H5: Contract settlements
SCOPE OF POWER
HMRC's power to make agreements
- 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).
- Statutory recognition of contract settlements
"(1A) An officer of Revenue and Customs or a person authorised by the Commissioners may conduct county court proceedings for the recovery of an amount payable to the Commissioners under or by virtue of an enactment or under a contract settlement." (CRCA 2005, s.25)
"(6) In this section “contract settlement” means an agreement made in connection with any person's liability to make a payment to the Commissioners under or by virtue of an enactment." (CRCA 2005, s.25)
- 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)
- 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)
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)
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).
LIMITS OF HMRC'S POWER TO CONTRACT
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).
Agreements regarding future liability to tax are void
"[65] A related point is that although HMRC have very wide powers of care and management, those powers do not extend to making binding agreements about the basis or amount of assessment in future years, or to making forward tax agreements of the kind held to be invalid by the Inner House of the Court of Session in Al Fayed v Advocate General for Scotland [2004] STC 1703 at [73], citing the judgment of Astbury J in Gresham Life Assurance Society v Attorney-General [1916] 1 Ch 228." (R (oao Refinitiv Ltd) v. HMRC [2024] EWCA Civ 1412, Henderson, Underhill, Whipple LJJ)
"[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)
[151] The Inspector's approach was, as Ms Grainger said, ultra vires. He did not have the power to bind the Inland Revenue not to apply the statutory provisions in future years, for any one or more of the following reasons:
(1) income tax is an annual tax and the law could have changed in the future (see Gresham), and the same must be true of Class 1A NICs which depend on the benefit-in-kind rules;
(2) the agreement conflicted with HMRC's statutory duty "to collect the tax as it falls due in respect of actual transactions", see Al Fayed; and
(3) the sum payable under the agreement was not "a genuine and realistic approximation to the actual liability", again, see Al Fayed.
152. We therefore agree with Ms Grainger that the Inspector had no power to agree that the Cars would in the future be treated as pool cars, and in relation to those years, the agreement was ultra vires and void." (MWL International Ltd v. HMRC [2024] UKFTT 402 (TC), Judge Redston)
- Agreement for one period unlikely to be intended to have effect in later period
"[67] Neither party, in my judgment, could reasonably have contemplated that, if (as happened) the APA was not renewed, the methodology used and applied for the years covered by the APA should have a continuing and constraining effect on HMRC's approach to transfer pricing in future accounting periods from 1 January 2015 onwards. Those future periods lay outside the temporal scope of the APA, so in the absence of further agreement each succeeding accounting period must be examined separately for corporation tax purposes unaffected by the APA. Still less, in my judgment, could the parties reasonably have contemplated that the time-limited methodology of the APA should somehow constrain the extent or nature of any charges to DPT that HMRC might later seek to impose on TR UK under legislation that did not yet exist, and had only very recently been announced, when the five-year term of the APA came to an end on 31 December 2014." (R (oao Refinitiv Ltd) v. HMRC [2024] EWCA Civ 1412, Henderson, Underhill, Whipple LJJ)
Consequences of agreement being void
- No legitimate expectation of continued application of void agreement
"[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)
- May be an abuse of power to undermine reliance before taxpayer was notified it should not rely on the agreement
"[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)
- No estoppel based on void agreement
"[159] Here, the Inspector and Mr Walpole agreed that the Cars were pool cars, provided the terms agreed at the Meeting were satisfied, and the Inspector had no power to enter into a future agreement to that effect. This is not the same as the Tinkler situation, where the parties could have taken steps to regularise the position. In our judgment, Ms Grainger is correct: a void and illegal agreement cannot form the basis for an estoppel." (MWL International Ltd v. HMRC [2024] UKFTT 402 (TC), Judge Redston)
CONTRACT FORMATION
- Ordinary law of contract applies to agreement to settle tax liability, but contextual factors may differ
