New Judgment: R v Maughan (Northern Ireland) [2022] UKSC 13

On appeal from [2019] NICA 66

This appeal concerns the discount which convicted criminals in Northern Ireland are entitled to when they are sentenced.

The appellant and his brother burgled a house before they were apprehended by the police later that evening and a range of items from the burgled property were recovered. Further enquiries provided compelling evidence including CCTV evidence that in the previous three days the appellant and his brother had committed or attempted to commit burglaries of other properties. Following his arrest, the appellant refused to leave his cell to be interviewed by the police. He did not accept responsibility for the charges that are the subject of this appeal.

The appellant was charged and brought before the Magistrates’ Court. He pleaded guilty at arraignment on charges of aggravated burglary and stealing, false imprisonment, burglary, attempted burglary. He had given no prior indication of an intention to plead guilty.

The sentencing judge held that the appellant was entitled to a reduced discount to his sentence because he (i) failed to accept responsibility for his offending behaviour at interview or indicate an intention to plead guilty at any stage prior to arraignment and (ii) was caught red handed in respect of some of the offences. The Court of Appeal in Northern Ireland dismissed the appellant’s appeal. The appellant now appeals to the Supreme Court.

 

HELD – The Supreme Court unanimously dismissed the appeal.

 

Reasons for the Judgment

This appeal concerns two sentencing policies: (1) to benefit from the maximum sentencing discount a defendant must indicate their intention to plead guilty at the earliest opportunity, and (2) the discount where a defendant has been caught red-handed should not generally be as great as those where a viable defence is possible.

 

(1) Reduction in sentence for a guilty plea

The appellant’s principal argument was based on Article 33 of the Criminal Justice (Northern Ireland) Order 1996 (the “1996 Order”), which provides that the court shall take into account the “stage in the proceedings” at which the defendant indicated his intention to plead guilty. The appellant argued that “proceedings” within the meaning of Article 33 did not include any stage prior to arraignment because in the Northern Irish criminal justice system that was the first time the defendant was required to indicate whether they pleaded guilty. An early plea in the Northern Irish system therefore does not provide the same benefits as other systems in which the defendant is required to indicate their plea at an earlier stage, in terms of saving police time and prosecution resources. The appellant argued that the defender’s failure to admit wrongdoing prior to arraignment should therefore not be treated as relevant to the sentencing discount.

 

The Supreme Court holds that “proceedings” within the meaning of Article 33 does not include the investigative process prior to charge or the issue of a summons. However, Article 33 does not prevent the Court of Appeal in Northern Ireland from developing guidelines for the sentencing discount for a guilty plea based on utilitarian benefits such as administrative resources, inconvenience to witnesses and vindication and relief to victims. The Court of Appeal in Northern Ireland is therefore entitled to adopt a sentencing policy which treats as relevant to the sentencing discount the failure to admit wrongdoing during interview. Such a policy is typical of those applied from time to time in all three United Kingdom jurisdictions over many years. In addition to saving time, costs, and promoting the interests of victims and witnesses, early guilty pleas promote public confidence in the justice system. In summary, the Court of Appeal in Northern Ireland made no error of law.

 

(2) Reduction in discount for plea when caught red handed

 

The Supreme Court explains that a reduction in discount where the offender has been caught red handed has long been recognised as a feature of sentencing practice throughout the United Kingdom. The purpose of the discount is to encourage guilty pleas to obtain the utilitarian benefits of saving time, cost, and providing reassurance for witnesses and victims. However, where the prosecution case is overwhelming, the offender may be left with little realistic choice but to plead guilty. Such an offender might not deserve the same level of encouragement to plead guilty. Although in England and Wales and in Scotland sentencing policy has changed in recent years so that full discount for an early plea is now given in cases where the offender has been caught red handed, that does not render unlawful the different policy adopted by the Northern Ireland courts.

To view he judgment, please see below:

Judgment (PDF)
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Watch hearing

27 January 2022
Morning session
Afternoon session

This Week in the UKSC – 16th May 2022

Hearings in the Supreme Court are now shown live on the Court’s website.

From Tuesday 17th May – Wednesday 18th May, the Court will hear the joined cases of HA and RA (Iraq) v Secretary of State for the Home Department where it will consider in what circumstances is it ‘unduly harsh’ to deport a foreign criminal in light of that person’s family life in the UK and where there are ‘very compelling circumstances’ against deportation. This is on appeal from [2020] EWCA 1176. The hearing will take place from 10am on Tuesday in Courtroom One.

At the same time, the Court will also hear the case of AA (Nigeria) v Secretary of State for the Home Department. This appeal also concerns the ‘unduly harsh’ and ‘very compelling reason’ tests, but will also consider the relevance, if any, of evidence of the criminal’s rehabilitation and how much weight should be accorded to it if it is relevant. The judgment being appealed is [2020] EWCA 1296.

On Wednesday 18th May, the Court will hand down judgment in R v Maughan (Northern Ireland) [2022] UKSC 13. There are two issues that the Court will rule on: (1) Whether the term “proceedings” should be confined to court proceedings in the context of considering reductions to defendants’ sentences when they plead guilty to a crime at an early stage, and (2) Whether such reductions to sentences may be reduced where the defendant is caught “red handed”. Hand-down will take place via WebEx at 09:45.

The following Supreme Court judgments remain outstanding: (As of 18/5/22)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Basfar v Wong, heard 13th-14th October
Secretary of State for the Home Department v SC (Jamaica), heard 19th October
Harpur Trust v Brazel, heard 9th November 2021
Guest and another v Guest heard 3rd December 2021
Fearn and others v Board of Trustees of the Tate Gallery heard 7th December 2021
Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, heard 19th January 2022
Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another, heard 25th January 2022
Cornerstone Telecommunications Infrastructure Ltd v Compton Beauchamp Estates Ltd, Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd and another and On Tower UK Ltd (formerly known as Arqiva Services Ltd) v AP Wireless II (UK) Ltd, heard 1st February 2022
DCM (Optical Holdings) Ltd v Commissioners for Her Majesty’s Revenue and Customs (Scotland), heard 8th February 2022
Competition and Markets Authority v Pfizer Inc and Flynn Pharma Ltd, heard 22nd February 2022
Hastings v Finsbury Orthopaedics Ltd and another (Scotland), heard 28th April 2022
HA and RA (Iraq) v Secretary of State for the Home Department, heard 17th May 2022
AA (Nigeria) v Secretary of State for the Home Department, heard 17th May 2022

Case Comment: Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd [2022] UKSC 10

In this post, Hannah Jones, Assistant Professional Support Lawyer in the Tax team at CMS, comments on Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd [2022] UKSC 10, a case which concerns the UK’s pre-2014 tax treatment of manufactured overseas dividends.

