Contentious Tax Update 2

This blog is based on an article by Adam Craggs and Harry Smith which was published in Tax Journal on 12 July 2024

Open Justice 1 – anonymity and privacy

The starting point in both civil and criminal litigation is that justice should be administered in public, and that it must not only be done, but also must be seen to be done.  This means that, with the exception of family proceedings, hearings generally take place in public, unless one of the parties successfully applies for all or part of the proceedings, or evidence, to be heard in private (see, for example, Scott v Scott [1913] AC 417).

However, this principle is subject to certain important exceptions. In the case of litigation before the First-tier Tribunal (FTT), these are set out in rule 32, Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the Tribunal Rules).  Rule 32 provides that the FTT may direct that all or part of a hearing shall be heard in private if it considers that restricting access to the hearing is justified: "(a) in the interests of public order or national security; (b) in order to protect a person's right to respect for their private and family life; (c) in order to maintain the confidentiality of sensitive information; (d) in order to avoid serious harm to the public interest; or (e) because not to do so would prejudice the interests of justice".  

In HMRC v The Taxpayer [2024] UKUT 12 (TCC), the Upper Tribunal (UT) upheld HMRC's appeal against a case management decision of the FTT that preliminary proceedings were to be conducted in private.  The UT considered that the FTT had erred in reaching its decision to make the direction. It should have considered what the effect of its not doing so would have been and should also have considered whether this would have rendered a further direction that both parties provide submissions as to whether anonymity should be granted to the appellant (a direction that was not appealed) moot. Further, the FTT should have considered (but failed to do so) the practical consequences of a direction for privacy, and whether it was proportionate to any risk to the interests of justice. The direction extended to privacy for all (unspecified) preliminary proceedings, and the taxpayer had not produced any evidence of harm or prejudice that would have resulted if no privacy order had been made.  The UT considered that it was a "blanket derogation from open justice by the backdoor". Accordingly, the UT allowed HMRC's appeal against the direction.  The UT bore in mind the Supreme Court's decision in BPP Holdings v HMRC [2017] UKSC 55, to the effect that appeals of case management decisions should only be allowed where the appeal court considers that the decision below was unjustifiable (and not just one with which it disagrees).

However, in L [2024] UKFTT 401 (TC), the FTT allowed an application for anonymity by the appellant taxpayer, who sought anonymity on two grounds, arguing that if anonymity were not granted they would: (1) risk serious financial harm; and (2) suffer a serious risk to their health (in particular, their mental health). The FTT observed that even where HMRC expressed itself to be neutral as to an application, this would not necessarily lead to it being granted simply because it was unopposed. It was for the FTT to consider the public interest in open justice on behalf of parties who might have, had they known about it, objected to the application.  Indeed, the test in rule 32(e) of the Tribunal Rules was clear – there would have to be an injustice in not granting the application in order for it to be granted. The FTT found as a fact, in light of the evidence before it, that a public hearing would, objectively, have risked serious harm to the appellant's health (ground 2), and so allowed the application. Given its decision on this ground, it was not necessary for the FTT to reach a conclusion as to the potential commercial impact of a public hearing (ground 1), but it did note that it would have required more evidence in support of  ground 1 before allowing an application on this basis.

There is continued interest in the press and online in the affairs of, in particular, high-profile taxpayers, and public opprobrium continues to attach itself to anyone considered to be involved in tax planning that perhaps seemed less objectionable at the time it was carried out than when seen through the lens of hindsight. It therefore seems likely that the number of applications for decisions to be issued on an anonymised basis and/or for hearings to be held in private, will increase. 

Open Justice 2 – access to pleadings

Recent years have seen a number of decisions in which the FTT has had to determine applications by third parties for the provision of documents relating to substantive proceedings. Typically, the applicants are tax disputes practitioners with clients in the process of litigating similar cases; other tribunals have seen similar applications by journalists (see the decision of the Employment Appeal Tribunal in Guardian News & Media Ltd v Rozanov and EFG Private Bank Ltd [2022] EAT 12).   

The decision in Hastings Insurance Services Ltd & HMRC v KPMG LLP (third party) [2018] UKFTT 478 (TC), is now six years old. It was the first published FTT decision relating to an application by a third party for access to documents generated during the course of appeal proceedings before the FTT (although the Court of Appeal had already confirmed the courts' inherent jurisdiction to grant inspection of some categories of documents read into court during the course of CPR-based litigation, or which formed part of the pleadings or evidence (see Cape Intermediate Holdings Ltd v Dring (Asbestos Victims Support Group) [2018] EWCA Civ 1795)). Hastings Insurance established that third parties with a 'legitimate interest' in obtaining pleadings, including skeleton arguments, would be able to do so. The question of what constitutes a 'legitimate interest' falls to be determined on the facts of each case.   

