Al Fayed v Advocate General for Scotland (representing the IRC)

Factual and Procedural Background

The petitioners, three brothers, sought judicial review of a decision by the Commissioners of Inland Revenue ("the respondents") concerning a forward tax agreement dated 22 and 28 April 1997 ("the 1997 Agreement"). The petitioners included a United Kingdom resident and ordinarily resident taxpayer (the first petitioner) and two others regarded as neither resident nor domiciled in the UK for tax purposes. The 1997 Agreement was a forward tax agreement under which the petitioners agreed to pay a fixed sum annually in full and final settlement of income tax and capital gains tax liabilities arising from foreign remittances to the UK. The respondents initially accepted the agreement and payments were made up to the year ending 5 April 2000.

In 2000, the respondents, after receiving counsel's opinion, asserted that the 1997 Agreement was ultra vires and not legally binding. They suspended and then terminated the agreement, requiring the petitioners to complete tax returns and pay tax without reference to the agreement from 6 April 2000 onwards. The petitioners challenged this decision, contending the respondents were obliged to abide by the terms of the 1997 Agreement and that its termination breached their Convention rights. The Lord Ordinary refused the petitioners' judicial review petition on 31 May 2002, and the petitioners reclaimed to the Inner House.

Legal Issues Presented

1. Whether the 1997 Agreement was ultra vires of the respondents.
2. If ultra vires, whether the respondents' decision to terminate the 1997 Agreement was unfair or amounted to an abuse of power.
3. Whether the respondents' decision breached the petitioners' legitimate expectations.
4. Whether the Human Rights Act 1998 applied to the respondents' decision and, if so, whether the petitioners' rights under the European Convention on Human Rights were breached.

Arguments of the Parties

Petitioners' Arguments

• The respondents had power incidental to their statutory duties to enter into forward tax agreements as part of their care and management of Inland Revenue.
• The 1997 Agreement was a lawful exercise of managerial discretion to secure a certain return in uncertain circumstances and to avoid costly investigations.
• The petitioners had a legitimate expectation that the respondents would abide by the terms of the Agreement until its expiry in April 2003.
• The termination of the Agreement was unfair and amounted to an abuse of power, particularly given the petitioners' reliance on it and the lack of notice.
• The 1997 Agreement did not constitute tax avoidance or a conduit for it, and the respondents retained powers to investigate under statute.
• The respondents' differential treatment of other taxpayers with forward tax agreements was unfair.
• The respondents had not allowed the petitioners time to adjust their affairs after terminating the Agreement.

