Lunn & Ors, R (on the application of) v HM Revenue and Customs [2011] EWHC 240 (Admin)

“The authorisation will continue until HMRC are told that you or your client has withdrawn it or when your client dies.”

“1.1 HM Revenue & Customs (the Department) estimates that around eight million taxpayers receive help from third parties in completing and filing income tax and corporation tax returns each year. Third parties are responsible for filing around 65 per cent of self-assessed income tax returns, 78 per cent of Corporation Tax returns for small and medium sized enterprises, 33 per cent of end-of-year PAYE returns filed by employers and 43 per cent of VAT returns. There are around 43,000 professional tax agent firms, ranging from international corporations to sole traders representing most of these taxpayers. Others are assisted by the voluntary sector, including unpaid intermediaries who look after the tax affairs of their friends and family. This report covers professional tax agents which we have defined as those authorised and paid to act on another’s behalf in their dealings with the Department. The analysis in the report covers self-assessed income tax, PAYE, corporation tax and VAT, although we recognise that tax agents will also assist taxpayers on other taxes. 1.2 Taxpayers may choose to use tax agents for a variety of reasons. Some taxpayers may consider they do not have the knowledge to manage their own tax affairs or want assurance that they are paying the right amount of tax. While others simply want to save time. Some taxpayers need help because their tax affairs are more complex. We estimate that the market for preparing tax returns in the UK is worth around £2.5 billion. Many tax agents also charge their clients for tax advice. 1.3 Tax agents are therefore an important intermediary between the Department and its customers. Most professional tax agents have hundreds of clients, so it is efficient for the Department to engage with these intermediaries to ensure that their customers pay the tax due. Recent research by the Department into tax agents’ role in the compliance of small and medium sized enterprises has indicated that good agents have a positive impact, helping their clients get their tax right and reducing errors.”

“2.6 We analysed the sample of around 5,000 cases where the Department had reviewed tax returns to establish where there were under-declared liabilities. We found that self-assessed income tax returns filed by represented taxpayers appear to be associated with higher levels of under declared tax liabilities than returns filed by non-represented taxpayers. In the sample, covering returns for 2004-05, 37 per cent of self-assessed income tax returns from represented taxpayers had under-declared tax liabilities compared to 26 per cent of returns filed by unrepresented taxpayers. The sample results are statistically significant and we also analysed equivalent data for the previous two years and found that the results were broadly consistent over the three year period. Analysis of the Department’s enquiries into corporation tax returns revealed under-declared tax liabilities on 43 per cent of tax returns filed by represented businesses in the sample, compared with 36 per cent for returns filed by unrepresented businesses in the years 2001-04 but owing to a smaller sample size, these results are not statistically significant. 2.7 In 2004-05 the average under-declared self-assessed income tax liability detected by an enquiry into represented taxpayers was just under £900 compared to around £350 for unrepresented taxpayers. There was, however, little difference between the average value of under-declared tax liabilities on corporation tax returns from represented and unrepresented taxpayers, at around £3,450 for represented taxpayers and £3,360 for unrepresented taxpayers. We also analysed under-declared liabilities as a percentage of total self-assessed income tax or corporation tax liability due, net of tax taken at source. The analysis indicates that tax returns from represented taxpayers do have substantial levels of under-declarations even when the size of the total liabilities are taken into account, but that the level of under-declared liabilities on returns from unrepresented taxpayers is greater still.”

“… I also alluded to the surprisingly frequent assertions that turnover appeared to be represented either totally or substantially by “work in progress”