Background

This Supreme Court case concerned the UK’s pre-2014 tax treatment of income paid to the Respondent (Coal Staff Superannuation Scheme Trustees Ltd (the “Trustee”)) as lender under stock lending agreements.

In basic terms, stock lending agreements are arrangements by which an investor lends a stock portfolio to a borrower, normally for (i) a return equivalent to the shares at the end of the term and (ii) payments of amounts similar or equal to the dividend which the investor would have expected to receive, had they not lent the shares. Generally, these lending arrangements are entered into so that the borrower can use the shares in ways that might not be appropriate for the lender; for example short selling. As such, the borrower is not normally required to continue to own the shares during that time.

Where the agreement involves the payments to the investor which are equivalent or based on the dividend which the investor would have received, these are known as “manufactured dividends”. Where that payment is made by a company tax resident overseas, it is known as a “manufactured overseas dividend” – with the pre-2014 tax treatment of such dividends being known as “the MOD rules”.

The manufactured dividend rules sought to treat the receipt of manufactured dividends (both overseas and domestic) in the same way as if the investor had received an actual dividend. That meant that, where the payment from the borrower was a manufactured overseas dividend, it was subject to withholding tax at source equivalent to what would have been paid had the investor received the dividends from the shares directly. As would be the case for normal dividend withholding tax payments, the MOD rules allowed the investor to claim a tax credit against the notional overseas withholding tax levied on the borrower. However, such credit was useless to UK tax exempt investors – such as the Trustee (being the trustee of a UK pension scheme) in this case.

The Trustee therefore argued that the MOD rules contravened the free movement of capital, contained in Art 63 of the Treaty on the Functioning of the European Union (the “TFEU”), by disincentivising investment overseas.

It is important to note that the UK’s tax treatment of “actual” dividends was not in question throughout the case. Even though the MOD rules were designed to mimic the UK tax treatment for UK investors directly receiving overseas dividends – and the Trustee would face the same “disincentive” had they directly invested in overseas shares, given their exempt status – it is common ground that the UK’s dividend taxation regime (and its credit method of unilateral relief from double taxation) was not contrary to EU freedoms. Indeed, in paragraph 7 of the judgment, Lord Briggs and Lord Sales set out that so-called juridical taxation is a “fact of life”, given that each member state has sovereign authority over its own tax affairs.

The key question was therefore whether the UK’s MOD rules (which artificially apply the normal dividend taxation rules to manufactured dividends) amounted to a restriction on the free movement of capital (Issue 1). The following two questions were also before the court:

whether, if there was an unlawful restriction on Article 63, was it justified?
if it was not justified, what would be the appropriate remedy for infringement?

Decision of the lower courts

The First Tier Tribunal (Tax and Chancery Chamber) considered that there was no restriction offending Article 63. Their key finding in this regard was that it was the UK’s general withholding tax regime which dissuaded investment in overseas shares, and, given that the MOD rules merely replicated this, the MOD rules could not amount to such a restriction.

However, the Upper Tribunal found for the Trustee, and, in the Supreme Court’s words, “in substance adopted the whole of [the Trustee’s] case” (paragraph 36 of the judgment). Contrary to the First Tier Tribunal’s findings, they found that the difference in the treatment of manufactured dividends and manufactured overseas dividends was solely attributable to the UK tax regime (unlike the difference in the treatment of actual dividends). The Upper Tribunal further held there was no justification for the restriction, and that the appropriate remedy was a repayment of the withholding tax in full to the Trustee.

The Court of Appeal came to the same conclusion as the Upper Tribunal, but for different reasons. Key to their judgment was that the borrower was under no obligation to hold onto the shares. Therefore, “the dividend of which the manufactured overseas dividend was representative may not then have been subject to overseas withholding tax at the rate used for the MOD regime, if at all”; and as such, the MOD regime was liable to discourage investors from buying or retaining overseas shares. Similar to the Upper Tribunal, the Court of Appeal rejected HMRC’s case on justification, and held that full repayment of the withholding tax was the appropriate remedy.

Supreme Court decision

The Supreme Court overturned the judgment of the Court of Appeal. They found for HMRC on Issue 1 – i.e., that the MOD regime did not infringe Article 63. They also went on to consider, obiter, Issue 3 – what would have been an appropriate remedy had Article 63 been so infringed.

On Issue 1, the Supreme Court took the view that “the answer depends on a market analysis of the effect of the MOD tax regime upon the investor, best undertaken by the application of the “but for” test (paragraph 42).

In applying this test, the Supreme Court found that, in the stock lending arrangements under consideration:

the borrower intends to make profitable use of the shares, through using the shares in ways that the lender does not wish to;
the lender intends to benefit from borrower’s use of the shares through the payment of stock lending fees from the borrower, while the payment of the manufactured overseas dividends ensure that the lender’s net income stream is not less than they would have received had they held the shares directly.

It was the fact that the Trustee’s benefit from choosing to enter into a stock lending arrangement was found in the form of the stock lending fee – and not the payment of the manufactured overseas dividend (noting they would have received a dividend had they not entered into the arrangement) – that was key to the Supreme Court’s decision. The court found that the MOD regime in no way negatively impacted the negotiation or payment of the stock lending fee, and, further, the stock lending fee was exempt from tax in the hands of the Trustee.

Further, and importantly, the borrowers here never had to account to HMRC for the notional withholding tax payable to the overseas’ tax authority, because they always had sufficient withholding tax credits.

