On 28 September 2011 the New Zealand Court of Appeal issued its judgment in Hardie v Commissioner of Inland Revenue  NZCA 492. It is the latest decision in the long-running Hardie tax litigation - but what is striking about this case is that it is a win for the taxpayer in the judicial review context. This article also considers another relevant and recent judgment (delivered on 19 October 2011), being the United Kingdom (UK) Supreme Court (formerly the House of Lords) decision in Davies v Commissioners for Her Majesty's Revenue and Customs  UKSC 47, in which the issue of the legal status of Inland Revenue policy statements were discussed. What is particularly noteworthy inDavies was the concession that the UK Inland Revenue made as to the extent to which it considered itself bound by its policy statements.
In Hardie, the successful appeal was against a High Court Judgment striking out Mr Hardie’s judicial review application. The taxpayer’s judicial review application was in the context of years of default assessments being issued by the Commissioner of Inland Revenue (CIR). Those default assessments were issued because of a persistent and flagrant disregard by Mr Hardie of his tax obligations, which manifested itself the failure to file GST and income tax returns.
The default assessments and interest and penalties created a debt of $21 million as at 10 May 2010. The essence of the judicial review application was that the CIR’s default assessments were not valid assessments, because no attempt had been made to genuinely ascertain the actual amount of GST and income tax that should be payable. The CIR’s witness rather surprisingly described a very add hoc method as being used to justify the default assessments. For example, the amounts assessed were just increased by 10 per cent each year.
The Court of Appeal noted that judicial review was available as a ground for disputing an assessment, notwithstanding that it might have been challenged under the Tax Administration Act 1994 (TAA 1994) where the “assessment” is not of the sort that the legislature had in mind: at . There must be a genuine if perfunctory attempt to ascertain the correct tax liability. It was found that in the Hardie case that minimum standard was not met: at  to .
While a successful judicial review claim will be rare, it is gratifying to see that where the requisite facts are present, the remedy is available.
This case concerned a policy document called an IR20, published by the UK Inland Revenue in 1999 and which remained operative until 2009. The IR20 was a guide book offering guidance as to the meaning of the word “residence” and of the phrase “ordinary residence” in the context of liability to UK taxation.
There were two appellants in Davies. Both appellants were taxpayers found to be resident in the UK for tax purposes by the UK Revenue and who disputed that classification. The UK equivalent of the internal disputes procedure was invoked by one of the two taxpayers and then review proceedings were commenced. With respect to one disputant, the preceding disputes procedure was stayed pending the outcome of the judicial review. The second taxpayer had lost his tax dispute on the black letter law, but nonetheless brought review proceedings following that loss. Consequently, in the case of the second taxpayer, the starting point was a necessary acceptance that under the ordinary law he was resident and ordinarily resident in the UK for tax purposes.
The essence of the argument advanced by both review appellants in Davies was that the interpretation of the word “residence” and of the phrase “ordinary residence” in the guidebook was more taxpayer-friendly than the test under the general law. Importantly, the taxpayers argued that they had a legitimate expectation such that the Court should give effect to the more benevolent interpretation in the guide book, and that that interpretation should be applied to the appellants in the resolution of their tax status.
Inland Revenue accepted that if a legitimate expectation was established by either an interpretation of the IR20 or by way of practice then the taxpayers’ status ought to be determined by applying that expected benevolent interpretation. In New Zealand, Inland Revenue has, by way of direction to its employees, said that it will apply its policy statements and will not act inconsistently with them. This is given effect to in terms of not assessing inconsistently with those statements. The law, however, is not as benevolent, a point which will be discussed later.
In the UK there is no statutory definition of the word “residence” despite judicial criticism of the lack of such a definition. Consequently taxpayers have to look to the common law as developed by the courts for guidance as to what the term means, and also to the Revenue guidance on the subject.
While the concept of residence is defined in New Zealand, it still has a resonance with the test developed in Levene v Inland Revenue Commissioners  AC 217. In that case, the judicial definition of “settled or usual abode” was established. Thus a person who has been resident in the UK ceases to be resident only when they cease to be settled in the UK or cease to have their usual abode there. The statute adds a gloss to the effect that a person remains resident in the UK notwithstanding that they may have left the UK to live occasionally abroad if they are ordinarily resident in the UK.
The case law in the UK requires a “distinct break” from a person’s pattern of life in the UK if they are to escape being resident either under the common law test in Levene or under the statutory extension or gloss: Reed v Clark  Ch 1 at 18.
The UK Revenue authorities provided the IR20 booklet to be helpful and stated in it that if a person has full time employment outside of the UK then they were definitely not resident in the UK. This apparently disposed of the need for a multifactorial inquiry (ie, involving or including a number of elements or factors) as to residence if a person had full-time employment abroad. In this sense the guidance statement was benevolent.