In Cider of Sweden Ltd v HMRC and Ernst & Young LLP as third party [2022] UKFTT 76 (TC), the FTT held that while it "undoubtedly [had] the inherent jurisdiction to allow access to documents", the question was "whether it [was] appropriate for the FTT to exercise that jurisdiction in favour of EY" (who had made the application). It noted that the equivalent right under CPR5.4C was not unqualified and, in any case, the FTT's jurisdiction to grant access to documents by third parties did not derive from CPR5.4C. The applicant had not shown that the provision to it of pleadings at an early stage of the proceedings would advance any purpose of the principle of open justice. The FTT determined that while the applicant would have a legitimate interest in access to the documents, this was, on the facts, outweighed by the interest of the parties to the main proceedings in maintaining the confidentiality of the documents at the stage of the proceedings at which access had been sought. The FTT therefore refused the application.

More recently, the FTT has determined two applications for third party disclosure in relation to the same principal matter. In Osmond & Allen v HMRC (KPMG LLP as third party) [2024] UKFTT 413 (TC) and Osmond & Allen v HMRC (Stewarts Law LLP as third party) [2024] UKFTT 414 (TC), two firms of professional advisers sought copies of documents relating to the proceedings (both applications related to skeleton arguments, and KPMG's application also related to any supplemental written submissions although, as it turned out, no such further submissions had been made). At the time the applications were determined, the principal decision had already been written and was about to be published. The FTT judge allowed KPMG's application so that it could advise three clients with appeals which were stayed behind the principal appeal.  The application made by Stewarts gave rise to some initial "misgivings" as it was also expressed to be made in a representative capacity on behalf of the wider tax community (as well as on behalf of specific clients of that firm). However, these misgivings were overcome. The FTT, in allowing the application, noted that there was no reason that judges should not be "judged by the public at large", and suggested that the applicant should put the documents into the public domain to save other organisations that might more typically claim representative standing (such as the Chartered Institute of Taxation) making their own applications.

The reasoning contained in these two decisions suggests that it will be unusual for applications for disclosure of public documents made by third parties to be refused, provided that the underlying principal litigation is at an advanced stage.  

The Court of Appeal has recently confirmed this reasoning in relation to CPR litigation. In Hopcraft & ors v Close Brothers Ltd & ors [2024] EWCA Civ 634, the applicants sought, and were granted, access to the appellant's notice, grounds of appeal and skeleton argument, and the respondent's notice, grounds of opposition and skeleton argument, even where they had not yet been read into court or referred to in a hearing. The applicants were held to have a legitimate interest which justified their obtaining the "fullest information fairly available". It was within the court's jurisdiction to place a limit on the use to which the information disclosed could be put (in this case, regarding case management decisions in the related claims), and the court imposed such a limit, but recognised expressly that the permitted use could result in the documents being put into the public domain in which case there would be no further restriction on their use. 

Carried interest

We have also recently seen the first case in relation to the carried interest provisions contained in sections 103KA–KH, Taxation of Chargeable Gains Act 1992 (the carried interest provisions) (and the transitional provision at section 43(2), Finance (No 2) Act 2015 (the transitional provision)) to reach the FTT. 

In Ferguson-Davie and another v HMRC [2024] UKFTT 321 (TC), the taxpayer appealed against assessments to capital gains tax (CGT) in respect of amounts of carried interest received as partners in a limited partnership. If the (concessionary) transitional provisions applied, then there would be no liability to CGT, but if they did not, then under the carried interest provisions the assessed liability would stand. The transitional provisions applied in respect of carried interest that arose “in connection with the disposal of … assets of … partnerships” prior to 8 July 2015. The carried interest that was the subject of the dispute became payable upon the satisfaction of an internal rate of return (IRR) hurdle. While the great majority of the fund's investments had been disposed of prior to 8 July 2015, the final IRR could not be worked out until the disposal of the final property investment; whether the hurdle was met would depend on the price at which the realisation of that investment took place. As it turned out, this final investment (which was realised after 8 July 2015) yielded proceeds sufficient for the IRR hurdle to be met and accordingly for the carried interest to become payable. However, the final investment was disposed of at a loss (but not so significant a loss as to bring the IRR down below the IRR hurdle), such that all positive returns were in fact referable to transactions occurring prior to 8 July 2015.

The FTT held that the carried interest amounts arose "in connection with" the disposal of the final investment, such that the transitional provisions did not apply. In the FTT's view, the correct way to interpret the words "in connection with" in the legislation, was to consider the words that surrounded them and the wider context. Here, the purpose of the carried interest provisions was to set out a new regime for the taxation of carried interest. In particular, the aim was to remove the availability of base cost shift and to do so immediately upon the announcement of the provisions, in order to prevent forestalling. The purpose of the transitional provision was to provide an exception from this new regime. The FTT considered that it was the disposal of the final investment that caused the carried interest amounts to arise. Had it not been for that disposal (at a minimum sale price, which was exceeded), there would have been no carried interest amounts. The FTT therefore dismissed the appeal.

As a key plank of the new Labour government's tax policy is reform of the taxation of private equity income, it is a distinct possibility that this is not the last case we will see on this important topic.