Chapter 3: Constitutional and Administrative Law Flashcards
3.1 Introduction
It was explained that substantive law can be divided into public and private law. Constitutional law, administrative law and tax law are distinct areas of public law, however there is some overlap.
The creation, amendment, repeal and enforcement of tax law has a constitutional aspect. Taxation is within the care and management of HMRC. The decisions it makes affects inhabitants of the UK and others with UK connections. It is important some control is exercised over HMRCs affairs, that is exercised according to the rules of administrative law.
3.2 The Constitutional Law of the UK - executive
The UK
Great Britain comprises of England, Scotland and Wales. The SSCBA 1992 applies only to Great Britain. The UK includes Northern Ireland but excludes UK’s dependent territories like the Isle of Man. The UK belongs to other political organisations such as the Commonwealth, currently the EU and the EEA.
The Organs of UK government
There are 3 main organs of government that the constitution states:
The Crown (also executive) – function to formulate policies (cabinet and senior ministers), conduct the administration of the government (via civil service), provide for and run the agencies that enforce the law (eg police) and protect the realm.
The Privy Council is a formal group of Cabinet Ministers, plus some junior ministers who advice the monarch (eg on royal prerogative). The day to day business of Privy Council is transacted by ministers who are Privy Counsellors. For tax, policies agreed by the cabinet are formulated by the treasury and declared annually as part of the budget to Parliament made by Chancellor of Exchequer. The office of the Parliamentary Counsel (cabinet office department) is responsible for drafting documents containing the rules that give effect to those policies. HMRC is the government department that administers tax law and exercises enforcement powers as part of its management of the crown’s revenue.
3.2 The Constitutional Law of the UK - Parliament, judiciary
Parliament (legislature) – function is to legislate; UK has a bicameral parliament with two chambers. The law made by Parliament is contained in written documents called statutes. In UK Parliament alone can levy tax, this resides with the Commons. This rule of constitutional law is set out by Article 4 of the 1689 Bill of Rights. The rule is still true despite some tax-raising powers been devolved. Parliament alone has the authority to raise tax.
Judiciary – function is to adjudicate in disputes between parties in accordance with the law. The courts declare the rules of common law, Equity or interpret law made by Parliament.
The nature of the Constitution in England
• Monarchical constitution – Queen head of state and succession of throne based on hereditary principal. Convention means the Queen exercises her constitutional powers on the advice of her ministers and those powers are exercised by ministers in her name.
• Uncodified – rules comprising the constitution are varied and include statute, common law, conventions and royal prerogative
• Flexible – constitution is not a higher form of law that is supreme above all other law. The laws comprising the constitution may be enacted, amended or repealed by ordinary law-making process and no special procedure is needed
• Unitary constitution – the country is governed as a single entity in which constitutional power is centralised and sub national units exercise powers only to the extent that is designated to them. The UK is not a federal state
Historically executive and legislative power solely remained in central institutions in London, devolution means this is no longer the case. But the UK Parliament remains supreme and can repeal devolution.
The constituent countries of the UK have always had their own judiciaries. In the context of tax, devolved Scottish assembly powers include landfill tax, stamp duty. Although income tax is not devolved, Scotland may alter the income tax rates and thresholds so that it applies to non-savings income. The Welsh Assembly has exercised its devolved tax levying powers and has enacted a Land Transaction Tax in place of stamp duty and land tax. Air passenger duty on long haul flights has been devolved to Northern Ireland.
• Dualist constitution – crown can conclude a treaty with another country due to prerogative power. The treaty does not alter domestic UK law, Parliament must pass legislation to ratify the treaty. In relation to double tax Agreements Parliament has delegated power of their ratification to the Crown in the form of Orders in Council
Fundamental doctrines of the UK constitution
The UK constitution is built on three fundamental doctrines: the rule of law, separation of powers and the supremacy of Parliament.
3.2 The Constitutional Law of the UK - rule of law
Rule of Law – everyone in UK is subject to this, the concept is everyone in the UK has the freedom that transcends the constitution to do whatever they want unless the law prohibits or curtails the freedom. Classic freedoms are:
• Freedoms of the person (person not deprived of liberty except in accordance with the law)
• Of association (belong to organisation)
• To assemble and demonstrate
• Of expression
• Freedom from interference with property
These freedoms and other rights have their source in both common law and the European Convention on Human Rights and the Human Rights Act 1998. The principle is reflected in the field of tac in that a person is at liability to enter into lawful tax planning and mitigation arrangements.
