Whether the claimant was entitled to challenge the decision of the Commissioners for HMRC to cease to deal with the claimant as agent/ representative for any taxpayer and to cease to communicate, by any means, with the claimant as tax agents for taxpayers

The claimants (collectively referred to hereafter as “CLAC”) challenged by an application for judicial review the decision of the Commissioners for HMRC made on 25 November 2010 and sent to CLAC in a letter dated 30 November 2010 to cease to deal with CLAC as an agent or representative for any taxpayer and to cease to communicate, by any means, with CLAC as tax agents for taxpayers. By letter dated 30 November 2010 HMRC also informed the clients of CLAC of the decision.

By the time of the “rolled up” oral hearing the wide-ranging attack on the lawfulness of the decision had narrowed to the following two grounds:

1. an alleged unlawful failure by HMRC to give the claimant the opportunity to make representations before HMRC took the decision and;
2. an alleged failure to state reasons, or adequate reasons, for the decision.

HMRC Practice when Dealing with Tax Agents

The case set out the background to HMRC's customary practice of dealing with authorised tax agents on behalf of UK taxpayers. Whilst there is no specific statutory provision which requires HMRC to deal with agents authorised by taxpayers, HMRC has adopted the practice of dealing with agents on behalf of taxpayers in the exercise of its general statutory powers.

HMRC's website guidance on agents states, under the heading “How long does the authorisation last?”:

• “The authorisation will continue until HMRC are told that you or your client has withdrawn it or when your client dies.”

The case highlighted that HMRC has no formal procedure to deal with the termination of, for suspected fraud or other serious misconduct, its administrative relationship with an authorised Agent.

However, during the course of the proceedings, evidence was given that HMRC'S Business Customer Unit issued a confidential Note to HMRC staff on 30 June 2009 giving guidance on dealing with agents. The Summary of the Note which was produced in this case states that it is:

• “designed to help HMRC staff identify agent conduct that falls below that which HMRC and the major agent representative bodies would consider appropriate in a professional relationship and sets out the reporting mechanisms to use when issues of this nature arise”.

The Note identified four main headings of poor agent behaviour:

1. Suspected repayment fraud or evasion;
2. Abusive, threatening or discriminatory behaviour;
3. Technical ability that puts tax at risk;
4. Agent behaviour, which though legal, gives HMRC cause for concern.

The Note went on to set out “general principles and guidance” to apply when HMRC is considering what can be done on a practical level when poor agent behaviour is encountered. Under the heading “Refusal to deal with an agent entirely – is this an option?” the Note states that HMRC should not refuse to deal with an agent completely other than in “the most exceptional and extreme circumstances”, in which case legal advice should be sought.

Under the heading “What can we tell our customers if we refuse to deal with their appointed agent?” the Note indicates that, generally, disclosure of information regarding an agent's behaviour is prevented by Section 18(1) of CRCA 2005 but “there are... exemptions within Section 18(2) CRCA 2005 that would enable a necessary, relevant and proportionate disclosure to be made to our customer about the behaviour of their agent.”

Facts of the Case

The individual circumstances of this case were that Mr Lunn as sole proprietor of Christopher Lunn & Company and sole director of Christopher Lunn & Company Ltd qualified as an Associate of the Institute of Chartered Accountants of England & Wales. Membership of ICAEW lapsed in 1995. Mr Lunn having been made bankrupt in 1995 by Customs & Excise was discharged from bankruptcy on 13 October 1998. By way of clarification, Mr Lunn is therefore not a qualified accountant and not registered with any professional regulatory body.

Mr Lunn's practice clientele involved some 7,000 taxpayers. In 2008/2009 HMRC local compliance began to express serious concerns about a significant number of tax returns submitted by CLAC on behalf of clients and, more generally, about the level of skill and care employed by CLAC in its dealings with HMRC as an authorised agent.

