This case relates to an administrative law challenge, by a member of the public, to a proposed compromise between HMRC and taxpayers (Goldman Sachs International and Goldman Sachs Services Limited (together, Goldman Sachs)). The case deals with some important issues about HMRC's power to compromise with taxpayers. In general, the decision embodies a common sense, non-technical approach.
Noteworthy tax points include the judge's acceptance:
- Of the general applicability in administrative law of HMRC's Litigation and Settlement Strategy (remembering though that it may not always be designed for the case in hand and so should be applied with caution);
- That an arrangement is only a "package deal" if there was a single global payment not allocated to the issues being compromised; and
- Of the principle of equality in tax matters, that taxpayers should be treated in the same way as other taxpayers in the same situation unless there is some rational basis for discrimination.
The decision suggests that where HMRC has made a decision which is invalid because of a failure to abide by its own procedure and policy, but subsequently (following reconsideration) decides to maintain that decision, any subsequent administrative law challenge is of the subsequent decision, not the original decision. This may have important implications for time limits. Where the original decision has given rise to a binding agreement (for instance with a taxpayer) it is further likely that a subsequent decision not to adhere to the original decision would be unfair and consequently unlawful.
The UK Uncut case emphasises how important it is that administrative decision-makers exclude irrelevant matters from consideration.
The case also illustrates a number of important issues about evidence in administrative law proceedings, in particular, the basic importance of written evidence, including witness statements, some of the difficulties in having issues of fact tried in the course of a judicial review, the importance for an applicant for judicial review of considering an application to cross-examine witnesses whose statements are to be challenged and the limited ability of the court (in the absence of cross-examination) to reach a conclusion of fact which is at variance with the witness statements.
This case arose out of disputes between HMRC and Goldman Sachs. By November 2010 there were altogether six issues in dispute. Of these, three were conceded by Goldman Sachs which paid the tax HMRC claimed. A fourth issue concerned management structure and did not concern a specific amount of money, but HMRC's case was considered weak by an independent expert. The fifth issue was "a technical issue", and the last issue was whether HMRC should waive interest on certain unpaid national insurance contributions.
Originally Goldman Sachs had denied liability to pay the national insurance contributions (and had appealed, unsuccessfully, to the First-tier Tribunal) but, at a meeting to discuss the six issues held on 19 November 2010 (the 19 November meeting) Goldman Sachs conceded liability to pay the contributions, on the basis that (among other things) the interest would be waived. Goldman Sachs also agreed to adopt HMRC's Code of Conduct for Banks at the 19 November meeting.
The HMRC representatives at the 19 November meeting were under certain misapprehensions, which were not corrected until December 2010. When they had been corrected, two HMRC officers decided at a meeting on 9 December 2010 (the 9 December meeting) nevertheless to proceed with the agreement reached at the 19 November meeting.
UK Uncut Legal Action Ltd (UK Uncut) applied for a judicial review of HMRC's decisions, arguing that the general body of UK taxpayers had suffered as a result of what was (in UK Uncut's view) unlawful action by HMRC. UK Uncut was granted leave to apply for a judicial review but was not permitted to obtain a quashing order in relation to HMRC's decisions. At most, UK Uncut could obtain a declaration that HMRC had acted unlawfully, which would no doubt have prompted reconsideration. The case is unusual therefore in that the specific taxpayer's – Goldman Sachs' – interests were aligned with those of HMRC.
Which was the relevant decision for judicial review purposes?
This issue is of course fundamental. The judge in the judicial review proceedings resolved it by holding that it was HMRC's decision at the 9 December meeting that was material1. By that time, as explained above, agreement had already been reached (presumably informally) at the 19 November meeting between HMRC and Goldman Sachs on each of the six issues. So far as the national insurance contributions issue and the interest issue were concerned, the agreement was that Goldman Sachs would pay the contributions but not the interest.
Is it "fair" in administrative law terms for HMRC to breach a binding agreement with a taxpayer?
It is noteworthy that UK Uncut did not seek to argue before the Court that the settlement agreement was not binding on HMRC on any grounds, including that the agreement reached at the 19 November meeting was ultra vires, HMRC's failure to observe (prior to 30 November 2010) its own internal procedures for approving settlements of the relevant type invalidated the agreement, that the individuals who made the decisions on HMRC's behalf at the 19 November meeting lacked authority to do so, or that the agreement was affected by some vitiating factor such as mistake or misrepresentation.
The judge stated that the independent expert, Sir Andrew Park, "thought that [the settlement agreement] was legally binding on HMRC" and that Sir Andrew's "view" was that the settlement reached at the 19 November meeting was "almost certainly legally binding"2.
If then the settlement agreement was indeed legally binding on HMRC, how could any judicial review of the decision at the 9 December meeting succeed? It must be unlawful for HMRC to repudiate a binding agreement and so the decision at the 9 December meeting to adhere to the settlement agreement was the only one open. It might perhaps be argued that fairness to the general body of taxpayers might justify breach of an agreement with a particular taxpayer, but there is no authority to justify such an extreme view. On the contrary, it is important, in the interests of maintaining public confidence in the tax system, that the Courts enforce agreements between HMRC and particular taxpayers even if the general body of taxpayers may be said to lose out as a result.
It is likely therefore that the binding quality of the settlement agreement made at the 19 November meeting by itself excluded a successful judicial review.
2. Disregarding the binding nature of the settlement agreement, would the decision at the 9 December meeting have been lawful?
