© 2024 by Michael Firth KC, Gray's Inn Tax Chambers
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H5: Tax agreements pre-appeal
HMRC's power to make agreements
Agreements outside HMRC’s powers are void
“It is common ground that any agreement between Southern Cross and HMRC will be void if the agreement was outside the powers of (or 'ultra vires') HMRC.” (HMRC v. Southern Cross Employment Agency Ltd [2015] UKUT 122 (TCC), §45, Newey J).
HMRC do have power to reach binding agreements pre-appeal
“I accept that the exchanges in early July 2007 resulted in a binding agreement between HMRC (through Mr Stewart) and the Company (through Mr Thomas). That, so it seems to me, is the clear effect of the telephone discussion on 6 July 2007 as confirmed in the later correspondence. The FTT appears to have been impressed by the fact that at that time Mr Stewart was still awaiting information from Mr Thomas, information which was in fact never provided. It concluded that Mr Stewart was unlikely to be willing to agree to a final settlement of the tax position in relation to the bonus payment of £900,000 while these questions were outstanding. I do not accept that. On the contrary, a final settlement may be regarded as more rather than less likely if there is uncertainty about the underlying facts – the settlement reflects a decision to put that uncertainty to one side and reach agreement so as to avoid the need for further enquiries.” (Spring Salmon Ltd v. HMRC [2016] UKUT 313 (TCC), §27 Lord Glennie – on the facts, however, the agreement was conditional and the taxpayer had breached it)
“In the end, I have concluded that s 80 of the VATA does not bar HMRC from entering into a binding agreement to settle a claim under s 80(1) where there is no pending appeal. My reasons include these:
(a) It is apparent from Moses J's judgment in the DFS case that s 85 of the VATA allows HMRC to enter into a binding settlement agreement in the context of an appeal. It is hard to see why Parliament would have wished HMRC to have such an ability only where an appeal has been instituted. On the face of it, Parliament might have been expected to have thought it undesirable that parties should have to resort to litigation to achieve a binding agreement;
(b) As mentioned above (at para [34]), Moses J observed in the DFS case that 'it falls for consideration elsewhere as to whether s 85 ousts or merely augments the common law rule'. The issue raised before Moses J was, however, whether an agreement to settle could be concluded at common law where an appeal was underway and, hence, s 85 could apply. Moses J was not dealing with a case (such as the present one) in which no appeal has ever been launched;
(c) IRC v Nuttall shows that HMRC can enter into binding agreements relating to direct taxes otherwise than under s 54 of the TMA, which corresponds to s 85 of the VATA. Much as Bingham LJ thought that it would be 'extraordinary, and also regrettable' if HMRC lacked such a power, it strikes me as preferable that HMRC should be able, if they so choose, to dispose of claims under s 80 of the VATA on a final basis regardless of whether an appeal has been brought;
(d) On HMRC's case, a person to whom HMRC made a payment pursuant to s 80(1)–(2A) of the VATA could be exposed to the possibility of a recoupment assessment under s 80(4A) for an extended period. As a minimum, HMRC could make an assessment until two years after the end of the accounting period in which the relevant amount was credited to the recipient (see s 80(4AA)(a)). If 'evidence of facts sufficient in the opinion of the Commissioners to justify the making of an assessment' did not come to the knowledge of HMRC until after the end of that accounting period, the limitation period would be extended indefinitely;
(e) The cases cited in para [30], above indicate that s 80(7) of the VATA was intended to leave 'no room for the co-existence of other remedies for the recovery of overpaid VAT from the Commissioners'. It does not follow that it was any part of Parliament's intention to prevent HMRC from settling claims made under s 80; and
(f) It is evident from the Building Societies Ombudsman and DFS cases that HMRC can be precluded from assessing under s 80(4A) of the VATA by judicial determinations and s 85 agreements even though s 80 does not expressly cater for either possibility. The decisions can be reconciled with the terms of s 80 on the basis that such determinations and agreements serve to 'establish the amount of the commissioners' liability' for the purposes of s 80(1) and (4A) (to use words of Rix LJ in the Building Societies Ombudsmancase). The better view, as it seems to me, is that, where no appeal is pending, HMRC's liabilities can similarly be fixed for the purposes of s 80(1) and (4A) by means of a contractual agreement outside s 85.” (HMRC v. Southern Cross Employment Agency Ltd [2015] UKUT 122 (TCC), §37, Newey J).