“Turning to your letter dated 30 March 2009, you will recall that when we met in Salford on 21 November 2008 I went to some lengths to explain the background to my involvement in your affairs, and the basis for my concerns over the work of Christopher Lunn & Company. I illustrated to you that your clients’ record-keeping appeared generally to be very poor, well short of the statutory requirement in this respect, and suggested to you that perhaps your clients were not being guided appropriately. I highlighted the fact that revenue expenditure appeared to be too frequently estimated and unsupported by documentation and seemingly not always “wholly and exclusively” incurred for the purposes of the trade, as required by Section 74(1)(b) ICTA 1988. Myself and Karen Diver both then remarked that “work in progress” principles appeared to be being misrepresented, to such an extent that it was my worry that perhaps work in progress was being introduced merely to bring about an air of legitimacy to the profit and loss account. Indeed, doubts were expressed about the very existence of a trade in some circumstances. Finally, I drew your attention to the frequently unacceptable tone and language adopted in some of your correspondence. I went on to explain that I had formed these opinions following reviews of your work I had carried out from time to time, primarily during my previous role as a manager of several enquiry teams. Asked how many cases of yours I might have become acquainted with I suggested approximately ten or so. You argued that this number was perhaps not representative of your firm’s work and asked for details of those cases. A precise record of each and every review I conducted has not been formally maintained, but I have managed to compile a list of some of the cases I have seen: [List of 10 taxpayers] By the time we had met on 21 November 2008, following your earlier refusals to meet and discuss the above issues, I had initiated a programme of additional compliance checks. This was partly to gauge whether my initial concerns were sufficiently well founded, although definite risks had been identified. For the most part those checks are still ongoing. I have, however, sought feedback from the managers of those officers undertaking the checks. The preliminary results are alarming. Not only have my initial concerns been confirmed, they have been heightened. Indeed, not only am I content that the shortcomings with your work, outlined above, are representative, I am now of the belief that the risks to this Department exist right across your client base. You have declined to meet again when it had been my intention to use some of these latest compliance checks as case studies. I am therefore providing you here with a small sample of the findings as further evidence for my concerns. [Case 1] • Income totalling over £7,000 omitted from the SA Return. This income was identifiable from bank statements you would have analysed. • Telephone expenses over-claimed. • Other expenditure claimed without “supporting documentation” (Section 12B TMA 1970). • Unsupported assertions that a receipt of £65,100 came to your client from a “non-domiciled distant relative”. • Supporting documentation supplied as evidence of an alleged business trip to New York in fact relates to an apparent holiday in Palma. • A suggestion that some expenditure incurred during trading is in fact no more than “pre-trading” costs. [Case 2] • Six months into the check no supporting documentation has been provided at all. • Income From Property omitted from the SA Return despite bank statements being clearly annotated “Rent”

“Your tax returns Because of the criminal investigation, we may have to carry out a check of your tax returns. Once the officers from our Criminal Investigation Group have finished examining the documents they took away, we will write to you to let you know whether we will be checking your returns”

“In due course I will be checking your Tax Returns. If you now think your Returns may be incorrect, or any of the reasons outlined above may apply, you should write to me or call on the above telephone number quoting the reference “Edgewood”

“We therefore advise that HMRC should formally notify CLAC that we will not deal with CLAC in respect of client returns and accounts submitted by CLAC to HMRC on or before Criminal Investigation’s search operation on 22 June 2010. We consider it impractical and unhelpful for HMRC to conduct civil enquiries involving CLAC and criminal action against CLAC in parallel in respect of the period prior to 22 June 2010. Additionally, it is considered that any direct civil contact with CLAC will necessitate a Criminal Investigation presence and interviews under caution.”

“33. The picture painted was of a compelling body of evidence of fictitious fraudulent accounting, expected to affect most if not all of CLAC’s client base, with strong indications that CLAC were instigating the fraudulent activity. We considered that both the scale of under-declaration, and the evidence of deliberate fraud, put this case into a different and more serious category to other cases in which HMRC have identified errors or inaccuracies in completing returns. 34. Paragraph 13 of the Submission stated: “The full extent of the fraud is emerging on a daily basis. In respect of 225 ITSA enquiries, years 2004-2007 data relied on by RIS indicates average settlements of £2362 in HMRC’s favour. This understates the full extent of the fraudulent claims because most cases would have been settled on a compromise basis to avoid litigation costs. Taking this average figure and applying it to an ITSA client base of say 6000 as at 2009/10 produces a projected loss of £14.1m. If we add to this an estimate for CT abuse of say £5m and then scale back the resultant £19.1m to 1996/97 the overall loss to HMRC becomes £117m plus interest (and penalties).”

“35. In the light of the strong evidence of fraudulent tax agent activity by CLAC, we concluded that our duty to collect and manage revenue effectively required us to take action now, and not to allow the status quo to continue. We did not consider that we could await the outcome of any criminal proceedings before making a decision because that would result in unacceptable delay. 36. The Commissioners’ legal advice is, of course, subject to legal professional privilege. But we were particularly aware of the need for our decision to be both proportionate and reasonable, in the knowledge that the Claimants’ ECHR rights might be engaged, but also that the interests of CLAC clients were involved and might well differ from CLAC’s interests. 37 We, as Commissioners were particularly conscious of HMRC responsibilities to clients of CLAC, who faced a difficult position. 38. First, given CLAC’s business methods based on widespread fictitious tax reporting, there appeared to be a substantial risk that CLAC would continue to submit fraudulent Returns on behalf of its clients, thereby exposing clients to the risk of further investigations, penalties and compliance costs. 39. Secondly, CLAC clients faced early deadlines. The time limit for submission of paper Returns for individuals for the tax year ended 5th April 2010 had already passed. For companies with a financial year ending 31st March 2010 the most probable filing date was 31st March 2011. The time limit for submission of electronic Returns for individuals was 31 January 2011. 40. Thirdly, HMRC Local Compliance had already offered CLAC clients a disclosure opportunity (Letter of 17th September 2010) till 30 November 2010. That had so far elicited 367 telephone calls/letters including 93 specific disclosures. Local Compliance were extending the disclosure deadline until 28 February 2011, due to discovering the addresses of further CLAC clients, to whom LC had not previously written. 41. Fourthly, CLAC clients were facing great uncertainties over what was best for them to do, in the face of conflicting advice. Tab 29a [of the submission] referred to a CLAC client, “reassured by an accountant at Christopher Lunn that all their practices are above board” then being told “I have nothing to be reassured about” (“Cowboy” and “mess”) with the prospect of very expensive fees to re-work 6 years’ accounts. The discussion at Tabs 29b and 29c pointed to the difficulties of giving (or obtaining) advice in such a situation. Tab 29d referred to “conflicting advice”