The court went on to consider what the appropriate remedy would have been, had there been a restriction of Article 63. Given that (i) the MOD regime pre-2014 is no longer applicable and (ii) this is likely to be one of the last Supreme Court cases on TFEU freedoms, the court’s comments on remedy may be of more relevance to taxpayers.

The Trustee had argued that the appropriate remedy was restitution; a payment of a sum equal to the full sum of the “unusable” withholding tax credits to the lender. The judgment roundly rejected this remedy, given that:

the MOD rules levied the withholding tax on the borrower, and not on account of the lender;
HMRC, in this scenario, had never actually received any payments of the notional withholding tax due to the availability of the borrower’s withholding tax credits; and
it would in any case be disproportionate for the relief to be a payment of a sum equal to the full amount of the credits; the appropriate remedy would have been limited to the actual economic effect on the Trustee of the dissuasive effect of the MOD regime on investing overseas.

Comment

This case is likely to be largely of academic interest only, given that (i) Article 63 is no longer applicable to UK legislation, and (ii) the case concerns the pre-2014 MOD regime. However, practitioners may find the court’s obiter comments on restitutionary claims interesting.

New Judgment: Zipvit Ltd v Commissioners for Her Majesty’s Revenue and Customs (No 2) [2022] UKSC 12

On appeal from [2018] EWCA Civ 1515

This is the second judgment given by the Supreme Court in this case. In the first judgment ([2020] UKSC 15), the Court set out the background to the dispute and made a reference to the Court of Justice of the European Union, upon which judgment was delivered on the 13th of January 2022. The Supreme Court could then determine this appeal without the need for any further hearing.

The Appellant is a business which used a specialised bespoke service offered by Royal Mail. Royal Mail should have charged VAT in relation to the service. However, at the time it was mistakenly believed by all concerned, including the Respondent, that this service was exempt from VAT under European law.

In 2009, however, the Court of Justice of the European Union (“CJEU”) held in R (TNT Post UK Ltd) v Revenue and Customs Commissioners (“TNT”) that the VAT exemption for postal services under the Principal VAT Directive (“the Directive”) applied only to supplies made by a public postal service like Royal Mail when acting as such, and not to supplies of services for which the terms had been individually negotiated. As a result, the services supplied to the Appellant should have been standard rated for VAT purposes.

Where VAT is charged, it is possible for the person charged to reclaim it as input VAT in relation to any supply of goods or services it provides to others on which VAT is chargeable. Although the Appellant had not been charged VAT by Royal Mail, it relied on the judgment in TNT to argue that the sums it paid Royal Mail as the contract price for its service should be treated as if they did include an element of VAT. On the basis of this contention the Appellant made two claims against the Respondent for repayment of input VAT for a total sum of £415,746 plus interest in respect of the services it had purchased from Royal Mail. The Respondent rejected these claims, maintaining that since the Appellant had not in fact paid VAT it should not now be able to claim a tax rebate based on an alleged notional payment of VAT.

The reference to the CJEU dealt with two issues in particular: (1) whether the Appellant was entitled under Article 168(a) of the Directive to deduct as input VAT part of the sum that it had paid to Royal Mail, on the basis that VAT had been “due or paid” within the meaning of the Article because the sum charged by Royal Mail must be treated as containing a notional element of VAT (“the due or paid issue”); and (2) if the Appellant did in principle have a right to deduct under Article 168(a), whether there is an additional condition to be fulfilled before it could make a claim for a deduction, namely that it holds VAT invoices evidencing its claim to have actually paid input VAT (“the invoice issue”).

In addition to those issues of European law, the Appellant also maintained that the Respondent had a discretion under domestic law pursuant to regulation 29(2) of the Value Added Tax Regulations 1995 (“regulation 29(2)”) to accept other evidence of payment of VAT, even if not recorded in an invoice, and to repay the notional element of tax, which it should have exercised in the Appellant’s favour (“the discretion issue”).

These proceedings are a test case in respect of supplies of services by Royal Mail where the same mistake regarding VAT exemption was made. The total value of claims against the Respondent is estimated at between £500m and £1 billion.

 

HELD- The Supreme Court unanimously dismissed the appeal.

 

Issue 1: The due or paid issue

The CJEU concluded on the first issue that the Appellant could not claim to deduct an amount of VAT for which it had not been charged and which as a result had not been charged to the consumer. As a result, VAT had not been “paid” within the meaning of Article 168(a) of the Directive.

The CJEU also found that VAT could not be regarded as being “due” within the meaning of Article 168(a), since no request for payment of VAT had been sent to the Appellant by Royal Mail.

 

Issue 2: The invoice issue

In view of its definitive ruling on the first issue, the CJEU did not find it necessary to answer the question referred to it in relation to the invoice issue. As the claim must fail due to the Appellant having no entitlement under Article 168(a), it was not necessary or appropriate for the Supreme Court to determine the second issue.

 

Issue 3: The discretion issue

The First Tier Tribunal found that the Respondent had not considered whether to exercise its discretion under regulation 29(2) to accept alternative evidence of payment of VAT in place of a tax invoice and to repay tax. However, the Tribunal found that had the Respondent considered whether to exercise this discretion, they would inevitably and rightly have decided not to accept the Appellant’s claim. The Supreme Court agrees, finding that there was no sound basis on which it would have been appropriate to use public monies to make a payment to the Appellant in the circumstances of this case.

 

For the judgment, please see below:

Judgment (PDF)
Judgment on The National Archives (HTML version)

Watch Judgment summary

11 May 2022
Judgment summary

This Week in the UKSC: w/c 9th May 2022

Hearings in the Supreme Court are now shown live on the Court’s website.

From Monday 9th May – Tuesday 10th May, the Court will assess costs in Secretary of State for Health and others v Servier Laboratories Ltd and others [2020] UKSC 44.

On Wednesday 11th May, the Court will hand down judgment in Zipvit Ltd v Commissioners for Her Majesty’s Revenue and Customs (No 2), on appeal from [2020] UKSC 15. The Court will consider the issue of where a customer pays a supplier for what both parties mistakenly believe is a VAT-exempt supply, but turns out to be standard rated, can the customer claim a deduction of input tax from HMRC for the VAT element of the original payment? The judgment will have the neutral citation [2022] UKSC 12.