The UK Revenue has a care and management provision which has been adopted in New Zealand and appears as ss 6 and 6A of the TAA 1994. The importance of the UK Commissioner of Inland Revenue giving guidance in a care and management environment was summarised in the judgment of Moses LJ in the judgment under appeal. He said:
The importance of the extent to which thousands of taxpayers may rely upon guidance, of great significance as to how they will manage their lives, cannot be doubted. It goes to the heart of the relationship between the Revenue and taxpayer. It is trite to recall that it is for the Revenue to determine the best way of facilitating collection of the tax it is under a statutory obligation to collect. But it should not be forgotten that the Revenue itself has long acknowledged that the best way is by encouraging co-operation between the Revenue and the public… Co-operation requires fair dealing by the Revenue, and frank and open dealing by the public. Of course the Revenue may refuse to give guidance and re-create a situation in which the taxpayers and their advisers are left to trawl through the authorities to find a case analogous to their own, or, if they are fortunate, a statement of principle applicable to their circumstances. But since 1973, in a field fraught with borderline cases relating to an enormous variety of circumstances, the Revenue has chosen to confer what presumably it regarded as a benefit on taxpayers who wished to know whether they were likely to be treated as resident or not.
The IR20 booklet explicitly stated that that the following would not be UK residents:
- A person who left the UK to take up full time employment abroad.
- A person who left the UK permanently for at least three years.
- A person who went abroad for a settled purpose and remained abroad for at least a whole year.
In respect of each of these statements it was added that a taxpayer will not be treated as regaining their UK residence merely by visiting the UK during the years following departure, as long as the visits totalled less than six months in total and on average were all less than 91 days. This, however, was only part of a booklet that was reasonably lengthy and detailed and commenced with various qualifications and observations that the law was set out fully in the case law, and that the booklet was just a summary.
Because of the Inland Revenue concession (ie that if the booklet gave rise to the interpretation claimed by the taxpayers there was a legitimate expectation) the principal issue was what the proper interpretation of the booklet was. Unfortunately for the taxpayers, each had different arguments as to what the booklet meant. The first taxpayer argued that he fell within the third item above and did not breach the day count aspect in respect of return visits to the UK during the period after departure. The second taxpayer contended that the second test applied to their case; that they did not breach the day count test; and that the Revenue had done away with any other tests in order to simplify the position.
Lord Wilson provided the leading judgment in Davies. His Lordship carefully analysed the wording of the booklet in question and concluded that it did not in fact do away with the multifactorial inquiry when read as a whole. Therefore it did not provide any legitimate expectation. He also found that the appellants had failed evidentially to establish that there was a practice operating by the Revenue that completely removed the need for a multifactorial inquiry. Accordingly he dismissed the appeal. Lord Hope concurred with Lord Wilson, as did Lord Walker and Clarke.
Lord Mance dissented, however. The basis of his dissent concerned the construction of IR20. He simply disagreed with the view that it did away with the need for a multifactorial inquiry. Rather, he considered that the statement was a clear articulation of a test that implicitly did away with the multifactorial inquiry. With respect to the alternative argument that a practice had developed, Lord Morris did not provide an answer.
The UK law on legitimate expectation is very clearly set out in paragraphs 26 to 29 of Lord Wilson’s judgment. The view set out there is not inconsistent with the position articulated by our Court of Appeal in Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,340. There the taxpayer (Westpac) argued that its legitimate expectation had been actionably breached. The factual basis of the claim to a legitimate expectation was that it had obtained a binding ruling on one of its structured finance products and then entered into materially identical transactions which were then assessed by the CIR in a manner which removed the tax benefits and which was inconsistent with the ruling.
In the Westpac case, Young P said (at  - ):
The arguments advanced on behalf of Westpac rely heavily on decisions from England and Wales. This line of cases starts with HTV Ltd v Price Commission  ICR 170 (CA),…. Re Preston  1 AC 835 (HL) , R v Board of Inland Revenue, ex parte MFK Underwriting Agencies Ltd  1 WLR 1545 (QB) and R v Commissioners of Inland Revenue, ex parte Unilever Plc (1999) 68 TC 205 (CA).
We accept that the English decisions support the proposition that the Courts may intervene, by judicial review, to direct Inland Revenue authorities to abstain from performing their statutory duties or from exercising their statutory powers on the grounds of substantive fairness or legitimate expectation (see Preston at 864 per Lord Templeman).
The New Zealand decisions that provide for a substantially similar result are Commissioner of Inland Revenue v Lemmington Holdings Ltd (1982) 5 NZTC 61,268,  1 NZLR 517 (CA); and Miller vCommissioner of Inland Revenue (1995) 17 NZTC 12,341,  3 NZLR 664 (CA); and Miller vCommissioner of Inland Revenue  3 NZLR 316 (PC) at . Generally the courts have accepted that the correctness of a tax assessment can only be challenged in challenge proceedings and that a challenge by way of judicial review is reserved for truly exceptional situations.
What amounts to exceptional circumstances is an open area of law. For example, conscious maladministration has relatively recently been held to be such a situation. It is also acknowledged that now that New Zealand has a care and management provision, the UK cases have more bearing. It is thus likely that if the Davies case was argued here that a very similar outcome would eventuate.