Serpentine behaviour: ADR and negotiated agreements

David Whiscombe comments on a recent Tribunal case.

The First-tier Tribunal case of Serpentine Trust [2018] UKFTT 535 (TC) is nominally about the use of the Alternative Dispute Resolution (“ADR”) procedure in tax disputes.  But it has wider application as to what agreements HMRC can lawfully make in negotiation or otherwise and the extent to which HMRC are bound by these agreements.

The Serpentine Trust Ltd was and is a charity.  It disagreed with HMRC as to its liability to VAT: the details of the disagreement don’t matter for our purposes.  The parties agreed to use ADR to attempt to resolve the dispute.  As a result of the ADR procedure an agreement was reached in as to the VAT treatment in future years of certain amounts paid to the charity by its supporters.

In 2015 HMRC issued assessments on the Trust, going back to 2013, on a different basis than had been agreed under ADR.

The Trust appealed against the assessments. “You can’t do that,” it said. “We had a contractual agreement.”  HMRC responded that it hadn’t intended to agree under the ADR to anything that was contrary to HMRC policy; that the ADR had not resulted in any agreement; and that even if it had, the agreement didn’t say what the Trust said it said.

Given that the ADR ended with the exchange of a document headed “[t]his document records the agreement reached by close of discussions on 31 July 2013” and HMRC referred to “an agreement” in subsequent correspondence, any contention that there was no agreement was always going to be difficult to maintain and was duly rejected by the Tribunal.

Further, the Tribunal agreed with the Trust’s interpretation of what had been agreed and held that all the requirements for a contract were satisfied.  In particular, it rejected HMRC’s contentions that there had been no “intention to create legal relations”; that an essential term was omitted (so as to void the contract); and that the contract was void because HMRC had made a unilateral mistake which was (or should have been) known to the Trust.

Nonetheless the Trust lost the case.  The Tribunal considered the circumstances in which HMRC are able, consistently with their obligations under the relevant legislation, to make agreements with taxpayers as to the future.  They are limited.  HMRC have the power to operate extra-statutory concessions but only if and to the extent that to do so is not in conflict with HMRC’s statutory duty, which is to act in “the best manner of obtaining for the national exchequer the highest net return that is practicable”.  Other than that, HMRC have no power to collect less tax than is lawfully due.  The position that HMRC had agreed with the Trust under the ADR was wrong as a matter of law (as had been established by a subsequent Tribunal case).  Therefore, making the agreement was ultra vires and it was unenforceable against HMRC.  The only way for the Trust to challenge HMRC’s change of position would be by judicial review action on the ground of “legitimate expectation”.

There is in the case an interesting sidelight on the ADR procedure.  As HMRC put it in their explanation of ADR: “The person leading the ADR will act as a neutral, third party mediator.”  Normally this person will be an employee of HMRC (as was the case for the Serpentine Trust ADR).  This makes it particularly important that the mediator should be seen to act in a neutral manner.  So it is disappointing to read in the Serpentine case that the oral evidence given at the hearing by the HMRC officer who acted as mediator was set aside in its entirety as being unreliable for a number of reasons.  One was that it contradicted the mediator’s own witness statement.  Another was that it cited a document “about which no other witness was aware, of which no copy exists and to which [the mediator] made no reference in his witness statement”; and the very existence of which the Tribunal considered to be “implausible”.   If HMRC want ADR (and the vital neutrality of their own employees as mediators) to be taken seriously, they need to do better.

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This article has also been published by Tax Journal and is available on the Tax Journal website.

Geraint Jones

Partner, Private Client Tax

T +44 (0)20 8922 9354
E geraint.jones@bkl.co.uk

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