The following Supreme Court judgments remain outstanding: (As of 11/5/22)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Basfar v Wong, heard 13th-14th October
Secretary of State for the Home Department v SC (Jamaica), heard 19th October
Harpur Trust v Brazel, heard 9th November 2021
Guest and another v Guest heard 3rd December 2021
Fearn and others v Board of Trustees of the Tate Gallery heard 7th December 2021
Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, heard 19th January 2022
Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another, heard 25th January 2022
R v Maughan, heard 27th January 2022
Cornerstone Telecommunications Infrastructure Ltd v Compton Beauchamp Estates Ltd, Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd and another and On Tower UK Ltd (formerly known as Arqiva Services Ltd) v AP Wireless II (UK) Ltd, heard 1st February 2022
DCM (Optical Holdings) Ltd v Commissioners for Her Majesty’s Revenue and Customs (Scotland), heard 8th February 2022
Competition and Markets Authority v Pfizer Inc and Flynn Pharma Ltd, heard 22nd February 2022
Hastings v Finsbury Orthopaedics Ltd and another (Scotland), heard 28th April 2022

 

Case Comment: Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49

In this post, Amy Wilkinson, a senior associate in CMS’ financial crime team, comments on the decision of the UK Supreme Court in Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49. On 3 November 2021, the Supreme Court unanimously dismissed the appeal and ruled in favour of Aquila Advisory Ltd. The decision concerns attribution of directors’ criminal actions and who should have priority over assets derived from their criminal schemes.

Background

Robert Faichney and David Perrin were both directors of Vantis Tax Ltd (“Vantis”). During their time as directors of Vantis, they committed various criminal tax offences in breach of their fiduciary duties and made a secret profit of £4.55m. Vantis subsequently went into administration and when it did so, a company called Aquila Advisory Ltd (“Aquila”) was assigned Vantis’ proprietary rights.

Following contested trials, Mr Faichney and Mr Perrin were both convicted of tax offences. Vantis was never charged, indicted or tried for any offence.

Following conviction of Mr Faichney and Mr Perrin, the Crown Prosecution Service (“CPS”) sought confiscation orders under the Proceeds of Crime Act 2002 (“POCA”) for £809,692 and £648,000 respectively. Aquila asserted that as it had a proprietary claim to the secret profit of £4.55m it has priority over the confiscation orders, as those orders did not give the CPS any form of proprietary interest in the assets of either Mr Faichney or Mr Perrin. Accordingly, Aquila argued that it was entitled to all of their assets, leaving nothing to satisfy the confiscation orders, and sought a declaration to that effect.

Decisions of the lower courts

Mann J, at first instance, decided that Aquila was entitled to assert a proprietary claim to the funds in dispute in priority to the claim of the CPS. He made a declaration that moneys totalling £4.55m were held from the time of their receipt on constructive trust for Vantis, whose rights had been assigned to Aquila.

The CPS appealed to the Court of Appeal on the basis that the judge should have attributed the actions of Mr Faichney and Mr Perrin to Vantis and therefore treated Vantis’ claim to recover the proceeds of the crime as barred on the principles of illegality. The Court of Appeal dismissed the appeal on the basis that the CPS accepted that:

what Mr Faichney and Mr Perrin did amounted to a breach of fiduciary duty owed to Vantis and therefore, the consequence was that Vantis had a proprietary claim to the secret profit based on a constructive trust; and
confiscation orders under POCA did not give rise to any form of proprietary interest in the available assets of Mr Faichney or Mr Perrin.

Accordingly, unless the constructive trust could be rendered unenforceable because the fraud of its directors could be attributed to Vantis itself, the CPS could have no claim to the £4.55m. In support of its decision, the Court of Appeal referred to Bilta (UK) Ltd v Nazir [2015] UKSC 23 (at para 24), which confirmed that: “a director sued by a company for loss caused by a breach of fiduciary duty cannot rely on the principles of attribution to defeat the claim even if the scheme involved the company in the fraud or illegality”. The Court of Appeal could not attribute the actions of Mr Faichney or Mr Perrin to Vantis and therefore, the appeal was dismissed.

Summary of the Supreme Court’s findings

The CPS appealed to the Supreme Court on three grounds:

Ground 1: The Court of Appeal was wrong to conclude that the facts of the present case fell within the ratio of Bilta and contended that the fraud of its former directors should be attributed to Vantis in circumstances where, it was suggested, Vantis suffered no loss but rather stood to profit from the illegal acts of its directors by obtaining a proprietary interest in the proceeds of their crimes.
Ground 2: The Court of Appeal’s decision was inconsistent with the regime established by POCA, which aimed to permit innocent third-party purchasers, who paid market value for criminal property, to keep it, and innocent third-party victims, who have suffered a loss as a result of crime, to be compensated, in each case in priority to the State, but not to permit third parties otherwise to benefit from the acts of criminals any more than those criminals themselves.
Ground 3: Even if the directors’ unlawful conduct could not be attributed to Vantis, Mann J should not have exercised discretion to grant Aquila declaratory relief.

Lord Stephens, who gave the leading judgment (with which all members of the court agreed), considered the following:

Ground 1: This argument was dismissed and Bilta was correctly applied to this case. The unlawful acts or dishonest state of mind of a director cannot be attributed to the company to establish an illegality defence defeating the company’s claim under a constructive trust.
Ground 2: Overall, the scheme of POCA was not to interfere with property rights. While there were specific provisions of POCA which allowed the State to override property rights (in POCA, Pts 2 and 5), these provisions were not engaged by the CPS in this case. Accordingly, the Court of Appeal’s decision was not inconsistent with POCA.
Ground 3: Constructive trusts arise automatically when directors breach their fiduciary duties. At no stage did the directors own the secret profits in equity. Mann J’s declaration recognised this and was a proper exercise of his discretion.

