James Kessler QC discusses Kessler v Information Commissioner & HMRC

It is a good thing for a barrister to be personally involved in litigation occasionally. Physician, heal thyself! Tax cases involving barristers who were or later became QCs are set out in table 1. The reader will notice that the success rate was only 50%. Perhaps this shows the impartiality of the Bench.

A striking feature in this list is that in only one case did the taxpayer represent himself (and that unsuccessfully). My own case concerns the Freedom of Information Act 2000. I was represented by Jonathan DC Turner.

The old CGT residence rules

Under the UK tax regime, capital gains tax is charged on the capital gains of trusts if the trustees are resident in the UK. The definition of residence is therefore crucial.

Until 6 April 2007, trustees were treated as resident in the UK unless

1. the general administration of the trust was ordinarily carried on outside the UK and

2. the trustees or a majority of them were not resident in the UK

See section 69(1) of the Taxation of Chargeable Gains Act 1992.

However, until that date there was an exception, whereby trustees acting in the course of a business of managing trusts were treated as not resident in the UK if the settled property was provided by a person who was not domiciled or resident in the UK (section 69(2)). This rule “the professional trustee residence rule” was very important for those carrying on the business of managing trusts in the UK, since it enabled them to compete fairly with those carrying on similar businesses in other jurisdictions. Those who establish professionally managed trusts are in principle able to choose between professional trustees in a variety of locations. Settlors outside the UK would not appoint professional trustees in the UK if, as a result, all capital gains of the trust on property, wherever located, were subject to UK capital gains tax.

The third edition of my book Taxation of Foreign Domiciliaries (2004) explained:

“This thoroughly sensible provision allows UK professional trustees to act without attempting to tax them. The object is to allow the UK to compete on equal tax terms with foreign trustees.”

I would have thought that was self evident.

In March 2005, the Inland Revenue issued a discussion paper. One of its proposals was that the professional trustee residence rule should be extended to income tax. In January 2006, HMRC published draft legislation to this effect but announced unexpectedly that it was in consultation with the Dti about whether the “professional trustee residence rule” might constitute a State aid for the purposes of European law. The announcement went on ominously: “If the conclusion of those discussions is that the proposal does constitute a State aid then it is possible that the draft provisions may need to be revised or withdrawn”.

On 22 March 2006, HMRC announced “We have now consulted with the Department of Trade and Industry which has confirmed that [the professional trustee residence rule] would indeed constitute a State aid. In view of this we have had to withdraw the measure”.

The professional trustee residence rule was abolished by the Finance Act, 2006, with effect from 6 April 2007. Effectively, capital gains of a trust made by a foreigner are subject to CGT unless there is a foreign trustee. (In such a case why bother to appoint a UK trustee? Of course no-one does).

Was the Dti advice right?

Was the Dti right? Chris Vajda QC, a leading expert in the field, found it difficult to see how the Dti came to its conclusion. Ireland (which has a large and growing financial services industry) has exactly the same professional trustee rule as the UK used to have: Section 574 of Ireland’s Taxes Consolidation Act 1997. The provision has not been amended and there has been no suggestion or proposal to amend it, notwithstanding the UK reforms. Perhaps the Dti advice was wrong. Perhaps it was just a pretext? It is hard to say without seeing it.

Motive for the litigation

Every reader of Taxation will agree that that the state of UK statutory tax law is far from satisfactory. In my view one way towards improving the situation is better informed public debate of the policy issues. The disclosure of documents such as the Dti advice sought in my appeal will facilitate that debate. Indeed, it is essential to make that debate a possibility. It is very difficult to point out mistakes in documents you can’t see (though HMRC implausibly deny this.)

The UK tax system should be fair, and it should facilitate the UK economy. In my view – I think any reader will agree - the professional trustee rule achieved exactly that end. Its repeal leaves the law in a state which is unfair to UK trustees and damaging to the UK economy. The disclosure of the Dti advice would assist in the debate as to whether that was necessary.

The appeal had the support of STEP and the CIOT.

Freedom of information law

Readers may not be as familiar with the Freedom of Information Act as they are with the provisions of the Taxes Act, which (according to Walton J) Her Majesty's Tax Inspectors are apt to sing in their baths. ¹

The Dti advice was legal advice and was held to qualify for legal professional privilege. Nevertheless HMRC are obliged to disclose it unless:

“the public interest in maintaining the exemption outweighs the public interest in disclosing the information.”

