Wednesday, June 30, 2010



“In considering my approach to remaking the decision, I have tried to avoid being seduced by the blandishments of one side [Goldman Sachs] as to its willingness to settle (as to which it has yet made no concrete offer) or by the blustering intransigence of the other [HMRC] and its determination to litigate everything to the bitter end. I think I should approach the prospect of settlement by reference to how responsible parties ought to behave in discharge of their duty to the Tribunal. It seems to me that the question of settlement ought to figure in that approach, as the Tribunal rules themselves demonstrate is necessary. I therefore consider that I ought to do whatever is necessary to facilitate a settlement whilst not compelling the parties to enter into any process”.

Mr Justice Norris in Goldman Sachs International v HMRC; and Goldman Sachs Services Ltd v HMRC.

I first posed that above question in Blogs 84 and 85. The first of these was concerned with a tax case in which HMRC seemed to me to have been acting unreasonably. The second dealt with what seemed to be an unreasonable imposition of penalties. (Incidentally, I am happy to acknowledge that in the latter case after the intervention of the solicitors, McGrigors, to which I had referred in the blog, HMRC reviewed the penalty and not only cancelled it but made an ex-gratia payment to the taxpayer to compensate him for the worry that he had been caused. Well done, HMRC. But wouldn’t it be a lot better if HMRC had a system that identified penalties that were clearly unreasonable and reviewed them voluntarily rather than putting an unrepresented taxpayer through weeks of needless worry and forcing him to find a solicitor willing to act on a pro-bona basis.

But back to Goldman Sachs. As a taxpayer, do you want the tax authority acting in your name to be “blusteringly intransigent” and insist on spending your taxes on litigation rather than take a pragmatic approach of trying to reach a settlement? I don’t. But in this case the question is not a wholly straightforward one. Goldman Sachs used a tax (or rather NIC) avoidance scheme. 21 other businesses used the same scheme. They all settled on HMRC’s terms. Goldman Sachs is the only one that refused to do so. HMRC’s terms were “Pay 100% of the NI that we think is due but we won’t charge you interest”.

HMRC have a published Anti-Avoidance Strategy. One leg of that is, “We aim to persuade our customers not to attempt to engage in avoidance by changing the economics of avoidance to make it less attractive”. This is expanded to “HMRC will develop a climate in which avoiders face increased risks of investigation and litigation” and “We will take a strategic approach in litigating avoidance cases”. So being tough is consistent with that strategy.

HMRC also have a published a Litigations and Settlements Strategy. This says that, “Where we have a strong case we should seek full value from settlement or take the matter to litigation”. If 21 out of 22 users of a scheme have completely caved in and paid “full value from settlement”, HMRC probably believe that they have a strong case with user 22. Norris J explained earlier in his judgement:

“HMRC’s publicly stated position is that it is opposed to a settlement of any sort. HMRC will contemplate only capitulation to its present demands. It says that there is no question of settling with GSI in respect of GSI’s liability for the GSI employees because it has already settled with 21 other taxpayers and to settle with GSI would not be consistent with the terms it offered those other 21 taxpayers. There is accordingly no question of a settlement, even a settlement on harsher terms than those put upon the other 21 taxpayers. What is required is complete capitulation”.

What came before Norris J was not the substantive appeal. It was two procedural points. Firstly Goldman Sachs wanted to minimise costs by having a preliminary hearing to decide whether GSSL was “present in the UK”; if so it would be liable for the bulk of any tax and NI. GSI would be liable for a maximum of around £10million (25% of HMRC’s total claim) and might well be prepared to capitulate at that level. HMRC refused to agree to the Tribunal separating out that issue. Norris J decided that the issue should be separated out and dealt with first. As my opening quote makes clear, he expressed the view that “responsible parties” to litigation would not adopt the intransigence in fact being adopted by HMRC.

Secondly, there were at the time the scheme was entered into no special rules for the recovery of NIC. HMRC have to issue a county court summons and have to do so within the six-year statutory limitation period. They issued such a summons against GSI but not against GSSL. HMRC brushed this aside. They said that the court will be likely to substitute GSSL as the defendant under GSI’s summons to the extent that it is appropriate. GSSL said that HMRC ought to ask the county court to do so as a preliminary issue. It would be a complete waste of time and money to litigate the substantive points if at the end of the day HMRC cannot collect the money even if they win. Norris J agreed with GSSL. He was far less confident than HMRC that the court would accede to a request for substitution. However he said that it is up to HMRC whether they apply to the county court and that he would remove the stay on the case if GSSL were to delay the hearing.

Whether that is satisfactory to GSSL is questionable. It was Goldman Sachs, not HMRC, that requested that the substantive appeal should be listed for hearing before the First-tier Tribunal. Accordingly if HMRC do nothing, Goldman Sachs will simply have delayed its own appeal. GSSL have to rely on an expectation that if HMRC do not apply to the county court at this stage, when they have been told by the judge that he thinks it appropriate for them to do so, the court would take that into account when deciding at a later stage whether or not it has power to substitute GSSL as the defendant and if so should exercise it.

The question as to what sort of HMRC do you want perhaps resolves itself into whether you want a big bully that makes life as difficult as possible for its victims, or whether you want a body that acts reasonably even in relation to tax avoidance. I notice that the HMRC Charter (actually “Your Charter”) issued at the end of last year says, “Your Rights: What you can expect from us … Do all we can to keep the cost of dealing with us as low as possible”. If that is what Goldman Sachs are entitled to expect they have certainly not been given it!