Commentary

In this case, the Supreme Court reaffirmed the existing law on constructive trusts, illegality and attribution of directors’ wrongdoing to their companies. In doing so, it not only highlighted that companies will be given priority over unsecured creditors such as the CPS but may also obtain what might be perceived as a windfall by retaining illegal profits from directors’ criminal acts. Particularly where former directors may be insolvent, this case is helpful for companies seeking to recover and retain directors’ secret profits.

It also brought into sharp focus that confiscation orders will not always be an effective tool in law enforcement’s fight against financial crime. However, in this case, the Supreme Court suggested that the CPS may have avoided their problem by including Vantis in the original indictment (which could have been possible, given the directors were sufficiently senior to represent the “directing mind and will” of the company) and then seeking a confiscation order against it directly post-conviction. Going forward, we might see the CPS taking a more aggressive approach to indicting companies in similar circumstances, in order to recoup ill-gotten gains.

Case Comment: Ho v Adelekun [2021] UKSC 43

In this post, Daniel Saul, an associate at CMS, comments on the UK Supreme Court’s decision in Ho v Adelekun [2021] UKSC 43, an important decision on the scope of Qualified One-Way Costs Shifting.

The Supreme Court has allowed an appeal which determined that the ‘setting off’ of the costs payable to a defendant against costs owed to the claimant is a method of enforcement and therefore not within the intentions of Qualified One-Way Costs Shifting (‘QOCS’). This further restricts the avenues open to a defendant to recover costs awarded to it by the court.

Legal Background

QOCS came into force on 1 April 2013 as part of a host of changes implemented to try and curtail the rising cost of litigation, predominantly in relatively low value personal injury claims. QOCS meant that a defendant who successfully defended a claim brought by a claimant under a Conditional Fee Agreement dated post 1 April 2013 would only be able to recover costs from the claimant in specific circumstances, rather than receiving an automatic entitlement to its costs following a discontinuance or success at trial. The trade-off was that successful claimants were no longer entitled to a success fee on their base costs or recover the After the Event insurance premiums which were regularly taken out by claimants. It was considered that far more claims are successful than are not and the savings those unsuccessful defendants would see on not paying success fees would outweigh the costs which successful defendants could no longer recover.

Under QOCS, the intended avenue for costs recovery for a defendant would be an offset from damages and interest ordered to the be paid to the claimant under CPR 44.14. However, the courts developed the position to allow defendants to offset costs owed to them from costs they owed to the claimant. The Court of Appeal was at odds on whether offset in this way amounted to enforcement of the defendant’s costs. The Supreme Court therefore considered whether the true interpretation of QOCS was to constrain defendants so that only following an order for damages and costs could costs be offset.

Factual Background

The substantive matter involved a road traffic accident in respect of which Ms Adelekun accepted a Part 36 offer of £30,000 for her damages. However, a dispute arose as to whether fixed costs were payable under CPR 45 or whether this was a matter to which standard costs applied.

At first instance, the court found in favour of Ms Ho and awarded fixed costs. This decision was reversed on appeal but then subsequently overturned by the Court of Appeal on a further appeal, leaving fixed costs to be paid to Ms Adelekun and Ms Ho being awarded her costs of the appeal.

Decisions of the lower courts

It was agreed between the parties that as a personal injury claim this was a matter to which QOCS applied and as settlement of damages had taken place by way of Part 36 there was no ‘order for damages’ within the meaning of the QOCS regime. Following Cartwright v Venduct Engineering Ltd [2018] EWCA Civ 1654 an order for damages and interest was necessary for a defendant to offset any costs it was owed under CPR 44.14 leaving no scope for Ms Ho to offset her owed costs from the damages payable.

Ms Ho therefore accepted that she could not recover her costs which were in excess of the fixed costs which she owed the claimant, £16,700, but asked the court to offset, under CPR 44.12, the fixed costs payable in relation to the substantive action from the significant costs she was owed in relation to the appeal. Noting Ms Ho accepted she could not recover costs in excess of £16,700, this would lead to no actual payment being made by either party in respect of costs.

The Court of Appeal found in favour of Ms Ho following its own decision in the unreported case of Howe v Motor Insurers’ Bureau [2020] Costs LR 297 which found that set off is not a type of enforcement and as such was not impacted by QOCS. However, Sir Geoffrey Vos C, Newey and Males LJJ sitting in the Court of Appeal in this case indicated they were inclined to take the opposite view but considered they were bound by Howe. The Court of Appeal therefore gave permission to appeal to the Supreme Court on the set off availability issue.

Summary of Supreme Court’s findings

The Supreme Court allowed the appeal, determining that the set off of costs owed to the defendant as against costs owed to the claimant was a method of enforcement and so was contrary to the intention of QOCS. This followed a consideration of the construction of both CPR 44.12 and 44.14. Although neither amounted to a complete code, it was apparent to the Supreme Court that it was the clear intention of QOCS for defendants only to be able to set off costs owed to it as against the totality of damages and interest which have been awarded by the court. No such order was present in this case and accordingly Ms Ho had no order under which her appeal costs could be offset.

In making the decision the Supreme Court recognised the potentially adverse policy consequences of its determination. Finding in favour of the claimant would prevent a defendant (in a no court order for damages case) from recovering any costs which could lead to claimants’ taking weak or unmeritorious applications/points or unreasonably opposing meritorious points brought by defendants. In the alternate, finding for the defendant would deprive the claimant’s solicitor of costs incurred in parts of the case where it had been successful.

For this reason, the Supreme Court commented that it did not feel appropriately placed to comment upon the issue but had to reach a decision as permission for the appeal had been given. It recognised the decision may appear “counterintuitive and unfair”, but considered it had found the proper construction of QOCS as intended by the wording of the CPR and invited the CPR Committee to consider any imbalance to QOCS caused as a result of the decision.

Commentary

The implications for defendants are stark, with their ability to recover any costs constrained even further against a backdrop of growing numbers of weak or unmeritorious claims.

Costs owed to defendants for successful interim applications can only be enforced against an order for damages and, not following settlement before trial, and not against costs owed to the claimant. Late acceptance of a Part 36 offer by a claimant will not lead to the defendant benefitting from a costs order which can be enforced, as there will be no order for damages.