Respondents' Arguments

• The respondents have a statutory duty to collect tax lawfully due and no power to enter into agreements fixing future tax liabilities unrelated to actual transactions.
• The 1997 Agreement was ultra vires because it was based on inadequate factual information, lacked provision for review or termination on material change, and treated the petitioners as not domiciled irrespective of the true position.
• Forward tax agreements are not a lawful exercise of the respondents' powers as they involve accepting fixed sums for future liabilities that may never arise.
• The respondents could not bind themselves not to perform their statutory duties in future years.
• The termination of the Agreement was lawful and not an abuse of power once it was established to be ultra vires.
• There was no breach of legitimate expectation because the Agreement was unlawful and public bodies cannot be expected to uphold ultra vires contracts.
• The Human Rights Act 1998 did not apply retrospectively to the decision to terminate the Agreement.
• The respondents sought to avoid unfair prejudice to the petitioners by not reopening tax years prior to 6 April 2000 and by considering adjustments for irreversible transactions after termination.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
R v. Sampson and Others ex p Lansing Bagnall Ltd. (1986) 61 T.C. 112	Tax liability arises only where transactions creating tax liability have occurred.	Supported the conclusion that respondents' duty to collect tax relates to actual taxable transactions, undermining legality of forward tax agreements.
Whitney v. I.R.C. [1926] A.C. 37	Stages of tax imposition: declaration of liability, assessment, and collection.	Clarified respondents' functions and limits in tax collection and assessment.
I.R.C. v. National Federation of Self-Employed and Small Businesses Limited [1982] AC 617 ("Fleet Street Casuals case")	Respondents have wide managerial discretion in tax collection balancing cost and efficiency.	Distinguished from present case as it involved arrangements for future tax collection but did not fix tax liabilities in advance.
I.R.C. v. Woollen [1992] S.T.C. 944	Back tax agreements are compromises and lawful, even without formal assessments.	Used to argue similarity between back tax and forward tax agreements by petitioners; court rejected equivalence.
R. v. I.R.C. ex parte Preston [1985] AC 835	Decisions of commissioners can be judicially reviewed for unfairness and abuse of power.	Supported petitioners' argument on unfairness and abuse of power in terminating the Agreement.
R. v. I.R.C. ex parte M.F.K. Underwriting Agents Limited [1990] 1 W.L.R. 1545	Legality of pre-transaction rulings and limits on legitimate expectations.	Clarified limits on respondents' power to bind themselves and relevance of legitimate expectation.
Gresham Life Assurance Society v. Attorney-General [1916] 1 Ch. 228	Statutory bodies cannot contract to fix future assessments or exempt future statutory duties.	Supported respondents' submission that forward tax agreements were ultra vires.
Vestey v. I.R.C. [1980] AC 1148	Taxpayers must be taxed by law, not by concession.	Used to argue that the Agreement amounted to untaxed concession, not lawful taxation.
R. v. North and East Devon Health Authority ex parte Coughlan [2001] QB 213	Legitimate expectation can amount to abuse of power if breached unfairly.	Considered in relation to petitioners' claim of legitimate expectation; court found no legitimate expectation to uphold ultra vires contract.
Southport Corporation v. Birkdale District Electricity Supply Co. Limited [1925] Ch. 794; [1926] A.C. 355	Limits on legitimate expectation in discretionary powers context.	Distinguished from cases cited by petitioners; supported respondents' position that no legitimate expectation arose.
R. v. Customs & Excise Commissioners ex parte Kay & Co. Limited [1996] S.T.C. 1500	Legitimate expectation in administrative law.	Supported respondents' submissions on limits of legitimate expectation.
R. v. Inland Revenue Commissioners ex parte Matrix Securities Limited [1994] 1 WLR 334	Legitimate expectation and pre-transaction rulings.	Referenced in discussing limits to legitimate expectation and lawful exercise of discretion.
Wilson v. First County Trust Limited (No. 2) [2004] 1 AC 816	Nullity of ultra vires contracts precludes possession under Article 1 First Protocol.	Respondents relied on this to argue that no Convention rights were engaged by ultra vires Agreement.
Pine Valley Developments Limited v. Ireland (1992) 14 EHRR 319	Legitimate expectation can constitute a possession under Article 1 First Protocol.	Petitioners relied on this to argue Convention rights were engaged; court accepted arguendo but found interference justified.
Pressos Compania Naviera S.A. v. Belgium (1995) 21 EHRR 301	Deprivation of possessions must be in public interest and proportionate.	Applied to assess proportionality of respondents' interference with petitioners' legitimate expectation.
R. v. Lambert [2002] 2 AC 545	Principle of proportionality and necessity in interference with possessions.	Referenced in assessing the fairness and proportionality of terminating the Agreement.
National and Provincial Building Society v. U.K. [1997] STC 1466	Margin of appreciation granted to contracting states in balancing public interest and individual rights.	Supported the court's conclusion that the respondents' interference was justified.
Fredin v. Sweden (1991) 13 EHRR 784	Limits on deprivation of possessions under Convention.	Reinforced the principle of proportionality and fair balance.
Rowland v. Environment Agency [2003] Ch. 58	Legitimate expectation cannot entitle realisation beyond powers of public body.	Supported the court's view that petitioners could not enforce ultra vires Agreement.

Court's Reasoning and Analysis

The court analysed the nature and scope of the respondents' statutory duties under the Inland Revenue Regulation Act 1890 and the Taxes Management Act 1970, confirming their duty to collect tax lawfully due and their wide managerial discretion in doing so. It acknowledged the respondents' power to enter into back tax agreements but distinguished these from forward tax agreements, which fix sums payable for future tax liabilities without reference to actual transactions.

The court found that the 1997 Agreement was ultra vires because it was not based on adequate factual information, lacked mechanisms for review or termination on material change, and treated the petitioners as not domiciled irrespective of the true position, thus potentially exempting them from lawful tax liabilities. The respondents' entering into such an agreement was incompatible with their statutory duty to collect tax on actual taxable transactions.

Regarding unfairness and abuse of power, the court accepted that public authorities must act fairly but concluded that once the respondents became aware the Agreement was ultra vires, they had no discretion to continue to be bound by it. The petitioners failed to prove unfairness amounting to abuse of power in the termination decision. The court also rejected the petitioners' claim of legitimate expectation, holding that legitimate expectations must arise from lawful promises, and public bodies cannot be compelled to uphold ultra vires agreements.

On the Human Rights Act 1998 and Convention rights, the court held that the Act did not apply retrospectively to the decision made before its commencement. Even assuming the Agreement engaged Article 1 of the First Protocol, the respondents' termination was a justified interference pursuing a legitimate aim of fair taxation and was proportionate, striking a fair balance between community interests and individual rights.

Holding and Implications

The court REFUSED THE RECLAIMING MOTION, upholding the Lord Ordinary's decision that the 1997 Agreement was ultra vires and that the respondents lawfully terminated it.

The direct effect of this decision is that the respondents are not bound to honour the 1997 Agreement and may require the petitioners to comply with their statutory tax obligations without reference to it from 6 April 2000 onwards. No broader precedent was set beyond confirming the limits on the respondents' powers to enter into forward tax agreements and the application of principles of ultra vires, unfairness, abuse of power, legitimate expectation, and human rights in this context.