HMRC may make agreements to collect a particular amount where the actual amount has not been quantified
“Although HMRC have no power to refrain from collecting tax which is due, it does have the power to compromise where the actual tax recoverable has not been quantified…In our judgment the agreement reached between HMRC and Southern Cross falls into this category. At the material time there was no clarity as to the correct VAT treatment of the supplies in question.” (Southern Cross Employment Agency Ltd v. HMRC [2014] UKFTT 88 (TC), §§65…66).
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If HMRC go down contractual route, rights and obligations sound in contract rather than tax law
"[61] It cannot make all the difference that, once the Settlement Agreement has been rescinded in equity, HMRC could then use their statutory powers to recover the tax which they allege they were wrongfully prevented by the Settlement Agreement from recovering in the first place. In the exercise of their care and management powers, HMRC decided in December 2005 to reach a contractual settlement with GE in relation to certain transactions for which GE had sought clearance under the new legislation in the Finance (No.2) Act 2005 which was enacted to counter tax avoidance through the use of hybrid entities. Having decided to go down this contractual route, rather than rely on their tax-gathering powers, the rights and obligations of HMRC under the Settlement Agreement then sounded in contract, not in tax law. Accordingly, I can see no reason why ordinary principles should not apply when deciding whether, and within what time limits, HMRC should be able to seek rescission of the Settlement Agreement for fraudulent misrepresentation, or pursue the alternative remedy of an action for damages in deceit. The six-year limitation period in section 2 of the 1980 Act would admittedly have applied to any action for damages which HMRC chose to commence, but once that period (or any extension of it under section 32) had expired, such action would have been time-barred. It is precisely because that opportunity was always available to HMRC, but they did not take advantage of it, that the same time limit should be applied, by way of analogy, to their attempt in the present proceedings to achieve substantially the same result by setting aside the Settlement Agreement in equity and then using their statutory powers to recover the tax allegedly underpaid." (IGE USA Investments Limited v. HMRC [2021] EWCA Civ 534, Henderson LJ)
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Contracts void on public law grounds (heavy burden on HMRC)
“[O]ne may safely assume that no court is going to be astute to allow public authorities to escape too easily from their commercial commitments. That should particularly be the case where, as here, legitimate expectations have been aroused in the other party (who clearly entered the contract in good faith), where the relationship between the parties is essentially of a private law character, where it is the authority itself which is seeking to assert and pray in aid its own lack of vires, and where that lack of vires is suggested to result not from the true construction of its statutory powers but rather from its own Wednesbury irrationality. The burden upon the authority in such a case must be a heavy one indeed. It does not seem to me that the council came within measurable distance of discharging it here.” (Newbold v. Leicestershire CC [1999] ICR 1182 at 1191 per Simon Brown LJ).
“In the present case, there is, I think, no reason at all to believe that HMRC acted for an improper purpose (or, in the words of Lord Diplock in the National Federation case, 'some extraneous or ulterior reason') in their dealings with Southern Cross. Miss Simor did not suggest that Mr Knight (or anyone else at HMRC) had any wish for Southern Cross to receive money to which it was not entitled, and there is in any case no evidence to that effect. The correspondence I have quoted in paras [5]–[13], above indicates that Mr Knight was seeking to limit the amount paid to Southern Cross, not to pay it too much. There is no question of Mr Knight having had any intention of agreeing to give Southern Cross any more than appeared to him to be lawfully due to it on the information available to him…Nor, in my view, can it be maintained that HMRC acted irrationally. They had in the past accepted that Southern Cross's supplies were exempt from VAT, and it has not to my mind been established that it was irrational for Mr Knight (or whoever else was responsible for HMRC's decision-making) to continue to proceed on that basis in 2009–10.” (HMRC v. Southern Cross Employment Agency Ltd [2015] UKUT 122 (TCC), §§50…51, Newey J).