Neither of these consequences are satisfactory for defendants. The former will limit the impact of actual or threatened applications by defendants, hindering sensible case management and matter progression. The latter arguably discourages claimants from accepting reasonable offers, knowing that they can apply costs pressure to the defendant to elicit higher offers and potentially accept the Part 36 offer at a later stage with only the limited consequence of not being able to recover the costs of the attempt to induce a higher offer. This would seem to go against the purpose of the CPR, by actively discouraging settlement and cooperation between the parties.

In addition to the existing encouragement to make sensible early Part 36 offers, defendants in PI claims where QOCS applies will now often be faced with the decision of whether to stick with their best offer and accept that the costs of trial will be incurred, or whether to increase the offer by the amount of the costs that would be incurred to see an earlier end to the claim. The knock-on effect for insurers funding claims in excess of any deductibles will be potential higher exposure from irrecoverable defence costs and higher damages payments if made to reach earlier resolution of the claim.

It remains to be seen whether the CPR Committee will accept the Supreme Court’s invitation to consider this issue further and make any revisions to the CPR.

New Judgment: Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd [2022] UKSC 10

On appeal from: [2019] EWCA Civ 1610

The Respondent is the corporate trustee of a tax-exempt United Kingdom pension fund. It held a large portfolio of UK and overseas shares. To generate revenue, it engaged in a practice known as stock lending. This involves a shareholder (the lender) transferring ownership of shares to another party (the borrower) on terms that the borrower will (i) return equivalent shares to the lender at the end of the lending period and (ii) pay an amount to the lender equivalent to the dividends paid on the shares during that period. These payments are known as a “manufactured dividend” (“MD”) if the shares are held in a UK company. If the shares are in a non-UK company, they are known as a “manufactured overseas dividend” (“MOD”).

This appeal concerns the alleged differential treatment for tax purposes of MDs and MODs received by tax-exempt taxpayers such as the Respondent. That differential treatment is said by the Respondent to be unlawful as a matter of European law because it constitutes a restriction on the free movement of capital, contrary to Article 63 of the Treaty on the Functioning of the European Union (“TFEU”).

The Respondent pays no UK tax on dividends it receives from shares in both UK and overseas companies. In relation to overseas companies however, the dividend may be subject to a withholding tax (“WHT”) charged by the country in which the company is based. To prevent double taxation of UK taxpayers, the UK grants a tax credit to the shareholder lender known as withholding tax credit. That tax credit is of no effect in relation to a tax-exempt shareholder such as the Respondent however because it has no relevant tax liability to which the credit can be applied.

Under EU law, this phenomenon of dividends being taxed both in the country where the company is based and in the country where the shareholder is based (known as “juridical double taxation”) is accepted as an unfortunate fact of life which does not generally fall foul of Article 63 TFEU.

Being contractual payments rather than actual dividends, MODs are not liable to WHT. To prevent differential treatment for tax purposes between real dividends and manufactured dividends, however, the UK implemented a regime whereby MODs were subjected to a deemed withholding tax (the “MOD WHT”) payable at source by the borrower of the shares. To compensate for this deduction, the share lender was granted a corresponding tax credit equivalent to that which would have been available to avoid juridical double taxation had it received an actual overseas dividend rather than a MOD.

In the case of a tax–exempt share lender such as the Respondent, however, the effect of the MOD WHT was to reduce its net income for which it was compensated only with tax credits for which it had no use. Unlike in relation to actual dividends, that did not amount to juridical double taxation, because it arose solely as a result of the UK scheme for taxing MODs which was a policy choice. The Respondent therefore complained that the MOD WHT regime amounted to a restriction contrary to Article 63 because, given that no MOD WHT was deducted in relation to MDs, it disincentivised tax–exempt entities from acquiring and stock lending shares in overseas companies relative to shares in UK companies.

The Respondent claimed that, as a result, it was entitled to repayment of the MOD WHT as tax deducted on its own income. Its own claim amounted to some £8.8 million, but the practice of stock lending by tax–exempt entities was widespread while the UK MOD WHT regime was in operation. This case therefore serves as a test case for more than £600 million in MOD WHT which, subject to the outcome of this appeal, the Appellant may have to repay.

At first instance before the First–tier Tribunal, the Appellant succeeded on the basis that there was no restriction which offended Article 63 TFEU. The Upper Tribunal overturned that decision, finding in favour of the Respondent. The Court of Appeal arrived at the same outcome as the Upper Tribunal though by different reasoning.

 

HELD – The Supreme Court unanimously allows the appeal.

 

In order to determine whether or not the MOD tax regime contravened Article 63 TFEU, the appropriate question to ask was whether, “but for” the MOD tax regime, investors would be sufficiently better off from engaging in stock lending such that its presence was a disincentive beyond that already created by juridical double taxation to them acquiring overseas shares, as opposed to UK shares.

The Court of Appeal concluded that the MOD tax regime did create such a disincentive because, without the MOD WHT being deducted prior to the MOD being paid to the lender, lenders could negotiate for a larger MOD which reflected the benefit to the borrower of dealing with the borrowed shares in a way which reduced the WHT which the borrower actually paid by using dividend arbitrage (i.e. moving the ownership of the borrowed shares to entities in different countries so as to optimise the rate of WHT payable on them).

Lord Briggs and Lord Sales consider that to be a flawed market economic analysis. The benefit to the stock lender of any additional benefits generated by the borrower’s use of the shares (for example, dividend arbitrage) is to be found in the size of the lending fee, not of the MOD. In a sophisticated market, it is to be assumed that the lending fee already had a relationship to the expected benefits accruing to the borrower from the shares.

Whether there was any relevant dissuasive effect constituting a breach of Article 63 TFEU therefore depended on whether the obligation on the borrower, here Authorised UK Intermediaries (“AUKIs”), to account to the Appellant for the MOD WHT was likely to have reduced the amount which the borrower would otherwise have been prepared to pay the lender as a lending fee for the opportunity to, for example, engage in dividend arbitrage. That depended, in turn, on whether the MOD tax regime would result in the AUKI actually having to pay anything to the Appellant by way of MOD WHT deductions.