However, Parliament, the courts and HMRC have restricted a person’s ability into tax planning and mitigation agreements:
• Parliament has enacted anti-avoidance legislation, the general anti-abuse rule (GAAR) and the regime on the Disclosure of Tax Avoidance Schemes (DoTAS)
• The courts interpret legislation purposively
• HMRC publish a list of anti-avoidance spotlights in which they identify examples of tax avoidance schemes that they have reason to believe are ineffective
Tax practitioners can be guilty of negligence if they fail to point out the possible tax advantages of carrying out the transaction in different ways. However, the extent to which they can be involved in enabling clients to enter in these arrangements are limited by ATT and the CIOT. The European Convention on Human Rights says all persons are entitled to the enjoyment of property and shall not be deprived except in accordance to the law. The requirement for a person to pay tax results in their being deprived of their property but tax does not breach human rights provided its levied in public interest and in accordance to the law.
There are restrictions on operations to collect tax by all means, the means of collecting tax must be proportionate. It is a breach of rights to deprive a business of tax relief for money spent on the business merely because the person they paid have not paid taxes on the money received.
The Crown is a corporation sole and has a double capacity, namely its political capacity and its individual capacity. The monarch has royal prerogative and has pre-eminence over and above other persons. The crown both as the monarch and executive is not bound to Acts of Parliament unless refereed to expressly or by necessary implication.
In relation to tax, the taxing statues apply to the crown if they expressly say so. Thus VAT, Stamp Duty and Stamp Duty Land Tax applies to the crown. But income tax, capital gains tax or inheritance tax does not. The Queen and Prince of Wales have chosen to contribute to the Exchequer an amount that would be payable by them were they liable to income and capital gains tax.
3.2 The Constitutional Law of the UK - separation of powers and the supremacy of parliament
The three functions of government are vested in separate bodies which exercise their powers independently, each body checks the other. Parliament holds the crown to account and the judiciary is independent from the crown. Parliament exercises no judicial function. Despite this, the separation of powers is not absolute and there are elements of fusion. For example, positions in the executive can be held only by members of Parliament, the Crown appoints the judiciary and the judiciary creates rules of common law and Equity.
The Supremacy of Parliament
Parliament is the supreme law-making body of the UK. It can legislate on any matter and to give its laws retrospective effect. Parliament is not bound by earlier Parliaments, conversely the current Parliament cannot bind a successor. The validity of rules by Parliament may not be tested in the courts. Parliament can choose to curtail its supremacy, which it did when enacting the European Communities Act 1972, which subjected the UK to the supremacy of EU law. However, Parliament has now chosen to reverse that position. Parliament is curtailed in the area of human rights, by virtue of the 1998 Human Rights Act, if Parliament infringe these rights, they can be taken to a UK court. These matters lie in the UK Supreme Court and can be taken to the European Court of Human Rights. If Parliaments legislation undermines this, courts can issue declarations of incompatibility although they cannot strike down the laws.
3.3 Administrative Law - the nature of admin law, judicial review
The nature of administrative law
This comprises the rules that govern the exercise by public bodies of their powers and duties and the control that the judiciary has over the exercise of those powers. In tax context the key principles determine the balance of power between HMRC and taxpayers. At the centre of this lies judicial review.
Judicial Review: nature and procedure
Judicial review is a judge made (common law) process which examines the legality of the actions or decisions of a public body. Since HMRC have legal authority to determine the rights of taxpayers they are susceptible to an applicable for judicial review to ensure they do not exceed or abuse their powers. In exercising judicial review, a court does not enquire the decision made by HMRC, only into the process by which the decision was reached. The purpose of judicial review is not to substitute the opinion of the judiciary with the opinion of HMRC. The proceedings of the First-tier tribunal are also subject to judicial review.
Applications for judicial review are made to the Administrative Court or the Upper Tribunal, the court/tribunal must grant permission for the application to be made, which shows they are satisfied there is an arguable case. Applications have to be made promptly and usually within three months after the grounds to make the claim first arose (one year in a case involving the HRA 1998). The availability of judicial review is limited to those applicants who have locus standi, that is a sufficient interest in the subject matter of the application.
Judicial Review: grounds
An application for judicial review of HMRC can be made on a number of grounds, including where HMRC have undermined the Convention of Human Rights. Other grounds can be classified under three heads: illegality, irrationality and procedural impropriety.
