HMRC loses Christopher Lunn battle, but could win the war

THE JUDICIAL REVIEW that found against HM Revenue and Customs’ decision to withdraw the tax agent status of a West Sussex accountancy firm, as well as fascinating, appears to be a blow to the taxman. However, the long-term implications of the ruling could work in the HMRC’s favour.

Mr Justice Kenneth Parker said that HMRC failed to follow correct procedure when removing the tax agent status of Christopher Lunn accountants by not allowing the firm to make representations against the decision. The firm was under criminal investigation and, in late November 2010, a meeting of HMRC commissioners decided that they had to stop the firm from representing clients on tax matters immediately.

This urgency was, HMRC said, to allow clients time to find different tax representatives. But Parker refuted these suggestions, saying that any clients wishing to recruit a new tax agent would have faced a “formidable task” anyhow. Therefore, the firm’s “strong claim” to make representations should have been allowed.

His ruling further damned HMRC by claiming that it “substantially contributed” to the tight deadline, and had sufficient evidence to issue a “minded to terminate” notice as early as September.

Mike Warburton, tax partner at Grant Thornton, said the ruling showed that the taxman had “jumped the gun” in this case. “This is a warning shot across the bows of HMRC to not get carried away and think twice before they take drastic action. It is a fascinating outcome.”

Christopher Lunn himself was delighted. “We have been astonished at the allegations which HMRC have made which we believe are fundamentally flawed and inaccurate,” he said. “This victory now gives us the opportunity to rebut the allegations that have been thrown at us.”

However, although HMRC has lost this battle, the department is winning the war and this judgment has, strangely, made more likely long-term victories against firms it believes are indulging in fraudulent accounting.

In terms of the Lunn case specifically, not much has changed. The judge did refer the decision back to the commissioners, but did not criticise the decision they took – only the procedures themselves. James Roberts, tax partner at Barlow Lyde and Gilbert, questioned what Christopher Lunn could say that would change the commissioners’ minds. “The likelihood is that HMRC will go through all the procedural hoops and reach the same decision,” he added.

More importantly, this is the first time that HMRC has removed the tax agent status of a firm that has not been found guilty of fraud – and this power was not challenged in the case.

As Roberts said: “HMRC has been knocked back on the facts, but there has been no knockback on its ability in principle to remove this status. This ruling gives HMRC the opportunity to improve its procedures in cases where they feel the status can be removed.”

With the associated difficulties of reputations being damaged, accounting firms had better beware – the taxman’s teeth have not been blunted.