"[22] ... Secondly, and more significantly, context includes the identity and special features that attach to one, or both, parties. In this case, it is right to have regard to the fact that HMRC is a very large public body that operates within a highly complex statutory framework. It has duties to collect tax and, of course, the taxpayer has a duty to pay tax that is properly due and payable. Decisions made by HMRC may be challenged under the statutory regime and, in limited circumstances, at common law. There are obvious differences between HMRC and a commercial person or entity, where HMRC is undertaking its duties to collect tax. Different considerations may apply where HMRC is negotiating the terms of a commercial deal with a business that is hoping to provide commercial services to it. That said, HMRC regularly reaches contractually binding agreements with taxpayers about the amount of tax that is payable and it agrees to accept a sum that is less that the full amount that would be payable if HMRC's view of the facts or the law were to be upheld in the Tribunal. The language used by the parties in this case might be very similar to that used by business people in the context of negotiating a commercial deal. The same words may have a different effect depending upon the context in which they are provided. In one context it might be obvious that a contract had been concluded, but it may be clear in another context that the same or similar words lead to the opposite conclusion. That said, the law of contract applies to an agreement to settle a tax liability in the same as any other agreement." (Kyte v. HMRC [2018] EWHC 1146 (Ch), Chief Master Marsh)
- Sending of calculations not an offer
"[54]...HMRC was clearly intending to encourage the claimant to conclude issues relating to his tax liability under the relevant tax mitigation schemes. On 28 May 2015 Mr Skelley sent "computations" with an invitation to BKL to say whether Mr Kyte wish to proceed with the settlement. At that point the language is some distance away from being an offer to enter into a contract. Matters started to come to a head following HMRC's letter sent on 5 August 2015 giving notice that the settlement opportunity would be withdrawn in early 2016. The telephone conversation between Mr Lamont and Mrs Pitt on 30 October 2015 clarified, if it had been in doubt, that HMRC was not in the business of 'horse trading'. In other words, HMRC was willing to resolve the dispute about the claimant's tax liability by a calculated sum being agreed. Although some care is needed to avoid labels becoming more than a useful lens through which to view the communications, I agree with Mr Brown it is helpful to distinguish between a computation (or a calculation) and a settlement offer. The two may become synonymous but it is important to take proper account of the need for HMRC first to obtain relevant information from the taxpayer in order to make a computation, on a basis that is acceptable to HMRC, of the tax that is due, secondly to process that information and thirdly to provide the taxpayer with the conclusions HMRC has reached. A computation provides the workings and may not be just an offer to settle at a stated sum.
[55] The letter sent by Mrs Pitt on 4 November 2015 is the immediate precursor to the Offer. It is essential to see the Offer as something that follows on from Mrs Pitt's letter rather than seeing it in isolation. To my mind, Mrs Pitt's letter is entirely clear; she was providing an indicative settlement calculation with a series of tax calculations for the claimant to consider." (Kyte v. HMRC [2018] EWHC 1146 (Ch), Chief Master Marsh)
- Tax calculations not comparable to sending a price to buy goods
"[54] I consider that the language used Ms Nottage's email sent on 4 January 2016, even seen in light of the previous communications, is some considerable distance from the type of language which could be described as 'promissory language' or the language of commitment. It is oversimplistic to see the calculations, that involve a considerable number of factors relating to a number of tax years, as leading to a figure that could be accepted. In the context of, say, negotiations about the purchase of a chattel or a specified quantity of a commodity, putting forward a figure may amount to an offer that is capable of acceptance. The context here is materially different. Using traditional language, the figure HMRC put forward in its calculations was an invitation to treat." (Kyte v. HMRC [2018] EWHC 1146 (Ch), Chief Master Marsh)
Acceptance
- T wanting to go ahead with settlement but requesting settlement deed and no payment dates agreed not acceptance
"[59] I do not consider that this question gives rise to any real difficulty. The language contained in Mr Lamont's email sent on 12 January 2016 is plainly equivocal. He says that the claimant would like to "go ahead with the settlement on Scion". He follows this by requesting a "settlement deed". Furthermore, he then asks a question, namely whether it would be acceptable for the claimant to pay over a nine-month period? In his analysis of the email, Mr Casey QC relied heavily on the first paragraph. However, when looked at as a whole, Mr Lamont was saying to HMRC that the figure was acceptable but there were terms that needed is to be negotiated, in particular a payment date.