Mistake may render agreement ultra vires, but not usually
“For his part, [Counsel for the taxpayer] took issue with the proposition that a compromise agreement can be invalidated by any error of law on the part of HMRC. According to Mr Mantle, such an agreement is not open to challenge on ultra vires grounds unless either irrational or entered into for an improper purpose…That submission is by no means without attraction, but I do not think I need arrive at any conclusion on it to decide the present appeal. I can dispose of Issue 2 on more limited grounds…In the first place, I do not consider that HMRC can disavow any agreement with Southern Cross simply on the basis that the decision-maker(s) did not know what has since been determined: that supplies of dental nurses to dentists are standard-rated for VAT purposes. The fact that such supplies have now been held not to be exempt need not mean that the decision-maker(s) misdirected themselves in law or failed to have regard to relevant considerations when they agreed to pay Southern Cross. At the time, there was, as the FTT said, no clarity as to the VAT position and it could not be known with certainty that supplies of dental nurses were not exempt. HMRC cannot, therefore, be criticised for failing to treat the Moher decision as a foregone conclusion and, correspondingly, cannot claim that any agreement with Southern Cross is vitiated by such failure.” (HMRC v. Southern Cross Employment Agency Ltd [2015] UKUT 122 (TCC), §§55…56…57, Newey J).
“We accept that a mistake may, depending on the circumstances, render an agreement outside the powers of HMRC, and thus as void. We do not consider that UK Uncut can be relied on by Mr Mantle as indicating to the contrary. It is clear from the judgment of Nicol J that the original decision to enter into the agreement, based as it was on mistake, particularly as regards the ability to recover interest, was not the operative decision. The operative decision was that ratifying the agreement, at which stage the commissioners knew the correct position as regards interest…We do not consider that an agreement that was made with a view to reaching a genuine and realistic approximation of the amount due, whether to HMRC or to the taxpayer, can be rendered unlawful if, in the event, it is later discovered that the deal was not a good one for HMRC. Were that to be the case, and leaving out of account special cases such as those where the taxpayer has withheld information from HMRC, it would render HMRC’s power to compromise claims virtually worthless. There is, as the cases demonstrate, a clear public interest in HMRC being able to resolve the tax position of a taxpayer without resort to enforcement powers, provided that they do so within the boundaries of the management powers vested in them.” (Southern Cross Employment Agency Ltd v. HMRC [2014] UKFTT 88 (TC), §§62…67).
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Agreements regarding future liability to tax are void
"[73] Under taxation legislation the respondents have the duty of collecting tax as it falls due in respect of actual transactions. The fact that a taxpayer may have to make a payment during the course of the year of assessment by reference to transactions taking place within the year as a whole does not constitute a true exception to this since the question of what is actually due is subject to a later reconciliation. The respondents have no power to require a taxpayer to accept an advance assessment of his liability to tax in a future year or years. Likewise they have no power to contract with the taxpayer as to his future liability (see Gresham Life Assurance Society v. Att-Gen.)." (Al Fayed v. Advocate General for Scotland [2004] ScotCS 278, Inner House)
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Consequences of agreement being void
No legitimate expectation of continued application of void agreement
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"[119] We have already reached the conclusion that, as the 1997 Agreement was ultra vires, the respondents did not have any discretion to continue to abide by the Agreement once they knew that it was ultra vires. A decision taken at that stage to continue to be bound by the Agreement for the remainder of its contractual duration would, in our opinion, have been outwith the powers of the respondents. However, under our domestic law a legitimate expectation can only arise on the basis of a lawful promise, representation or practice. There can be no legitimate expectation that a public body will continue to implement an agreement when it has no power to do so. In our opinion, the petitioners could not have had a legitimate expectation that the respondents would have adopted a course of action which was outwith their powers, and continued to maintain a contract which was unlawful. While the petitioners may well have had an expectation, it was not, in the particular circumstances of this case and according to our common law, a legitimate expectation." (Al Fayed v. Advocate General for Scotland [2004] ScotCS 278, Inner House)
