborough, which specialises in clients in the film and TV industries. Taxation previously reported that HMRC raided the firm in June last year and launched a criminal investigation.
The department subsequently wrote to all the business’s clients on the matter of potential irregularities in their accounts and returns, and they were invited to make a disclosure. The deadline for doing so was originally 30 November 2010 but has since been extended to 28 February 2011.
At the end of November, HMRC wrote to CLAC to say they were no longer prepared to deal with the firm as a tax agent. This is believed to be only the second time such a measure has been taken by the Revenue, and it is the first situation in which there had not already been a successful prosecution of the agent for a tax offence.
CLAC challenged the move by way of judicial review, and the case was heard last week in the High Court by Mr Justice Kenneth Parker.
Edited highlights of facts
Counsel for CLAC started by explaining there was very little information about the status of tax agents, and all the sources to which he referred the judge were extra-statutory. Counsel for CLAC then led the court through ‘edited highlights’ of the facts.
During this exposition, the names of both HMRC staff and CLAC clients were given in court. (Taxation feels it is inappropriate to publish them because the case is not about them directly.)
In April 2009, an inspector who had reviewed investigations into around ten clients of CLAC wrote to express several areas of concern.
He felt record-keeping was poor and failed to meet statutory requirements, and the clients had not been guided appropriately by their advisers. Revenue was too frequently estimated, and expenses not wholly and exclusively incurred for business purposes.
Work in progress principles were misrepresented to such an extent that they seemed to be introduced only to bring legitimacy to the accounts. There were queries about whether a trade actually existed in some cases; the tone and language of some correspondence was unacceptable.
HMRC started a criminal investigation some time in 2009, and searched the firm’s premises on 22 June 2010. Both current and archive files for all 7,000 clients were removed, along with computers and other evidence.
CLAC wrote on 1 July 2010 to ask for details of what had been in the ‘information’ put before the Crown Court to get the warrants. That was not, and still has not, been disclosed, and is the subject of a further judicial review.
HMRC wrote to all CLAC clients the department could identify, listing a number of areas of concern that included provisions being included for accountancy fees that were higher than the amounts actually charged, retrospective use of limited companies, and retrospective allocation of income and expenses between limited companies and sole traderships or partnerships.
Disclosure was invited by 30 November 2010, since extended to 28 February 2011.
Right to silence
Interviews were carried out by the Revenue’s criminal investigation team with the senior partner of CLAC and his son. Both refused, on legal advice, to answer the questions put to them. This revelation led to a long exchange between their counsel and Mr Justice Parker.
According to the judge, the firm’s whole case was that they were not given an opportunity to make representations. He queried why, in that case, no answer had been given when questions were put.
Counsel for CLAC countered by saying that there was a significant difference between answering questions posed in a criminal investigation and the right to make representations as to whether status as agents should be terminated. It was a standard response to refuse to answer questions at this stage.
Decision to terminate
The decision to terminate agent status was taken by a meeting of the Commissioners for Revenue and Customs on 25 November. The major concern of the leadership of the criminal investigation, according to CLAC’s counsel, was the legal difficulties involved in running civil and criminal investigation streams alongside each other.
They had concluded this would mean giving a formal caution to any employee of CLAC who turned up to represent a taxpayer during a civil investigation: a situation that was plainly untenable.
There were, therefore, two possible solutions considered by the commissioners. The first, proposed by those responsible for the criminal investigation, was that HMRC should refuse to deal with CLAC as an agent in respect of accounts or returns submitted before the raid on 22 June. The second posited solution was a blanket refusal to deal with CLAC as an agent at all.
In support of the first option, the criminal investigation side said there was no evidence that any unacceptable practices had continued past 22 June. Although this involved a risk, HMRC’s policy was to terminate an agent’s status only in the most exceptional circumstances.
The commissioners decided they would take the other option (a blanket ban on dealing with CLAC as an agent) because otherwise, given the amount of evidence of irregularities so far obtained, customers might continue to have incorrect returns submitted.
This, counsel for CLAC argued, ignored the view of the criminal investigation that there was ‘not a shred of evidence’ that irregularities had continued after 22 June.
The final question for the commissioners was whether to impose the ban immediately – and tell CLAC’s clients – and then invite representations afterwards, or to invite representations from CLAC prior to making a ban.
They chose to make the ban immediate because the January deadline for tax returns would otherwise mean many more clients would file returns through CLAC.
Counsel for the firm said this did not give consideration to what would happen if the representations made subsequently were successful in getting HMRC to overturn their ban, since by then clients would have appointed new agents.
The decision was procedurally flawed, because the firm was not given the opportunity to make representations before the Commissioners for Revenue & Customs reached their decision.
CLAC should have been given notice and access to the evidential material the commissioners were to consider.
The firm had a legitimate expectation that it would continue to be allowed to act as an agent, because it had been through the formal process of authorisation, and it had been allowed to continue despite the criminal investigation and the search in June 2010.
The reasons given for the decision did not reflect the evidence now seen, which proposed the two possibilities of suspension in respect of pre-22 June accounts and returns only, or a total ban.
Had CLAC seen this material, it could have made cogent representations to the issue at which the commissioners were looking.
If HMRC really believed the claimants were ‘flawed through and through’, then they had the evidence on which they could rely well before this. If the Revenue had addressed the question of terminating CLAC’s agent status after the search in June, it would have given plenty of time to allow representations in advance.
HMRC’s defence
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.
She 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 argument for Christopher Lunn & Co had included a point founded on the HMRC 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.
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 but not the full details.
Overnight, 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.
Commissioners’ 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.
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.
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.
It was not true that most of the work would have been done by November. In common with many firms, and as evidenced by hteir billing pattern in the months concerned, CLAC experienced a rush of clients submitting information for returns in December and January.
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 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.
Giving reasons
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.
Constructive suggestions had been made by HMRC 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.
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 this 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, since no further remedy was required.
The judge reserved his decision, but said he hoped to give it as soon as possible.
A further article will explore the implications of the case for the relationship between HMRC and agents once the judgment has been delivered.
