Mind the (interpretation) gap: Governmental attitudes towards "incorrect" legal interpretations

10 December 2021

The Times has recently reported that the Government is seeking to limit the power of the courts to overrule decisions made by ministers through the process of judicial review. The Judicial Review and Courts Bill, which was introduced following a consultation earlier this year, has clearly not satisfied the Government. Instead, it is suggested that a so-called "interpretation bill" could be enacted each year, which would allow MPs to strike out rulings with which the Government disagrees. 

It is unclear what such a bill would entail and there has already been comment from those who have queried whether such a bill would act retrospectively to change the law (which would be a concern) or would simply make prospective changes to the law (which arguably is no more than what Parliament is tasked to do in any event).

For those closely involved with the dealings of HMRC, the terminology is also interesting. In recent years, HMRC has also become increasingly concerned about the so-called "interpretation gap". 

This refers to tax losses that arise as a result of the taxpayer and HMRC taking different interpretations of the law. The legal interpretation gap was in 2019/20 the second largest category of behaviour contributing to the tax gap (£5.8bn), ahead of evasion (£5.5bn), criminal attacks (£5.2bn) and avoidance (£1.5bn), with only failure to take reasonable care (£6.7bn) coming in higher. 

It is a significant issue for HMRC, with the Government allocating an additional £292m across three years for more resources to “tackle the tax gap and ensure that those who should pay, do.” A portion of this amount will contribute to closing the interpretation gap.

One way that HMRC is seeking to reduce the interpretation gap is through the upcoming notification of uncertain tax treatment rules, which will come into force from 1 April 2022. These rules will require businesses to notify HMRC when they have adopted an "uncertain tax treatment". 

Under the draft legislation published in July 2021, in addition to a number of other triggers, the notification requirement would also arise if there was a “substantial possibility” that a tribunal or court would disagree with the tax treatment applied. This was ultimately removed in a policy paper published in October 2021, but with the caveat that the Government would consider the trigger for possible later inclusion. Such a trigger would require taxpayers to consider whether a court or tribunal might disagree with HMRC, presumably with the implication that the Government might do something about it.

The toing and froing over these rules and the interpretation gap is not dissimilar to what is taking place at a broader level with judicial review and the "interpretation bill". 

The notion that it is right to label the proper application of the tax rules (as confirmed by the courts) as a tax gap is one that might be questioned. It suggests that HMRC (and the Government more broadly) effectively start from the position that it is their view of the rules that should prevail. While it may be reasonable for HMRC (and the Government) to work on the assumption that their genuine view of the law is correct until told otherwise, it would be more troubling if the courts are simply seen as an obstacle to HMRC’s (and the Government’s) view, and one that can be set aside without an appropriate process. 

Taxpayers and everyone else will, therefore, be minded to keep a careful eye on the positions that they are taking. It will be necessary to consider how justified these positions may seem, not just to a court that might be called on to examine them but to Government bodies that might take a different view and will expect courts to follow suit.

Whether or not an "interpretation bill" ever appears, its appearance does not come out of the blue. It reflects a much wider and long-standing attempt across the Government to bring all legal interpretations into line with its own.