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May be an abuse of power to undermine reliance before taxpayer was notified it should not rely on the agreement
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"[104]...It was accepted that prior to 2 June 2000 the petitioners had been arranging their affairs in reliance on the Agreement. It was also accepted that between 5 April and 2 June 2000 the petitioners might have brought taxable remittances into the United Kingdom, and also that arrangements for the introduction of further remittances might have been made which were irreversible. The respondents stated that, on the receipt of the necessary information from the petitioners, steps would be taken to prevent them from suffering unfair prejudice as a consequence of the termination. Further, the respondents took the view that it would not have been fair to have sought to re-open the tax years prior to 6 April 2000 as it was appreciated that the petitioners would have arranged their financial affairs for those years in reliance on the Agreement and, indeed, may well not have kept any records, so that the petitioners retained the benefits of the Agreement in respect of those earlier years. In our opinion, the attitude of the respondents on this matter was perfectly reasonable and certainly cannot properly be regarded as being unfair." (Al Fayed v. Advocate General for Scotland [2004] ScotCS 278, Inner House)
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Rescission for misrepresentation
HMRC seeking to rescind agreement with taxpayer for fraudulent misrepresentation
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"[1] By the Finance (No.2) Act 2005, the UK introduced "Anti-Arbitrage Rules", designed to prevent tax avoidance through the exploitation of the tax treatment of "hybrid" entities in different jurisdictions. Hybrid entities are those which are considered in some jurisdictions to have separate legal personality for tax purposes and in others to be tax transparent.
[2] The defendants are entities in the GE [General Electric] group. I will refer to them, collectively, as "GE". GE approached HMRC in 2005 for clearance in relation to a number of transactions. One such transaction (entered into in 2004) concerned the investment by UK entities within the GE group in an Australian subsidiary (the "Australian Transaction"). On or about 21 December 2005, GE entered into two agreements with HMRC: a settlement agreement, concerning existing transactions, including the Australian Transaction (the "Settlement Agreement"), and a clearance agreement, concerning the ongoing treatment of various of GE's activities (the "Clearance Agreement").
[3] From 2011 onwards, HMRC began to accumulate information concerning the Australian Transaction which, they claim, painted a different picture to that which had been presented to them during the course of the discussions seeking clearance in 2005 (the "Clearance Discussions"). After extensive discussions with GE, HMRC purported to rescind the Settlement Agreement in a letter dated 16 October 2018. The basis of the purported rescission was expressed to be material misstatements of fact and/or a failure to provide adequate disclosure.
[4] On 23 October 2018, HMRC issued these proceedings seeking a declaration that the Settlement Agreement had been validly rescinded, and other declaratory relief. It is HMRC's contention that if the Settlement Agreement was validly rescinded it is able to recover the tax that arises upon the application of the Anti-Arbitrage Rules because the limitation period for raising discovery assessments against GE (being 20 years) has not expired.
[5] On 22 October 2019 HMRC issued an application to amend the particulars of claim in the form of a draft amended particulars of claim served on GE ("APOC"). The proposed amendments delete all but one of the existing alleged representations, introduce two new representations and introduce for the first time a claim that the representations were made fraudulently. They also introduce a claim based on an implied term and a claim that the Settlement Agreement was a contract of utmost good faith." (HMRC v. IGE USA Investments Limited v. HMRC [2020] EWHC 2121 (Ch))
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Rescission at common law for fraudulent misrepresentation not subject to time limit
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"[20] It remains common ground in this court that rescission of a contract at common law for fraudulent misrepresentation is a self-help remedy which does not require the intervention of the court, and that it is not subject to any period of limitation under the 1980 Act. Nor can any question arise of applying a limitation period by analogy under section 36, because rescission at common law is obviously not an equitable remedy.
