XL Insurance Company SE v IPORS Underwriting Ltd & Ors

For the purpose of joining HMRC and amending pleadings, a claim is arguable if it has a realistic legal basis on the assumed facts. A self-assessment may create a statutory debt and establish the amount payable, but it is arguable that it does not itself create the underlying liability to tax. In an unusual case involving misappropriated proprietary funds, a third-party beneficial owner may arguably challenge whether a genuine liability existed, despite the expiry of statutory mechanisms available to the taxpayer. That issue may affect both proprietary claims and unjust enrichment. The bona fide purchaser defence depends on genuine value being given, and the discharge of a fictitious or voluntarily created tax debt may arguably provide no such value. Subrogation is a remedy rather than a cause of action.

XL pursued fraud-based and proprietary claims concerning approximately £10 million in insurance premiums allegedly misappropriated by its former coverholder and its director. It alleged that the director declared part of those funds as taxable income and paid approximately £1 million to HMRC from the misappropriated money.

XL applied under CPR 19.2 to join HMRC and amend its particulars of claim to seek proprietary relief, repayment in unjust enrichment, and subrogation. HMRC consented to joinder in principle but opposed it on the ground that the proposed claims had no real prospect of success because the self-assessments created final statutory debts and the payments discharged valid obligations. The central issue was whether XL’s proposed claims were arguable on the assumed facts.

1. Application granted. HMRC was joined as a party and permission was given for the proposed amendments because the claims were arguable on the assumed facts. The CPR 19.2 joinder test was therefore satisfied.
2. The distinction between tax liability, assessment and recovery machinery was material. The Whitney v Commissioners for the Inland Revenue approach treated liability as distinct from assessment and recovery. The Taxes Management Act 1970 provisions, including section 59B, arguably established the amount payable under a self-assessment and the resulting debt, but did not themselves create the underlying liability.
3. The statutory time limits and finality provisions ordinarily protect the relationship between taxpayer and Revenue. They did not necessarily prevent a third-party beneficial owner from raising, in proprietary or equitable proceedings, the anterior question whether any genuine tax liability existed. The court considered that question particularly arguable where the declared income was fictitious and the challenge came from the beneficial owner of the funds rather than the taxpayer.
4. The unjust enrichment claim was arguable because the authorities relied upon by HMRC assumed a valid legal obligation. If no genuine liability existed, there could arguably be enrichment and injustice. Similarly, the bona fide purchaser defence was arguable because the discharge of a fictitious or voluntarily created debt might not amount to true value. The cases concerning payment of one trust’s money to discharge another trust’s debt arose in materially different circumstances.
5. Subrogation was a remedy, not a cause of action, and the proposed subrogation claim did not appear clearly to fall within the recognised boundaries of the remedy. Nevertheless, it formed part of the potentially available remedial spectrum and could be pleaded without materially widening the trial.
6. The issues were best determined after the full factual background had been established, including the tracing issues and the position of all relevant parties.