The case of XL Insurance Company SE and IPORS Underwriting Limited, Paul Alan Corcoran v. HMRC and others was not strictly a tax case but it concerns a principle of some potential importance for tax practitioners and a number of interesting and unusual features.
In complex litigation, XL Insurance Company SE (‘XL’) had alleged that Mr Corcoran had misappropriated commission he had received for the benefit of XL. Rather unusually, according to XL, the alleged fraudster had submitted self-assessment returns to HMRC in which he accounted for the commission receipts as dividends forming part of his taxable income.
In order to recover from HMRC the moneys paid to it by Mr Corcoran, XL sought to join HMRC as a party to the proceedings and to amend its statement of claim in various ways including:
‘i) A plea that the sums used to pay HMRC were … [XL’s] … proprietary premium funds;
ii) A claim for a declaration that the sums paid are held by HMRC on constructive trust and for repayment;
iii) A claim in unjust enrichment on the basis that HMRC had received no consideration for the payment in that it purported to satisfy a tax liability which did not exist;
iv) A claim that … [XL] … is entitled to be subrogated to or otherwise enjoy any rights held by Mr Corcoran against HMRC to claim a refund for overpayment.’
The Civil Procedure Rules provide that:
‘The Commissioners for HM Revenue and Customs may be added as a party to proceedings only if they consent in writing.’
In an uncharacteristic display of good sportsmanship, HMRC did not exercise its power of veto but it did oppose XL’s proposed amendments to its statement of claim listed above on the basis that the amendments had no real prospect of success as a matter of law.
The presiding Judge, Mrs Justice Cockerill, characterised all HMRC’s claims as based on the proposition that once Mr Corcoran had submitted his self-assessment form, a liability to pay Income Tax had been created even though, had he made a correct return, no liability would have arisen. On this basis, HMRC asserted that in accepting payment of the self-assessed amount from Mr Corcoran it had given full consideration for the moneys received by acknowledging the satisfaction of Mr Corcoran’s debt for that amount. The result of that assertion being correct would, HMRC asserted, be that it had not been unjustly enriched and was a bona fide purchaser for value of the moneys it received and so had a stronger proprietary interest in those moneys than XL.
Mrs Justice Cockerill did not find that HMRC’s assertions were incorrect but, rather, that there was a good arguable case in support of the contrary assertions of XL and that the matter was best resolved through a proper consideration of the matter at a full hearing. She, therefore, permitted the amendments of XL’s statement of claim as well as joining HMRC as a party to the litigation.
In doing so, the tone of her judgment suggests that she found XL’s arguments were more persuasive than HMRC’s.
The judgment summarises an argument, based on a consideration of the mechanism for the collection of Income Tax through self-assessment, that, although that system creates a statutory debt, it does not create a liability to tax but is dependent upon there being such a liability. In the alternative, Mrs Justice Cockerill considered sympathetically the argument that the debt created by a self-assessment is created solely as a matter between the taxpayer and HMRC and so is not relevant to dealings between HMRC and third parties.
The matters of principle in the case remain to be resolved at a full hearing but, should the Court at that hearing follow the strong lead given by Mrs Justice Cockerill, it gives the prospect of litigants recovering moneys from HMRC which have been paid to it by the other party in the litigation on the basis of an incorrect self-assessment.
One might think that such circumstances will be rare; fraudsters do not willingly volunteer a share of the proceeds of their fraud to HMRC. If XL’s allegations prove to be correct, however, and of course we do not know whether they are, the facts of the case will provide an example of a situation where a fraudster has in effect been forced to follow the logic of his deceit to provide a windfall to HMRC; a windfall from which, wider considerations of equity suggest, it should not be allowed to profit.