The Appellant did not, in fact, receive any cash payments attributable to MOD WHT. The reason for this was that AUKIs typically had more than enough withholding tax credits to soak up, by way of set–off, all the MOD WHT payable by them. To suggest that the MOD tax regime would potentially have the effect of discouraging investment in foreign shares relative to UK shares by tax–exempt investors was therefore no more than pure speculation which was insufficient to make out a breach of Article 63 TFEU. The AUKIs were not, in reality, paying anything more to the Appellant due to the MOD tax regime than they would have done otherwise.

Even if there is a dissuasive effect, Lord Briggs and Lord Sales conclude that the appeal should nonetheless succeed based on the remedy sought by the Respondent.

The Respondent’s complaint is that the UK tax regime should have provided it with usable tax credits in relation to the liability of a borrower to pay the MOD WHT, on the basis that it was a UK tax deducted at source from the share lender. Lord Briggs and Lord Sales reject this. The purpose of the MOD regime and contractual arrangements between lenders and borrowers was to mimic the position which would have existed had the lender retained the shares. From the lender’s perspective, the tax credit it received under the MOD tax regime was exactly the same in its effect as the tax credit in respect of WHT which it would suffer if it retained the shares.

The tax credits which the Respondent claims should have been paid to it were therefore ultimately in respect of WHT levied and retained by foreign tax authorities. The UK tax authorities did not receive those sums, but had decided as a matter of policy to provide access to credits in relation to tax levied by foreign states. Although the UK used its domestic tax regime to achieve this, that did not mean as a matter of substance that the foreign WHT was to be treated as if it had been collected and retained by the UK tax authorities.

Further, although the dissuasive effect regarding investment in foreign shares identified by the Court of Appeal was comparatively small, the relief sought by the Appellant was a sum equal to the full amount of the credits. The remedy claimed was therefore wholly disproportionate when compared with the breach. Having reviewed the relevant principles of the European Court of Justice, Lord Briggs and Lord Sales conclude that a remedy to be provided in respect of a breach of Article 63 is required to be proportionate to the relevant violation of EU law. Where the issue is not the restitution of money received by the state but the provision by the state of a financial benefit (i.e. the payment of credits in relation to taxes paid to another state as in this case), the remedy has to be tailored to the wrong committed in breach of EU law.

On the facts of the present case, if there was a breach of Article 63 it was only on the basis that the MOD WHT regime omitted to allow for the grant of a tax credit payment to the extent that a tax–exempt lender like the Respondent could show that it had been unable to benefit from the possibility of sharing in the financial gains from dividend arbitrage by an AUKI. That is the extent of the relief to which the Respondent is entitled, if the remedy is to be kept proportionate to the wrong suffered. However, the Respondent has never sought to claim for such a loss nor presented any evidence to show that in fact it suffered any such loss.

 

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26 October 2021
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27 October 2021
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New Judgment: R (on the application of Coughlan) v Minister for the Cabinet Office [2022] UKSC 11

On appeal from [2020] EWCA 723

This appeal concerns a challenge brought by the Appellant to orders made by the Respondent in respect of Braintree District Council and nine other local authorities (“the Pilot Orders”). These Pilot Orders authorised schemes to temporarily change the rules set out in secondary legislation governing local elections. These schemes, which were implemented in ten local authority areas in respect of the local government elections in May 2019, each introduced a new requirement for some form of voter identification for those local elections.

The Appellant is a resident of the Braintree area who challenged the lawfulness of the Pilot Orders. His challenge was dismissed on the merits in the High Court. The Court of Appeal granted permission to appeal this decision in view of the “important constitutional function served by local government elections.” The Appellant’s appeal was dismissed on the merits by the Court of Appeal.

The primary issue in the appeal was whether the Pilot Orders were made ultra vires, that is outside the legal powers of the Minister for the Cabinet Office, because the pilot schemes they sought to establish were not schemes within the meaning of section 10(2)(a) of the Representation of the People Act 2000.

The second issue in the appeal was whether the pilot schemes were authorised for a lawful purpose under section 10(1) of the Representation of the People Act 2000, consistent with the policy and objects of that Act.

The appeal does not concern the merits or otherwise of the decision to introduce the pilot schemes, nor the merits of voter identification schemes in general, but only whether the decision to introduce the pilot schemes was lawful. The Runnymede Trust, Operation Black Vote, Voice4Change England, LGBT Foundation and Stonewall were given permission to intervene by written submissions.

 

HELD – The Supreme Court dismissed the appeal.

 

In respect of the primary issue, the Court found that the Pilot Orders were not made ultra vires. Section 10 of the Representation of the People Act 2000 is titled “Pilot schemes for local elections in England and Wales”. Section 10(1) enables the Minister for the Cabinet Office by secondary legislation “to make such provision for and in connection with the implementation of a scheme as he considers appropriate”. However, that power to make secondary legislation is limited to a scheme within the meaning of section 10(2). Section 10(2)(a) provides for schemes as regards “… how voting at the elections is to take place”.

Having regard to the relevant principles of statutory interpretation, the legislative framework for local government elections, and the content of the pilot schemes in question, the Court finds that the pilot schemes were schemes within the meaning of section 10(2)(a) of the Act, and in particular, that they were schemes as regards “… how voting at the elections is to take place”.

In respect of the second issue, the Court found that the pilot schemes were authorised for a lawful purpose under section 10(1) of the Representation of the People 2000 Act. The Court finds that the purpose of section 10 is to facilitate pilot schemes to enable the gathering of information to assist in the modernisation of electoral procedures in the public interest. The Pilot Orders were made to promote that object, and accordingly, were authorised for a lawful purpose.

Case Comment: Her Majesty’s Attorney General v Crosland [2021] UKSC 58

In this post, Leigh McLevy, trainee solicitor at CMS, comments on the decision in Her Majesty’s Attorney General v Crosland, a case which concerns an embargoed judgment and contempt of court.