It is a fundamental requirement for an administrative decision to be lawful that the decision-maker took into account all relevant matters and excluded from consideration all irrelevant matters. UK Uncut's case was based to a large extent on the taking into account by the HMRC decision-makers at the 9 December meeting of a number of matters claimed to be irrelevant, including possible embarrassment to HMRC officials and the Chancellor of the Exchequer if HMRC were to repudiate the settlement agreement. It is important to note in this connection that UK Uncut had not advanced any free-standing "rationality challenge" to HMRC's judgment in addition to the "irrelevant matters" challenge3.
The judge (and HMRC) accepted that avoidance of embarrassment was indeed not a matter on which HMRC's decision could properly have been based4. But what part had the avoidance of embarrassment really played in the decision? The witness statements of both HMRC decision-makers expressly stated that the decision to adhere to the settlement agreement was prompted by other substantial matters (besides avoidance of embarrassment), including concerns that Goldman Sachs would complain of bad faith if HMRC repudiated the settlement agreement, concerns that Goldman Sachs might litigate or that Goldman Sachs might withdraw from the Code of Practice and a general resultant concern that HMRC's relationship with Goldman Sachs might be impaired. It is an important characteristic of judicial review proceedings that the evidence is normally written, in the form of witness statements and other documents, and witness statements are, in judicial review proceedings as well as other litigation, accepted as true unless successfully challenged. While it is possible for an applicant in judicial review to apply for cross-examination of witnesses, this is unusual, and the interests of fairness require that the defendant in judicial review proceedings has an opportunity (through cross examination) to respond to any challenges to his witness statements5. In this instance, UK Uncut would (to succeed) really have had to challenge the veracity of a witness statement provided by a senior HMRC official. This would have been a hard task, and in fact UK Uncut had made no application to cross-examine HMRC's witnesses6.
UK Uncut's approach was to invite the judge to infer from the evidence as a whole, including certain email exchanges immediately before the 9 December meeting, that the avoidance of embarrassment had been a factor in the decision, whatever the witness statements said7. The judge did not accept this and his consideration of UK Uncut's argument along these lines merely amounted to an assessment of the particular evidence in the case, and raises no issue of principle, although the judge made certain useful general observations:
- There may be circumstances where a court can and should accept that a witness statement is manifestly wrong because it is contradicted by contemporaneous evidence. The existence of such contradicting evidence may also support an application for cross-examination, but in the absence of such cross-examination the contradicting evidence can only negative a witness statement if that contradicting evidence is undisputed, objective and incapable of being sensibly explained away, a test which the contradicting evidence relied on by UK Uncut evidently failed8;
- Where (as in the UK Uncut case) reasons are given after a decision has been made:
"a Court needs to be cautious of later reasons and be aware of the risk that they have been composed subsequently to justify the decision [made] and are a retrospective justification of that original decision".
(In the UK Uncut case, however, the judge was of the view that the decision would have been the same, even though one of the HMRC decision-makers had had a concern about a matter not relevant to the decision, namely personal embarrassment to the Chancellor of the Exchequer9); and
- Where (again as in the UK Uncut case), the disputed decision has been made by two or more decision-makers, the taking into account by any of the decision-makers of an irrelevant matter:
"is, in principle at least, sufficient to render the decision unlawful"10.
3. Other potential grounds of challenge to HMRC's decision
As well as the challenge based on HMRC having allegedly taken irrelevant matters into account, UK Uncut had other complaints:
- That the settlement agreement violated HMRC's Litigation and Settlement Strategy, the specific point being that the settlement agreement was a "package deal" which traded Goldman Sachs' promise to pay the principal amount of the national insurance contributions against HMRC's agreement not to collect interest and that it "split the difference" between Goldman Sachs' position and HMRC's, whereas the issue was an "all or nothing" issue in relation to which, under HMRC's Litigation and Settlement Strategy, HMRC had either to press for the full amount or concede completely, and they had done neither; and
- That the settlement agreement infringed the principle of equality, the point here being that a number of other companies had had a national insurance issue similar to Goldman Sachs' and had compromised it, five years before Goldman Sachs made their settlement agreement, on the basis of payment of the contributions in full without interest.
The interest in the judge's discussion of these two points relates less to his conclusions than to his acceptance of the two following points of principle:
- That HMRC's Litigation and Settlement Strategy (if it applied) was not something from which HMRC was at liberty to depart (which is consistent with the general administrative law principle that, where a public authority has formulated a definite policy, an unjustified decision to depart from it is unlawful)11; and
- That there is a principle of equality which would have precluded Goldman Sachs from being treated by HMRC differently from other companies who had the same issue, if Goldman Sachs' case was truly the same as the other companies' cases12.
As regards HMRC's Litigation and Settlement Strategy, the judge was, on the whole, of the view that it did not apply to the 9 December decision, because that decision was not whether or not interest should be charged but rather whether, having regard to the misapprehensions on the part of HMRC staff which had existed on 19 November, the settlement agreement should be proceeded with13. In any event, the judge accepted that there were two issues, one related to the principal amount of the national insurance contributions, the other to the interest, and there had been no package deal14.
The judge's conclusions with regard to the principle of equality were that there was no close parallel between Goldman Sachs and the companies who settled in 2005. The overall settlement proposal related to six issues, whereas the proposal regarding the national insurance contributions related only to that issue. The judge agreed with the independent expert and with HMRC that it was appropriate to consider the "reasonableness" of the part of the proposal that related to the national insurance contributions in the wider context of all the outstanding issues. The principle of equality meant no more than that if HMRC was, in deciding on 9 December whether or not to adhere to the 19 November agreement, going to distinguish between Goldman Sachs on the one hand (who were settling in 2010) and the other companies who had settled in 2005 (on the other), the distinction had to be on some rational basis. The judge was satisfied that there was such a rational basis15.