[60] A date for payment is an essential part of an offer to pay a sum of money. There are circumstances in which the court may, by virtue of an implied term, fill a gap. However, I find it hard to see how the acceptance of an offer could include the acceptor asking the offeror about terms for payment. This is not leaving a gap about the settlement date. It is either properly seen as a counter-offer, or as a step in a negotiation that might lead to a concluded contract.
[61] Mr Lamont's request for a settlement deed is also indicative of a wish to receive a more detailed proposal." (Kyte v. HMRC [2018] EWHC 1146 (Ch), Chief Master Marsh)
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).
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).
- Parties conduct indicating they intended there to be a further document to conclude tax settlement
"[24] The fourth limb of HMRC's case is that if offer, acceptance and certainty are satisfied, the 'agreement' was subject to contract. A useful summary of the relevant principles is found in the judgment of HH Judge Pelling QC (sitting as a High Court judge) in Bieber v Teathers Limited [2014] EWHC 4205 (Ch) at [14].
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[64] It is not essential for there to be any formality before a taxpayer concludes an agreement with HMRC. It is right there is no evidence of a requirement from HMRC for the taxpayer to make an offer to HMRC or for there to be a settlement deed (or indeed any additional document). However, Mr Lamont expressly requested HMRC to provide a draft settlement deed. I consider that such a request was not made not merely as a matter of form, or good practice, such that an agreement that had already been concluded remained contractually binding. Rather, it appears to me that his email was intended to be a further step along the path toward a concluded agreement being reached and that the agreement was to have additional formality. Even if all the other elements of a binding contract were present, which I do not accept, the acceptance was conditional upon their being a further document to conclude the agreement. The request for a deed can be analysed in a number of different ways, either as a counter offer, or as an acceptance that is subject to contract. Indeed, the Acceptance can be seen as being too uncertain by virtue of the request for a deed. Whichever way it is looked at, the Acceptance was not the last step in concluding a binding contract." (Kyte v. HMRC [2018] EWHC 1146 (Ch), Chief Master Marsh)
- Payment date for tax settlement could not be filled in by Court
"[60] A date for payment is an essential part of an offer to pay a sum of money. There are circumstances in which the court may, by virtue of an implied term, fill a gap. However, I find it hard to see how the acceptance of an offer could include the acceptor asking the offeror about terms for payment. This is not leaving a gap about the settlement date. It is either properly seen as a counter-offer, or as a step in a negotiation that might lead to a concluded contract.
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[62] It follows from what I have said that the terms included in the exchange of emails lacked a sufficient degree of precision to enable them to amount to a binding contract. In this connection, it is possible to put interest on one side because both parties could be assumed to have understood that interest was not a matter of discretion. It would simply have fallen to be calculated in accordance with the relevant regulations up to the payment date (or dates). There is however, real difficulty about the payment date. Mr Casey QC submitted that the calculation of interest to 31 January 2016 was a clear indication that this was the payment date and could be seen as an express term. I do not agree. The calculation of interest to that date is far more likely to have been merely a matter of convenience." (Kyte v. HMRC [2018] EWHC 1146 (Ch), Chief Master Marsh)
Certainty
EFFECT
- Insufficient precision about scope of complex tax settlement and release that would follow
"[63] I also consider that the terms contained in the Offer and Acceptance were insufficiently precise about the scope of the settlement and the release that would follow from it. It is here that the context is important. The claimant's tax liabilities were plainly complex and it would have been essential for both HMRC and the claimant to have understood with precision exactly what the scope of the agreement was intended to be and how it might affect the enquiry into the claimant's participation in the Scion Scheme. In theory it is possible for a taxpayer, perhaps in less involved circumstances, merely to agree a sum with HMRC, provided terms for payment are agreed, but here, Mr Lamont expressly asked HMRC to provide a settlement deed and it and it is clear he did so with a view to the claimant, and BKL, being able to understand what the effect of agreeing a settlement would be. Mr Casey QC relied upon an answer to one of the FAQs to make good the scope of the agreement. I can see nothing wrong with that approach in principle, if the answer to the FAQ is sufficiently precise. The difficulty with it in this case, however, is that the notion of the claimant's tax affairs being 'brought up to date' is far too general to be of assistance." (Kyte v. HMRC [2018] EWHC 1146 (Ch), Chief Master Marsh)
- 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)
- Sum is contractual debt, not tax (but is evidence of what tax was payable)
"[89] Subsection (2) accordingly simply limits the amount of the penalty payable. It does not impose the penalty. I do not see thus that it is necessary for there to be any assessment of the tax payable for the relevant years under either (a) or (b) before the limit placed on the amount of the penalty can be calculated. Subsection (2) is simply concerned to establish a limit being the difference between what tax would have been "payable" while a negligent or fraudulent return was in place - i.e. (b) - and what would have been "payable" with an accurate return - i.e. (a).
