Judicial review appeal fails in UK diverted profits tax case

The Court of Appeal dismissed the company's appeal against the refusal of the High Court to grant permission for judicial review of the notice, on the grounds that the statutory review and appeal process in the DPT legislation was a "suitable alternative remedy".

"To allow judicial review to intrude alongside the appeal regime risks disrupting the smooth collection of tax," Lord Justice Sales said.

The judge said that judicial review would only be the appropriate remedy in an exceptional case, and that it should only be available where there is "some serious error amounting to an abuse of power". That was not the case here. 

Ian Hyde, a tax expert at Pinsent Masons, the law firm behind Out-Law.com, said: "DPT has to be paid within 30 days of the issue of a charging notice, and an appeal to the Tax Tribunal cannot be made until at least 12 months later. By the time a final decision is given, the company is likely to have been out of pocket for several years. Although Glencore wanted to use judicial review to speed up this process, this has now been emphatically rejected by the Court of Appeal."

HMRC argued that agreements entered into between Glencore Energy UK and Swiss-based group company, Glencore International, were designed to divert otherwise taxable profits away from the UK and were therefore subject to DPT. HMRC issued a charging notice to Glencore, imposing a charge for DPT for around £21 million.

If HMRC considers that a company may be liable for DPT, it issues a preliminary notice outlining the grounds on which HMRC considers that DPT is payable and calculating the DPT based on certain simplified assumptions. A company then has 30 days to contact HMRC to correct any obvious errors in the notice, but there is no right to appeal the preliminary notice.

HMRC then issues a charging notice stating the amount of DPT payable, or it notifies the company that no DPT is payable. Following receipt of a charging notice, a company has 30 days to pay any DPT due. There is no right to appeal the charging notice prior to payment and there are no grounds for delaying payment. Following payment, HMRC has 12 months in which it must review the charge to DPT. The company can only appeal a DPT charge after the end of the review period. An appeal is heard by the Tax Tribunal in the normal way.

Glencore issued a claim for judicial review of the charging notice on the basis that the wrong test was used; HMRC failed to take account of Glencore's representations; HMRC failed to give adequate reasons for their calculation of DPT; and the calculation of DPT was irrational.

In July, the High Court refused permission for judicial review, and also refused permission to appeal. The Court of Appeal granted permission and also heard substantive arguments.  However, the company did not succeed on any of its arguments.

At a late stage in Glencore's discussions with HMRC, Glencore added an additional technical argument. Having previously accepted that there was an "effective tax mismatch outcome" (ETMO) in that the tax in Switzerland was less than 80% of the UK rate, they sought to argue that in fact the effective tax rate was slightly higher and the ETMO test did not apply. HMRC considered Glencore's representation, but noted that "explicit confirmation of the relevant rate would be sought from the Swiss tax authorities in the review period".

Lord Justice Sales commented that HMRC have to act very promptly to comply with the time limit for issuing a charging notice, and said that it made sense to provide for a review period with a "more relaxed timetable".

Ian Hyde said: "Lord Justice Sales described the 12 month review period as a 'form of mediation or alternative dispute resolution procedure'. Whether this turns out to be true and HMRC engage actively with the taxpayer in the period, or whether it turns out to be just a period of delay before the dispute can be progressed to the tribunal, remains to be seen."

"Taxpayers should try to make the most of the 12 month review period. They will need to be well-prepared to make their arguments clearly and cogently and to be ready to appeal at the end of the period, if necessary," he said.

DPT was introduced in 2015 ostensibly to target tax avoidance by multinationals operating in the UK. It imposes a tax charge of 25% in two different situations. The first is where there is a group with a UK subsidiary or permanent establishment (PE) and there are arrangements between connected parties, which 'lack economic substance' in order to exploit tax mismatches. The second scenario is where a non-UK resident trading company carries on activity in the UK which is designed to ensure that the non-UK company does not create a UK PE.