Judicial review: Loan Charge not in breach of Human Rights Act

In Cartref Care Home Ltd & Ors, R (on application of) v HMRC [2020] EWCA Civ 1744, the Court of Appeal refused permission to appeal against a judicial review that found that the imposition of the loan charge on outstanding loans did not breach the Human Rights Act 1998.

The Court of Appeal findings are at the end of the summary of the original application for Judicial Review.

The four claimants listed were two companies, Cartref Care Homes (Cartref) and Brian Dawson Engineering Services (BDES)) and their sole directors. They had taken part in a scheme based on the distribution of film rights. The fifth claimant was one of the Limited Liability Partnerships (LLPs) used as part of the scheme.

• A series of loans were advanced that allowed the companies to purchase distribution rights as members of an LLP, with loans being made to the directors at one point in the arrangements.
• Separately, the loans triggered accounting losses that were used by the companies in question against other profits in the year.

HMRC categorised the arrangements as tax avoidance and issued letters in November 2018 stating that the loans would be subject to the loan charge if the tax was not settled by 5 April 2019. Letters and Partnership Follower Notices (PFNs) were issued to the LLP's representative in January 2019.

Whilst not in point in this case, the Court considered the use of Accelerated Payment Notices (APNs) and Partner Payment Notices (PPNs) as these are relevant to the normal trajectory of a claim. These, alongside Follower Notices (FNs) and PFNs, require the taxpayer to take corrective action regarding their tax return and make good any take tax (in the case of an APN) within 90 days, or face penalties.

There were also 241 other claimants included in the Schedule of Claimants. No other information was provided on these claimants and no case pleaded, except that they too had been subject to the loan charge.

Judicial review

The claimants' case rested on three key points:

• The Loan Charge is a tax on a taxpayer's loans as at April 2019. The provisions of the disguised remuneration rules mean that the charge can come about due to arrangements that came into existence as far back as 1999.  It deprives the taxpayer of the ability to argue that HMRC were out of time in determining tax liabilities and can apply a tax charge to a time when such arrangements were not deemed taxable.
• The effect of the Loan Charge, particularly when combined with an APN or FN, is to deprive the taxpayer of a right to a fair trial, which is in breach of Article 6 Human Rights Act 1998 (HRA 98).
• Whilst it is recognised that taxation is a broad exception to the concept of human rights, any interference with the rights needs to be proportionate. This is not the case given the penal nature of the Loan Charge and the fact that, in some circumstances, it is inconsistent with the right to the peaceful enjoyment of property (Article 1 Protocol 1 HRA 98 (A1P1)).

Permission to seek review

In order to claim a judicial review, there must be a reviewable decision:

• HMRC argued that the letters were not decisions but a means of opening a dialogue.
• The court found the wording of the letters, supported by witness statements, amounted to a decision.

The claimants must have the standing to make a claim. They must show they have been affected.

• The directors of the companies involved had no standing. The Loan Charge is levied on the company. Whilst an economic effect may be felt as individuals later in the proceedings, at the point of review, the company and its directors/shareholders are entirely separate.

The claimants required a possession in order to have their A1P1 rights breached.

• Funds held are a possession but if there is common ground that tax could be payable then HMRC has an arguable claim on the funds and so the taxpayer is not in possession of the disputed amount.  
• HMRC's potential claim depends on what was known to have been of interest to HMRC at the time that the loans were made.
• In 2010, the Disguised Remuneration Rules (DRR) were not yet published and existing consultations focussed on much narrower fields of schemes. Cartref could not have been expected to think that HMRC may challenge the arrangements.
• In 2013, the DRR had been legislated for and HMRC was clearly targeting schemes that used loans to avoid PAYE/National Insurance Contributions (NICs) (even if not these schemes in relation to close companies). As such, HMRC had an arguable claim in relation to BDES.
• The court agreed with Sir Ross Cranston in R (oao Haworth) v HMRC [2018] EWHC 1271 (Admin), that PFNs do not interfere with possessions.

Out of the five claimants, only Cartref was given permission to seek judicial review.

Substantial review

Despite the findings regarding the permissions, the court considered the review as if all five claimants had succeeded.

The claimants' case rested on two issues involving the use of :

• The Loan Charge is disproportionate in terms of A1P1 rights.
• The legislation combined with APNs and FNs breaches Article 6.

The claimants raised numerous issues to support their case, which the Court addressed in turn.