These concerns were expressed to CLAC in a letter dated 3 April 2009, the letter setting out in the form of case studies a small sample of the findings HMRC cited as further evidence of their concerns. HMRC stressed that the few examples provided therein were by no means unrepresentative ones and they cited that “material shortcomings are being unearthed in the overwhelming majority of those compliance checks being undertaken” in various HMRC offices in respect of clients of CLAC.

At that time CLAC was warned that HMRC had no alternative but to proceed with a further extension of its current inquiry programme until such time as HMRC believed the Exchequer to be no longer at risk and that reasonable care and accuracy was being applied to pre-Return/claim processes.

That letter was followed in October 2009 by the Criminal Investigation Unit of HMRC beginning a criminal investigation of CLAC. The unit came to a provisional view that CLAC was responsible for a “systematic attack on the ITSA [income tax self-assessment] system” and that materially false statements and documents had been provided in the course of the investigation.

HMRC therefore believed that CLAC had not simply been negligent and unprofessional in its dealings with HMRC but that there were reasonable grounds for concluding that CLAC had systematically committed fraud in such dealings.

In early June 2010 HMRC applied to Court for search warrants pursuant to Schedule 1 of the Police and Criminal Evidence Act. The Court, being satisfied that there were reasonable grounds for believing that an indictable offence, or offences, had been committed issued warrants that were executed at several premises of CLAC. This was followed by the arrest of Mr Lunn and his son on suspicion of cheating the public revenue contrary to common law, false accounting and offences contrary to the Fraud Act 2006.

The disclosure statement recited at the time of the arrests stated that it was believed the suspects had fabricated clients’ business expense claims, made materially false statements and provided materially false documents to HMRC in the course of civil investigations into their clients’ tax affairs and had furthermore understated the profitability of the CLAC enterprises.

On 9 July 2010 HMRC wrote to clients of CLAC informing them that HMRC's Criminal Investigation Group had carried out a search of the business premises of CLAC and had taken away a number of documents which they were now examining for evidence in the investigation. The letter also advised those clients that because of the criminal investigation, it may now be necessary to carry out a check of their tax returns.

On 17 September 2010 HMRC wrote a third letter to CLAC clients stating that tax returns submitted to HMRC might not be correct for a number of reasons. Such reasons included excessive claims to expenditure relating to travel and subsistence, use of home as office, work in progress, accountancy fees and other expenditure claims such as research, books and journals.

HMRC was also concerned about omissions or understatements of income/gains, private expenditure claimed as a business expense, retrospective apportionment of income and expenses between limited company/partnership/sole trader and false declarations to HMRC of self-employed status. The letter concluded by offering a form of disclosure opportunity to be made by 30 November 2010.

On 28 June 2010 CLAC requested from HMRC a copy of the information grounding the issue of the search warrants. This was request was declined by HMRC which led on 5 November 2010 to a claim for judicial review (yet to be determined).

On 13 October 2010 there was a high level meeting within HMRC to discuss a proposal to seek the authority of the Commissioners to refuse to deal with CLAC. Those attending considered that a blanket decision to refuse to deal with CLAC was not “seen as appropriate”.

However, given the body of evidence pointing to fraud across the CLAC client base, a refusal to deal with CLAC in respect of client returns and accounts submitted to HMRC on or before the date of the search operation was “viewed as reasonable, relevant and proportionate.”

This meeting was then followed by an important submission dated 18 November 2010 and sent to two Commissioners for consideration. The submission set out the areas of concern and examined in some detail, with supporting documentation, alleged specific fraudulent conduct by CLAC in respect of inflated accountancy fees, backdated companies, backdating self-employment and partnerships, and false claims for self-employment.

The Judge noted the document as a formidable submission and stated that 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.

HMRC stated in the submission that the potential overall loss to HMRC, when scaled back to 1996/97 was £117m plus interest (and penalties). As such HMRC saw this as constituting a serious “attack” on the Treasury. And given that CLAC were also forecasting a substantial expansion of their client base, this would multiply the risk of further tax fraud.