[21] The "cast-iron defences" that GE says it has to any claim for rescission of the Settlement Agreement at common law principally relate to the alleged impossibility of effecting restitutio in integrum. As the judge rightly observed, however, GE did not rely on the existence of such defences in opposition to the proposed amendment, so HMRC's claim for rescission at common law will in any event go forward to trial." (IGE USA Investments Limited v. HMRC [2021] EWCA Civ 534, Henderson LJ)
Equitable rescission for fraudulent misrepresentation subject to 6 year limitation period
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"[59] For these reasons, I conclude that the ratio of Molloy is correctly stated in GE's first ground of appeal, namely "that any claim for equitable rescission of a contract on the ground of fraudulent misrepresentation is subject to a six-year limitation period by analogy to a claim for damages in the tort of deceit, where the facts as pleaded would allow either claim.
[60] ...On the contrary, as I have sought to explain, it was enough that HMRC seek rescission of the Settlement Agreement on the ground of fraudulent misrepresentation, in circumstances where they could in principle have relied upon the same facts to bring an action for damages in deceit. Such an action would not have involved setting aside the Settlement Agreement, but the damages would have been calculated on essentially the same basis as HMRC now seek to achieve by rescinding the Settlement Agreement and relying on their statutory power to make discovery assessments within a twenty year period. It is that similarity in the relief claimed which is sufficient, on the authority of Molloy, to justify and require application of the statutory six-year limit by way of analogy." (IGE USA Investments Limited v. HMRC [2021] EWCA Civ 534, Henderson LJ)
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Importance of restitutio in integrum
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"[64] The equitable remedy of rescission, like rescission at common law, is inextricably bound up with the possibility of achieving restitutio in integrum, although the authorities tend to show that the requirement is easier to satisfy in the case of equitable rescission because of the greater flexibility which courts of equity have traditionally been able to deploy: see generally Snell's Equity, 34th Edition (2020), at paragraphs 15-011 and 15-012. Precisely what (if anything) is required in order to achieve counter-restitution in any given case will depend on the particular circumstances, and it cannot be satisfactory for the law of limitation to draw a distinction depending on the terms of the consequential relief which the claimant needs or chooses to plead." (IGE USA Investments Limited v. HMRC [2021] EWCA Civ 534, Henderson LJ)
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Consideration
Agreement to give up a doubtful claim is capable of constituting good consideration
“As Mr Mantle pointed out, agreement to give up a doubtful claim is capable of constituting good consideration.” (HMRC v. Southern Cross Employment Agency Ltd [2015] UKUT 122 (TCC), §37, Newey J).
Consideration HMRC did not ask for
“[Counsel for HMRC] argued that HMRC had not requested Southern Cross to forbear from litigating to recover the balance of its claim and that it had been free to make a fresh claim. In reality, however, Southern Cross was giving up 24% of its claim for ever. Apart from anything else, any attempt to recover the 24% would have been time-barred. I accept [the taxpayer’s] submission that HMRC obtained complete protection against further claims for all relevant periods.” (HMRC v. Southern Cross Employment Agency Ltd [2015] UKUT 122 (TCC), §65, Newey J).
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Intention to create legal relations
Assessed objectively
“I agree with Mr Mantle that the pattern of correspondence between Horwath Clark Whitehill and HMRC, and specific wording used in it, tend to point towards a process of negotiation and, in the end, an intention to conclude a contractual agreement. For example, Mr Knight suggested on 26 March 2010 that the parties reach a 'compromise position' on a 'without prejudice' basis; Horwath Clark Whitehill referred in their reply to the 'offer' Mr Knight had made and then, on 14 April, to being 'willing to negotiate'; and Mr Knight said on 29 April that HMRC would 'accept' that 74% of the claim would be paid. Viewed objectively, such matters seem to me indicate contractual negotiation rather than HMRC doing no more than ascertain the extent of their liability under s 80 of the VATA. The individuals involved may or may not have seen things that way, but that is unimportant. Matters are to be assessed on an objective basis.” (HMRC v. Southern Cross Employment Agency Ltd [2015] UKUT 122 (TCC), §67, Newey J).
