As long ago as 2001, Lord Woolf LJ gave this guidance in  R (Cowl) v Plymouth City Council [2001] EWCA Civ 1935 at [1]:

“The importance of this appeal is that it illustrates that, even in disputes between public authorities and the members of the public for whom they are responsible, insufficient attention is paid to the paramount importance of avoiding litigation whenever this is possible. Particularly in the case of these disputes both sides must by now be acutely conscious of the contribution alternative dispute resolution can make to resolving disputes in a manner which both meets the needs of the parties and the public and saves time, expense and stress.”

And at [27]:

“This case will have served some purpose if it makes it clear that the lawyers acting on both sides of a dispute of this sort are under a heavy obligation to resort to litigation only if it is really unavoidable.  If they cannot resolve the whole of the dispute by the use of the complaints procedure they should resolve the dispute as far as is practicable without involving litigation. At least in this way some of the expense and delay will be avoided.”

Two recent tax cases offer a salutary reminder of the importance of this judicial guidance and that legal advisers should not use the issue of legal proceedings including judicial review as a first or concurrent line of attack, and if only in the interests of their clients, they should exhaust all alternative dispute resolution avenues, including mediation, first.  The extra-ordinary irrecoverable costs bill run up in one of the cases considered below illustrates the risk of failing to follow this principle.

Recent Cases Showing Why ADR Is so Important

The first case is R (on the application of Mrs Archer) v HMRC [2019] EWCA Civ 1021 and it involved a claim by Mrs Archer to recover the costs of her judicial review proceedings concerning an accelerated payment notice or “APN” issued to her by HMRC in 2014.  The APN required the payment of £6,116,598.95 tax in respect of a tax scheme she had deployed in order to avoid tax on a capital gain of £15.3m in the 2005/06 tax year.  Under the APN regime, there is no right to apply to HMRC or to the tax tribunal to postpone payment of the tax demanded.  However, section 222 of Finance Act 2014 allows the taxpayer to make representations to HMRC objecting to the APN and/or the amount demanded if the taxpayer believes that the statutory conditions for issuing the APN were not met or the amount shown in the notice is incorrect.  Payment of the tax demanded by an APN is normally required to be made within 90 days of the issue of the APN, but if representations are made under section 222, payment of the tax is then postponed until 30 days after HMRC respond to the representations, assuming that HMRC then either confirm the amount specified in the APN or amend the notice to specify a different amount.  Mrs Archer’s APN was issued on 4 November 2014 and the 90 days for payment of the tax ended on 5 February, 2015.  Yet less than four weeks after the issue of the APN, the legal services department of KPMG wrote to HMRC on 28 November, 2014 stating that they would be applying for a judicial review and that they would be sending a copy of the sealed claim form when it had been issued by the Administrative Court.  In fact, the claim form was issued on the same day although not served on HMRC until 2 December, 2014.  The statement of facts and detailed statement of grounds were settled by counsel.

KPMG then made representations under section 222 of Finance Act 2014 but not until two weeks after service of the judicial review claim form.

On 22 December, 2014, HMRC withdrew the APN, but in their defence against the judicial review, said that (1) KPMG’s letter had failed to comply with the pre-action protocol for judicial review and in any event was written on the date the claim form was issued; and (2) the claim was premature because Mrs Archer had not exhausted her statutory remedy under section 222 of Finance Act 2014.

The Costs Claim

It was argued on behalf of Mrs Archer that HMRC should pay the whole cost of the judicial review because Mrs Archer had been fully successful in her claim.  Total costs were put at £601,552.20, including that of Mrs Archer’s husband who had faced a similar APN. This level of costs was described by the judge hearing the original costs application as extra-ordinary, particularly as there had been no detailed preparations at that stage for a trial.

The Court of Appeal’s Decision

The Court of Appeal dismissed the claim for costs.  Henderson LJ held that Parliament must have intended taxpayers to take advantage of section 222 Finance Act 2014 before having resort to judicial review.  Judicial review is a remedy of last resort and the facility to make representations to HMRC under section 222 provides a relatively cheap and simple way for a taxpayer to challenge an APN without resorting to the Administrative Court.

Indeed, it was all but self-evident that section 222 was intended by Parliament to provide the primary recourse for challenging an APN.  The time for bringing a judicial review application should in practice not begin to run until the section 222 procedure had been completed.  The danger in the way KPMG had proceeded was that very considerable costs may be incurred in preparing for a judicial review when the whole point of section 222 is that it may lead to a result which makes legal action unnecessary.

A further ground to refuse costs was held to have been the litigation conduct of Mrs Archer’s advisers.  No serious attempt was made by KPMG to comply with the pre-action protocol for judicial review.  Indeed, HMRC were presented with a fait accompli on 24 November, 2014 instead of being given time to respond.  Far from using judicial review as a last resort, KPMG had employed it as the first line of attack and the very substantial costs of preparing the proceedings had already been incurred.

Another Example

The second case was Stirling Jewellers (Dudley) Ltd v HMRC [2019] in the first-tier tax tribunal and concerned a dispute about corporation tax with HMRC and the remarks of Judge Christopher McNall about the utility of ADR in clarifying the issues and helping to narrow the scope of the dispute are worth quoting in full:

“363.  The Appellant’s cover letter to its Notice of Appeal says that an application for ADR had been made. That was very sensible. If ever there was a dispute which cried out for a determined attempt at Alternative Dispute Resolution, it was this one.

364. This appeal has been allowed in part, and dismissed in part. Put bluntly, both parties’ cases as advanced and pursued before the Tribunal were either factually or legally wrong in significant respects. The Appellant still faces a significant tax bill, albeit this will end up being somewhat less than the amounts which were assessed and subject to the appeal.
365. If this appeal and our resolution of it – which has been laborious – has shown anything, the process of ADR may well have been challenging. Both parties would have had to be prepared – in a confidential and without prejudice environment – to reflect on the genuine strengths and weaknesses of their respective positions.
366. At the very least – even if a negotiated settlement, giving appropriate regard to the strengths and weaknesses of the parties’ cases, could not have been reached – there was nonetheless still ample scope for the parties to have engaged co-operatively so as to properly identify and narrow the issues genuinely in dispute.
367. At the end of the day, we cannot adjudicate on the ADR process, although in this case we happen to know quite a lot about it because the parties – each legally advised and represented – chose to place a significant amount of correspondence which pertained to settlement discussions before us.
368. Posturing and skirmishing in correspondence ultimately proved to be non-progressive, and there is an impression (we cannot put it higher than that) that the tone of the correspondence ended up driving the parties into polarised, and entrenched, positions.

The Lesson Learned

Both the Court of Appeal and the tax tribunal have recently provided reminders of the importance of pursuing and exhausting alternative dispute resolution remedies to try to resolve the matter or at least to try to clarify and narrow the scope of the dispute before going down the path of issuing legal proceedings.  The failure to do so can have huge costs implications for clients.  Moreover, professional advisers whose enthusiasm for a fight overrides their better judgment, risk professional embarrassment if they fail to advise clients to pursue alternative remedies first. Lord Woolf’s words quoted above should be at the forefront of every litigation lawyer’s mind.

By Patrick Cannon, tax appeals barrister

Patrick Cannon, a leading SDLT and tax appeals barrister. Patrick is a CMC accredited mediator and also advises on and appears in civil and criminal tax investigations and disputes with HMRC, challenges to tax avoidance schemes and action against professional and other advisers who mis-sold aggressive tax avoidance schemes now subject to APNs and Follower Notices.