Taking account of the submission, the two responsible Commissioners decided to terminate CLAC's status as an authorised agent. HMRC had concluded that their duty to collect and manage revenue effectively required immediate action, and not to allow the status quo to continue. The two Commissioners did not consider that they could await the outcome of any criminal proceedings before making a decision because that would result in unacceptable delay.

The Commissioners’ legal advice taken in the course of this final decision is subject to legal professional privilege. However, HMRC stated they were particularly aware of the need for the 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.

Given the strength of the evidence, and flagrant nature, of tax fraud, it was the view of the two Commissioners that a level of potential culpability had been shown at which it was impractical and uncommercial to draw fine lines between different time periods, and that in consequence the issue presenting itself for decision was whether HMRC should refuse to deal with CLAC as agent, for the entire future.

In respect of the decision to allow CLAC to make representations, but only after the decision was taken and communicated to CLAC, HMRC stated that there were legitimate reasons for them to make the decision at the time 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.

Judgement

Deciding in favour of CLAC on both counts, the court stated clearly that the status of authorised tax agent was valuable to tax advisers as it enabled them to deal directly with HMRC on behalf of the client. CLAC had been long established as authorised tax agents and had built up a large clientele. It was therefore clear that termination of their authorised agency would inevitably have a detrimental effect on the claimants’ business.

The real reasons why HMRC had been minded to terminate the claimants’ authority as tax agents had not been adequately brought home to the claimants before the decision to terminate was taken. Whilst the issue and execution of search warrants should have alerted the claimants to the fact that HMRC believed that there were reasonable grounds for concluding that they had committed serious criminal offences, the precise basis upon which the warrants had been issued was not known to the claimants.

Furthermore, the decision was motivated by HMRC's conviction that CLAC had committed systematic fraud on the revenue, and it was right that CLAC should know that its probity and integrity were in issue.

In the circumstances, procedural fairness required that the claimants should have been given the opportunity to make representations before the challenged decision was taken. CLAC should have been allowed to consider whether they wished to set out a reasonably detailed response to the serious allegations that were being advanced against them, even if by so doing they might have been giving advance disclosure of their defence case if criminal proceedings were ultimately brought.

The result of such consideration was not a foregone conclusion. Further, the claimants could reasonably have been expected, if they had been given the opportunity, to contend that termination of their status as tax agents was disproportionate.

They should have been given the opportunity to represent to HMRC that measures short of termination were sufficient to protect the legitimate interests of their clients and of the revenue.

The Court agreed that the right to be heard before an adverse decision was made might be excluded if the matter was sufficiently urgent. If a decision maker, exceptionally, invoked urgency as a ground for dispensing with the requirements of a fair hearing, it was relevant to take into account the extent to which the decision maker had itself contributed to the urgency of the situation.

In this case HMRC could and should have informed the claimants at an earlier stage that they were minded to terminate. In all the circumstances, the claimants should have had the opportunity to make representations before any decision to terminate was taken, and the alleged need for urgency did not justify the course in fact taken by HMRC.

The Court stressed that there was a very considerable gap between the terms of the decision and the reasons for termination articulated in HMRC's submission of 18 November 2010 and in witness statements to the Court. The decision did not seek to particularise any allegations of fraud, but the submission and evidence recited examples of this chapter and verse.

The Court decided that through the current proceedings CLAC now had a full explanation of why the decision was taken. As a result, no useful purpose would be served by quashing the decision on that ground alone.

CLAC succeeded on the first issue being the failure by HMRC to give the claimant the opportunity to make representations before HMRC took the decision. Permission was granted to bring the application for judicial review, and the claim was allowed. The court then quashed HMRC's decision on the basis of ‘unlawful procedural failure’, and the matter was remitted to the Commissioners for HMRC for reconsideration.

The full text of this case is available at http://www.bailii.org/ew/cases/EWHC/Admin/2011/240.html