“55. In our view, there were legitimate reasons for us to make the decision at our meeting in November, because of the imminent deadline for filing tax returns on 31 January and the need to notify CLAC’s clients in sufficient time to enable them to make alternative arrangements, as I have explained in detail above. If, at our meeting on 25 November, we had decided to defer our decision for 28 days to enable CLAC to make representations, we would not have been in a position to make a final decision until January. This would have been too late for CLAC’s clients to make alternative arrangements for filing their tax returns by 31 January. However, if we allowed CLAC’s clients to continue to use CLAC as their representative, we faced a real risk that, yet again, fraudulent tax returns would be filed by CLAC, in January 2011, causing further losses to the Exchequer.”

“One of the difficulties felt in applying principles of natural justice is that there is a certain vagueness in the term, and, as Tucker LJ said in Russell v Duke of Norfolk [1949] 1 All E.R. 109: “There are … no words which are of universal application to every kind of inquiry and every kind of domestic tribunal. The requirements of natural justice must depend on the circumstances of the case, the nature of the inquiry, the rules under which the tribunal is acting, the subject-matter under consideration and so forth.”

“What does fairness require in the present case? My Lords, I think it unnecessary to refer by name or to quote from, any of the often-cited authorities in which the courts have explained what is essentially an intuitive judgment. They are far too well known. From them, I derive that (1) where an Act of Parliament confers an administrative power there is a presumption that it will be exercised in a manner which is fair in all the circumstances. (2) The standards of fairness are not immutable. They may change with the passage of time, both in the general and in their application to decisions of a particular type. (3) The principles of fairness are not to be applied by rote identically in every situation. What fairness demands is dependent on the context of the decision, and this is to be taken into account in all its aspects. (4) An essential feature of this context is the statute which creates the discretion, as regards both its language and the shape of the legal and administrative system within which the decision is taken (5) Fairness will very often require that a person who may be adversely affected by the decision will have an opportunity to make representations on his own behalf either before the decision is taken with a view to producing a favourable result; or after it is taken, with a view to procuring its modification; or both. (6) Since the person affected usually cannot make worthwhile representations without knowing what factors may weigh against his interests fairness will very often require that he is informed of the gist of the case which he has to answer.”

“It is not enough … to persuade the court that some procedure other than the one adopted by the decision-maker would be better or more fair. Rather, they must show that the procedure is actually unfair. The court must constantly bear in mind that it is to the decision-maker, not the court, that Parliament has entrusted not only the making of the decision, but also the choice as to how the decision is made.”

“In the light of such factors each case will come to rest between two poles, or possibly at one of them: the decision which cries out for reasons, and the decision for which reasons are entirely inapposite. Somewhere between the two poles comes the dividing line separating those cases in which the balance of factors calls for reasons from those where it does not. At present there is no sure indication of where the division comes. Asked to give an example of the kind of decision in which in the light of his submissions fairness will not require reasons to be given, Mr Pannick was unable or unwilling, at least without further reflection, to commit himself. No doubt the common law will develop, as the common law does, case by case. It is not entirely satisfactory that this should be so, not least because experience suggests that in the absence of a prior principle irreconcilable or inconsistent decisions will emerge. But from the tenor of the decisions principles will come, and if the common law’s pragmatism has a virtue it is that these principles are likely to be robust. At present, however, this court cannot go beyond the proposition that, there being no general obligation to give reasons, there will be decisions for which fairness does not demand reasons. It follows that in appraising each case, the present included, too catholic an approach will amount to generalising what is still a particular obligation; though we are not prepared to accept Mr Beloff’s contention that it is any longer an exceptional one.”