See s. 2 Freedom of Information Act 2000.

It was not seriously suggested that disclosure of the Dti’s advice would cause any specific detriment to the public interest relating to the subject-matter of this case. Instead, the HMRC argued that disclosure should be excluded in this case because it might discourage frank legal advice in other cases.

That approach is contrary, one might think, not only to the policy of the Act but also to official government policy. As the announcement accompanying the Pre-Budget Report of 9 October 2007 states:

“The Government commits to three principles of tax simplification … the Government will share its findings on the viability of tax simplifications with business.”

In Parliament, Lord Falconer said that s.2 FOIA:

will put beyond doubt the Government's resolve that information must be disclosed except where there is an overriding public interest in keeping specific information confidential. Perhaps I may repeat that: information must be disclosed except where there is an overriding public interest in keeping specific information confidential.

Fine words, but they butter no parsnips and the culture of secrecy continues to flourish. As an example of this, Dave Hartnett put in a witness statement in the appeal. His argument that (1) the Revenue must obey the law; (2) ; in order to do so they need legal advice; and (3) they could not obtain legal advice if any advice they ever received ever had to be disclosed. This non-sequitor is the so called “candour argument” and if it is accepted we may as well tear up the Freedom of Information Act, at least so far as privileged documents are concerned. Significantly, HMRC refused to allow even Dave Hartnett’s witness statement to be published! Perhaps the fear was that his paean to privilege might be cited by the taxpayer. HMRC are entitled to argue that their own legal advice should be protected while regularly seeking privileged documents of taxpayers. But the argument should be in the open. Freedom of information is not, it is apparent, a value much appreciated within HMRC.

Secret submissions

In the course of the case HMRC applied to put in secret submissions to the Tribunal which I was not allowed to see. I have to say I was surprised that the application was made, and aghast that it was accepted.

To decide a case fairly, a judge must hear both sides of the argument and each side must know the arguments that the other side has made. This might seem obvious. “I cannot at the moment visualise any circumstances”, said Lord Donaldson,“ in which it would be right to give a judge information not disclosed to the other side.”² That was how it seemed in 1983.

The Human Rights Act affirms the “right to a fair hearing.” In Mantovanelli v France³, the European Court of Human Rights declared:

“The Court notes that one of the elements of a fair hearing within the meaning of Article 6 para. 1 (art. 6-1) is the right to adversarial proceedings; each party must in principle have the opportunity not only to make known any evidence needed for his claims to succeed, but also to have knowledge of and comment on all evidence adduced or observations filed with a view to influencing the court's decision”

But (as so often) we do not need - at least we should not need - to go to Europe to learn the requirements of a fair trial. The same principle has long been part of the common law.

There are exceptions borne of necessity. National security may make disclosure impossible. But these are rare and extreme cases.

Tribunals in England have now decided to accept secret evidence and arguments from HMRC in ordinary run of the mill cases which have nothing to do with national security. My own case - Kessler v HMRC - is an example of this worrying trend.

The result

The Tribunal accepted the candour argument, and HMRC were not required to disclose the Dti advice which we asked for. However HMRC were criticised by the Tribunal for the way they handled the matter. HMRC's view on the State Aid point was "bald and substantially unexplained" and they were urged to provide an "updated and fuller public statement of reasoning". So the result is a draw with something for both sides.

At the end of the day however what we had wanted to see is the advice that HMRC received from the Dti, not a precis of that advice run though the mill of HMRC. So I am proposing to appeal on two points:

(1) The Freedom of Information act point: if disclosure is not ordered in this case, it is difficult to see how it could ever be ordered: the Tribunal’s acceptance of the candour argument has effectively raised the qualified exemption for privileged documents in s. 42 Freedom of Information Act 2000 into an absolute exemption.

(2) The fair trial point: it is contrary to principles of natural justice and a fair trial that HMRC should have been allowed to put in secret submissions to the Tribunal which we were not allowed to see. (We were also not told the reason that HMRC wished to put in secret submissions: that, too, was secret.) For my part, I think this point is even more important and fundamental than the first and I am hearing worrying stories of occasions where the same has happened in tax litigation before the Commissioners.

It will no doubt be a year or so before the High Court gives its decision. Another lesson that a litigant must learn is patience.

Kessler@kessler.co.uk

The decision in Kessler v Information Commissioner & HMRC is available

here.

Here is information on how to order books by James Kessler.