3.3 Administrative Law - illegality, irrationality and procedural impropriety
Illegality
HMRC must understand the law that regulates their decision-making powers and give effect to it properly. If they fail to a judicial review may be made on the ground of illegality, which includes one or more of the following claims that HMRC have:
• Made an error of fact (made a mistake that leads to an error in the decision-making process)
• Made an error of law (misinterpreted law)
• Exercised their powers of improper purpose (not exercised their powers for the intended purpose)
• Added on the basis of irrelevant considerations in reaching a decision
• Unlawfully delegated their powers to make decisions so they are made by persons who do not have the requisite authority
• Fettered their discretion by not exercising their discretion on the basis of a proper consideration of the issues
• Failed to act by failing to carry out their duties
Irrationality or unreasonableness
HMRC’s decisions must be reasonable, if not an application of judicial review on the ground of irrationality or unreasonableness can occur. This includes at least one of the following claims in which HMRC have:
• Shown unreasonableness in reaching a decision (so unreasonable that no other body would have come to that decision)
• Made a lawful decision but have imposed unreasonable conditions on the person that has to perform them
Procedural impropriety
HMRC must observe the procedural rules that are laid out in legislation for the exercise of their powers. Procedural impropriety includes claims in which HMRC have:
• Failed to follow a mandatory procedure
• Failed to allow an opportunity for representations to be made in order to act fairly
• Failed to act impartially
• Failed to act on a legitimate expectation (where taxpayer has had prior dealings with HMRC leading to a reasonable expectation on their part regarding the future conduct of HMRC)
• Failed in their duty to give reasons for a decision
3.3 Administrative Law - judicial review a tax context
Judicial review – tax context
S.1 TMA 1970 states HMRC is responsible for the collection and management of income tax, corporation tac and capital gains tax. The courts use this section to make sure HMRC do not discriminate between taxpayers. Taxpayers have sought to challenge HMRC decisions on two grounds, acting contrary to legitimate expectations and the grounds of discrimination.
Where a taxpayer has had prior dealings with HMRC leading to a reasonable expectation on HMRC’s part for future conduct, the taxpayer has a legitimate expectation that HMRC will act. Legitimate expectation may arise where a ruling (known as clearance) has been obtained by a taxpayer in respect of:
• The taxpayer has made it clear that a ruling was being sought
• The taxpayer has given full disclosure of all the material facts to HMRC
• The ruling itself is obtained from the appropriate HMRC officer
• The ruling itself is clear and unconditional
Legitimate expectations may arise where HMRC suddenly departs from a long-established course of conduct. Legitimate expectations do not arise where HMRC have given clearance to a taxpayer but retracted the clearance before the taxpayer has acted on it. Even if a taxpayer has relied upon a clearance and it would be unfair so HMRC to retract it, the unfairness may be cured if HMRC compensates the taxpayer. Legitimate expectations do not arise in relation to agreements about future payments of tax. Forward agreements must be distinguished from back duty agreements which relate to past transactions and are justified by the difficulties that could arise in securing collection of tax. Legitimate expectations do not arise where, a taxpayer applies to take advantage of a beneficial procedure by HMRC and HMRC has notified the taxpayer that the procedure was under review so they could not have expected their application to be processed.
Taxpayers have argued on the basis of s.1 TMA 1970 that HMRC have acted unfairly and abused their powers. The HoL stated HMRC must use their management powers to avoid discrimination. HMRC is regarded as abusing its powers where they deliberately seek to tax two identical taxpayers in a different manner.
The courts have recognised that good management may require discrimination by HMRC in certain cases. For example, HMRC adopt a selective prosecution policy in tax evasion cases. In R v IRC, ex parte Mead and Cook 1992 STC 484 the court held the selective policy was not open to challenge on grounds of irrationality since the practice was rational and the only workable policy.
3.3 Administrative Law - judicial review: remedies
Judicial Review: remedies
Where a taxpayer is successful in judicial review proceedings, the court/tribunal may grant the following discretionary remedies (prerogative orders):
• A quashing order (renders HMRC’s original order invalid)
• A mandatory order (compels HMRC to take action)
• A prohibition order (prevents HMRC from making a decision that would be susceptible to a quashing order)
The court/tribunal may also grant an injunction or make a declaration of the parties’ legal positions. In the case of a violation of the HRA 1998, the court is able to award a remedy that is just and reasonable.