Background

Mr Crosland appealed against a decision of the Supreme Court in which he was ordered to pay a fine of £5,000 to HM Paymaster General, and costs of a further £15,000, for contempt of court. The court at first instance (“First Instance Panel”) was satisfied that Mr Crosland committed contempt of court by disclosing the outcome of the court’s judgment in R (on the application of Friends of the Earth) v Heathrow Airport Ltd [2020] UKSC 52 (“Heathrow Judgment”) whilst still in draft and subject to embargo.

First Instance Panel Decision

Mr Crosland, an unregistered barrister, had been involved in the proceedings giving rise to the Heathrow judgment. The Heathrow case concerned the lawfulness of the Airports National Policy Statement (“ANPS”), particularly on whether the Secretary of State had failed to have proper regard to the Paris Agreement or to explain how the ANPS was compatible with the UK’s emissions targets. The Heathrow Judgment was circulated to the parties’ representatives on 9 December 2020 and it was to be handed down on the morning of 16 December 2020. Mr Crosland formed the view that there were inaccuracies in the draft and believed that the ANPS was misleading as it was presented as being compatible with the UK’s international obligations on climate change and failed to take the Paris Agreement targets into account.

On the morning of 15 December 2020, Mr Crosland sent an email to the Press Association in which he disclosed the outcome in Heathrow Judgment and outlined what he saw was the inaccuracies in the judgment. Additionally, he issued a statement on Plan B Earth’s Twitter account. Mr Crosland acted in the knowledge that the judgment was under embargo until the following morning and that his actions may be in contempt of court. It was Mr Crosland’s position that it was necessary to “sound the alarm early” and raise awareness of the issue before the judgment was released due to the possible impact on the climate.

On 10 May 2021 the First Instance Panel of Supreme Court Justices issued the decision on liability and penalty, finding Mr Crosland to be in contempt of court and ordered to pay a fine of £5,000. A second decision on costs was delivered on 14 June 2021 in which Mr Crosland was ordered to pay £15,000 of the £22,504 of costs incurred.

Appeal to the Supreme Court

On 16 July 2021, Mr Crosland filed a notice of appeal on four grounds to which the Attorney General filed a notice of objection. The Attorney General submitted that there was no right of appeal from a decision of the Supreme Court and raised as a preliminary issue whether the court (“the Appeal Panel”) had jurisdiction to entertain the appeal.

Preliminary Issue – Jurisdiction

Mr Crosland sought to appeal against the order, on the basis that he had not been in contempt at all, and against the order for costs. Permission to appeal was granted by the same panel which heard the contempt application, and it was to be heard before a panel of five judges, none of whom had been involved either in the proceedings in the Heathrow Judgment or in the contempt application. The Appeal Panel decided that they had jurisdiction to hear the appeal. The basis for the jurisdiction is that where a decision such as contempt of court which can attract a custodial sentence, s 13 of the Administration of Justice Act 1960 can be read to include appeals from the Supreme Court to a separate panel of the same court in such limited circumstances. The court noted that “it is open to pave the way for a procedural route by which a substantive right may be exercised.”

Grounds 1 and 2

Mr Crosland appealed on the grounds that 1) the First Instance Panel erred in its approach to considering the relevance of Mr Crosland’s beliefs and motivations namely whether his breach of the embargo was a proportionate response to the suppression of evidence about the dangers of the Heathrow airport expansion and 2) the First Instance Panel failed to mention and therefore wrongly disregarded a letter written by leading scientists (“the Scientists Letter”) which demonstrated, amongst other things, the efficacy of Mr Crosland’s tactic of breaching the embargo. Both grounds were rejected on appeal. The Appeal Panel were not satisfied that Mr Crosland’s submission that his breach of the embargo drew facts to the attention of the public in relation to the impact on climate change would have otherwise passed unnoticed as he would have been free to comment and criticise the judgment the very next day. Further, the Scientists Letter did not suggest that its signatories only became aware of the Heathrow Judgment and its contents as a result of Mr Crosland’s breach or that they would not have participated in the public discussion that followed its release.

Ground 3
The third ground of appeal was that the First Instance Panel was not an independent and impartial tribunal as required by Article 6(1) ECHR and the Human Rights Act 1998. Mr Crosland submitted that the First Instance Panel was not independent and impartial and that the fair-minded observer would conclude that there was a real possibility that the Panel was biased. This was rejected by the Appeal Panel. Two main reasons were provided – 1) the decision to bring proceedings for contempt was taken by the Attorney General, to whom the matter had been referred by the President of the Supreme Court and was not taken by the court itself and 2) the First Instance Panel did not include any of the judges who sat on the Heathrow Judgment appeal.

Ground 4

Mr Crosland submitted that pursuant to the Attorney General’s obligations of disclosure under Article 6 ECHR and s 3 of the Criminal Procedure Investigations Act 1997, Mr Crosland should have been given information about an alleged breach of the embargo on court judgments in the case of Begum v Special Immigration Appeals Commission [2020] EWCA Civ 918. It was held that this submission had no force because it was irrelevant to the decision as to whether Mr Crosland was in contempt of court, or the punishment for contempt, to consider what the Attorney General may or may not have done in a different case.

Ground 5

This submission was on the basis that the court’s ruling on costs was oppressed and unjust. Mr Crosland submitted that the cost order of £15,000 should not be greatly at variance with any fine imposed and that as he has a modest income, the overall financial penalty of £20,000 for an act of conscience is oppressive, arbitrary, and disproportionate. This ground was rejected by the Appeal Panel. The award of costs is a matter for the discretion of the court making the order and the appeal court should only interfere if there has been an error of legal principle, which the Appeal Panel did not find.

Decision

Overall, Mr Crosland’s appeal was dismissed by the Appeal Panel of the Supreme Court on all grounds.

Comment

This case demonstrates that it is, in limited circumstances, possible for the Supreme Court to act as an independent and impartial tribunal to entertain appeals on decisions made by the Supreme Court itself when exercising its jurisdiction on contempt of court and where the Appeal Panel is made up of judges who did not sit on the First Instance Panel.

Further, the judgment shows that contempt of court is taken very seriously and is difficult to defend, even where there may be a public interest argument or a moral reason to disclose the information and high penalties and cost orders may be imposed.

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