[90] I do not with respect believe that IRC v Nuttall or IRC v Woollen have any real relevance to the calculation of the limit under section 95(2). An agreement or compromise with HMRC may provide very good evidence as to what was "payable" and thus be relevant in that sense. But it is irrelevant that the compromise itself produces a debt rather than a tax liability. What one is concerned to do is to establish what was "payable" in the two different situations.
The terms of the compromise would seem to provide good evidence both of what would have been payable if the incorrect returns over the relevant years had been correct – i.e. (b) under subsection (2) of section 95 - and that which would have been payable if correct returns had been made - i.e. (a) under that subsection - the difference according to the compromise being the amount of £76,508.75.
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[94] I cannot accept this latter argument as legitimate. It fails in my view because it overlooks the fact that subsection (2) is concerned to define the limit of a penalty by reference to the difference in tax "payable" with a correct return (a) and tax "payable" by virtue of an incorrect return (b). Subsection (2) is not concerned with whether there has been an actual assessment, and an actual assessment produced as part of a compromise does not provide any evidence of what was "payable" with a correct return as opposed to that which was "payable" with an incorrect return." (Stockler v. HMRC [2010] EWCA Civ 893, Waller LJ)
"[114] As for context, I agree with Sir Mark Waller that the fact that the compromise creates a contractual debt and that there are no amended returns is irrelevant in the context of section 95(2), which is solely concerned with the process of calculating the ceiling on the amount of the penalty that can be imposed on the taxpayer. It is not concerned with recovery of tax, or with proof of tax as a preferential debt, or with a defence to an action by HMRC for recovery under a settlement agreement.
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[119] I would not for a moment doubt the correctness of any part of the decision in Woollen that a sum due from the taxpayer under a settlement agreement with HMRC does not qualify as a preferential payment in the administrative receivership because it is not a claim for payment of tax. What I do not think is legitimate is to read that decision on the character of a contractual claim for payment in the context of proof for a preferential payment across to the quite different context of ascertaining, for the purposes of a cap on the amount of a penalty on the taxpayer, the amount of tax payable by a taxpayer, who has entered into a settlement agreement binding him to pay to HMRC an agreed amount in respect of the tax claimed plus interest." (Stockler v. HMRC [2010] EWCA Civ 893, Mummery LJ)
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)
Rescission for misrepresentation
VITIATING FACTORS
- HMRC seeking to rescind agreement with taxpayer for fraudulent misrepresentation
"[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))
- Rescission at common law for fraudulent misrepresentation not subject to time limit
"[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
"[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)
- Importance of restitutio in integrum
"[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)
Set aside agreement induced by fraud
Inducement sufficient - not necessary that the misrepresentations were believed
"[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)
Evidence of fraud that could have been obtained before the original decision
Query whether this prevents setting aside
"[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)