Effect
Non-statutory agreement may determine statutory “liability”
“In our view, the significance of BSOC and DFS is in demonstrating, first, that the question of liability to repay is to be examined at the time of the payment, and not at some later stage when it may be established that there was in fact a different liability, or no liability at all, and secondly that “liability” is not confined to what might be discovered to be the right answer as a matter of law, but can extend to judicial determinations, or agreements having the like effect under s 85, even though those might subsequently be shown not to have corresponded to the actual liability in law.” (Southern Cross Employment Agency Ltd v. HMRC [2014] UKFTT 88 (TC), §87 – no appeal on this issue).
Distinction between voluntary payments and payments pursuant to a binding contract
“That agreement was, like the judicial determination described by Rix LJ inBSOC, at [106], an intervening event which itself created a liability, in a way that the mere payment of a claim, or payment of part of a claim, would not. That is the relevant distinction, not as between judicial determinations and everything else, but between cases where HMRC is liable, whether under the statute, by judicial determination, deemed judicial determination under s 85 or a valid and enforceable agreement, to repay an amount at the date of payment and cases, such a voluntary payment of a claim, where they are not so liable, because the liability has not arisen as a matter of law.” (Southern Cross Employment Agency Ltd v. HMRC [2014] UKFTT 88 (TC), §88 – no appeal on this issue).
No assessments to reverse agreement
“By the same token, we do not consider that the language of s 80 (or s 85) can permit HMRC to raise an assessment in respect of a matter compromised by common law agreement outside the scope of s 85, and where the liability (of the taxpayer or HMRC) is enforceable according to the terms of that agreement. For the reasons we have given, the proper construction of s 80 does not permit such an assessment.” (Southern Cross Employment Agency Ltd v. HMRC [2014] UKFTT 88 (TC), §89 – no appeal on this issue).
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Conditional agreements
Cannot approbate and reprobate
“If, taking the appellant’s case at its highest, HMRC sought to levy PAYE and/or NIC from the Company in breach of the July 2007 Agreement, the Company could have challenged that action on the basis that HMRC were precluded by the agreement from so doing. What they cannot do is seek to insist upon the agreement when it suits them, as in this Appeal, but ignore it when it is in their interest to do so. That would be to both approbate and reprobate. Accordingly, even on this basis, which, as I say, puts the appellants’ case at its highest, I see no reason to hold that HMRC is precluded by the July 2007 Agreement from charging PAYE and NIC in respect of the £900,000 bonus payment.” (Spring Salmon Ltd v. HMRC [2016] UKUT 313 (TCC), §28 Lord Glennie)
Set aside agreement induced by fraud
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Inducement sufficient - not necessary that the misrepresentations were believed
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"[71] The question whether there has been inducement is a question of fact which goes to the issue of causation. The way in which a fraudulent misrepresentation may cause the representee to act to his detriment will depend on the circumstances. He rightly focused on the particular circumstances of the present case. Mr Hayward’s deceitful conduct was intended to influence the mind of the insurers, not necessarily by causing them to believe him, but by causing them to value his litigation claim more highly than it was worth if the true facts had been disclosed, because the value of a claim for insurers’ purposes is that which the court is likely put on it. He achieved his dishonest purpose and thereby induced them to act to their detriment by paying almost ten times more than they would have paid but for his dishonesty. It does not lie in his mouth in those circumstances to say that they should have taken the case to trial, and it would not accord with justice or public policy for the law to put the insurers in a worse position as regards setting aside the settlement than they would have been in, if the case had proceeded to trial and had been decided in accordance with the corrupted medical evidence as it then was." (Hayward v. Zurich Insurance Company plc [2016] UKSC 48)
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Evidence of fraud that could have been obtained before the original decision
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Query whether this prevents setting aside
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"[73] It was expressly conceded on behalf of the insurers for the purposes of the present appeal that whenever and however a legal claim is settled, a party seeking to set aside the settlement for fraud must prove the fraud by evidence which it could not have obtained by due diligence at the time of the settlement. It makes no difference to the outcome of the present case and the court heard no argument about whether the concession was correct. Any opinion on the subject would therefore be obiter, and since the court has not considered the relevant authorities (including Commonwealth authorities such as Toubia v Schwenke [2002] NSWCA 34) or academic writing, it is better to say nothing about it." (Hayward v. Zurich Insurance Company plc [2016] UKSC 48)
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