• Much weight was given to the conclusions of the All-Party Parliamentary  Group (APPG) Report published in April 2019, which was highly critical of the Loan Charge.
  • The Court noted the commentary and examples of hardship in the Report but the Report was written as a "call to action" and not as submissable evidence. Much of what was written was opinion or facts without quoted sources that could be checked. The Report contained no witness statements or statements of fact and could not be relied upon by the Court.
•  The interference with A1P1 rights was not reasonable or proportionate.
  • With regard to retrospective legislation, The European Court of Human Rights (ECtHR) has previously ruled that it is not prohibited under the European Charter of Human Rights (ECHR), provided that it strikes a balance between public and private interests and does not impose an unreasonable burden.
  • At the time of the hearing, the Loan Charge could apply to loans going back nearly 20 years, which is normally the window available only in criminal cases. The Court agreed that this was a long time but that this was not actually the case for the claimants. Their loans dated back to 2010 at the earliest and this was found not to be a disproportionate length of time.
  • The Court considered whether it was reasonable to expect a tax charge in relation to the arrangements caught by the Loan Charge. HMRC had been clear in their targeting of tax avoidance schemes and the legislation was expected. So too, over time, was the increased number of arrangements that were considered caught.
  • Whilst the Court agreed with the claimants that simply categorising arrangements as tax avoidance does not make them, per se, tax avoidance; there was evidence that the claimants were involved in tax avoidance. It was reasonable to assume that a tax charge may arise.
  • Proof of hardship caused by the Loan Charge would have been taken into account but there was no evidence of the claimants suffering any hardship.
  • The legislation was found to be legitimate and based in reason. It was only connected to taxpayers using the types of schemes HMRC were targeting. Whilst examples of this being overly intrusive (in terms of temporal reach) and causing hardship were presented to the Court, these were illustrative and not evidence that affected the claimants.
• The legislation combined with APNs and FNs amounted to a breach of Article 6.
  • The ECtHR has previously held that tax disputes are not a civil matter covered by Article 6.
  • UK Courts have held that even if tax disputes were held to be covered by Article 6, APNs and PPNs can be disputed through a Judicial Review and are not in breach.

The substantive challenges to the legislation failed and the case was dismissed.

Update

Following the APPG Report, the Government commissioned an independent review of the Loan Charge. The review was published shortly after the Judicial Review hearing in December 2019. The review was similarily critical and the Government accepted most of the recommendations. As a result, substantial amendments were made to the Loan Charge legislation through Finance Act 2020:

• The retrospective element of the legislation has been reduced from 20 years to nine years, now only going back to arrangements in place on or after 9 December 2010.
• The subsequent tax charge can be spread over three years through an election.
• It will not apply to loans made before 6 April 2016, where there is reasonable disclosure that a disguised remuneration scheme has been used in the relevant years and HMRC did not respond (e.g. through opening an enquiry).

Court of Appeal (CA)

The amendments made to the legislation in light of the review meant that the retrospectivity argument surrounding the Loan Charge was rendered academic.

The claimants still appealed on the basis that:

• The Judicial Review had considered all matters in isolation and not cumulatively. The CA held this was not the case.
• Even with the retrospective reach of the legislation shortened to 2010, this was too far in relation to close company schemes (for which HMRC did not consider applying the DRR until 2016). The CA held that this was a new claim and so could not be used on appeal.
• The new Finance Act 2020 amendments when combined with Inheritance Tax and/or APNs, could lead to double taxation. Again, the CA held these were not previously argued and could not be used.
• The judge had erred in law by not fully considering the APPG Report. The CA disagreed but concluded that even if this had been the case, the amendment to the retrospective scope of the legislation rendered this irrelevant.
• Insufficient consideration had been given to the hardship suffered by the claimants. The CA held that it was the claimants who had introduced this as an argument and it was up to them to produce sufficient evidence for the Court to consider.
• The claimants had been ordered to pay HMRC's costs. They argued that had the judge known about the forthcoming amendments then the order may have been different. The CA held that whilst amendments were made, the claimants' arrangements were stil caught by the legislation and that conclusion would not have changed, so it is unlikely the order would have changed.

All grounds for appeal were dismissed.

Useful guides on this topic

Disguised remuneration loan charge 
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?

Accelerated Payments and Follower Notices  
What action is required? What are the penalties for non-compliance? Is there a right to appeal?

FAQs for disguised remuneration settlements  
Can I just repay my loans? Which is cheaper: the loan charge or settling? How much will it cost to settle? And many other FAQs.

External links

Cartref Care Home Ltd & Ors, R (on application of) v HMRC [2020] EWCA Civ 1744

Cartref Care Home Ltd & Ors, R (on application of) v HMRC [2019] EWHC 3382 (Admin)