Legitimate expectation and reliance on HMRC guidance
The common law concept of legitimate expectation is not unique to the UK, explains Donald Drysdale, and its relevance to UK tax law is still evolving.
Although UK tax legislation is enacted by Parliament, HMRC need to exercise some discretion in collecting and managing taxes. In doing so they issue statements including statutory clearances, non-statutory clearances and assurances given to particular taxpayers or representative bodies, and they publish other material in the form of extra statutory concessions, statements of practice, HMRC’s internal manuals, guidance notes, tax guides, briefing notes and bulletins.
Where HMRC’s statements or guidance mislead a taxpayer to his detriment, he may have a ‘legitimate expectation’ that HMRC will treat him in a certain way and is protected by the courts on the basis that the principles of fairness, proportionality, predictability and certainty should not be disregarded.
Mansworth v Jelley
Some tax litigation seems to have almost endless reverberations. Mansworth v Jelley was such a case. It concerned unapproved share options granted to the taxpayer in the early 1980s, exercised in 1989 and 1991, with the resulting shares being sold shortly afterwards.
The point at issue was how the taxpayer’s acquisition cost was to be computed for capital gains tax purposes. Was it to be taken as the market value of the shares at the time of acquisition, as the taxpayer claimed? Or was it the market value of the option at the time it was granted, plus the consideration paid on exercise of the option, as the then Inland Revenue contended?
Revenue guidance published in 2003 confirmed that pre-10 April 2003 Mansworth v Jelley type losses would be allowed.
The Revenue lost before the General Commissioners, and again in December 2002 at the Court of Appeal. There was a flurry of activity as other taxpayers, relying on this judgment, submitted capital loss claims. The government then changed the law from 10 April, 2003, so for all options exercised on or after that date the arguments that the Revenue had advanced would prevail.
Revenue guidance published in 2003 confirmed that pre-10 April 2003 Mansworth v Jelley type losses would be allowed. Then in 2009 HMRC changed their guidance, saying that any still-open claims for such losses would not be allowed. In 2013 HMRC decided to use their collection and management powers to allow relief for such losses to the extent that taxpayers could show that, on the balance of probabilities, they had relied on the 2003 guidance to their detriment and legitimate expectation could have been demonstrated at the time, even if it could no longer be demonstrated because of delay.
This is still relevant to many taxpayers because capital losses, by their nature, can be carried forward and may not be used for many years.
Legitimate expectation examined
The principles of legitimate expectation in tax matters have been the focus of much attention since Mansworth v Jelley. The matter has been considered in some detail very recently, in a High Court judgment on 11 November, 2015 on an application for judicial review in R (oao Hely-Hutchinson) v HMRC.
This case concerned HMRC’s rejection of the taxpayer’s claim for Mansworth v Jelley type losses for 1999 to 2002 inclusive. He asserted a legitimate expectation to claim those capital losses, based on the Revenue’s 2003 guidance, and he contended that his claim shouldn’t be frustrated by HMRC’s revision of their guidance in 2009. He also complained that HMRC had discriminated against him without justification, because they’d agreed many other Mansworth v Jelley loss claims and repaid tax in those claims without opening enquiries.
Delivering her judgment, Mrs Justice Whipple recognised established authorities supporting the general principle that HMRC should be held to their published statements – because the publication of those statements is in the public interest, provides certainty amongst taxpayers, is part of the cooperative relationship between HMRC and the public, and is ultimately part of HMRC’s tax collection function.
She concluded that HMRC were required to consider whether it was fair to taxpayers to withdraw the 2003 guidance. This placed HMRC under an obligation to perform a ‘balancing exercise’, weighing taxpayers’ legitimate expectations from the 2003 guidance, and the consequent unfairness of withdrawing it in 2009, against the public interest in collecting the tax due under the statute as HMRC now interpreted it.
Legitimate expectation may apply across all taxes, but some claims based on the concept have failed
The Court held that legitimate expectation on the part of the taxpayer had been established, and that HMRC had failed to consider other aspects of unfairness claimed by the taxpayer. The case was remitted to HMRC to make a fresh decision, taking into account all aspects of unfairness.
Legitimate expectation may apply across all taxes, but some claims based on the concept have failed. HMRC v Noor in 2013 was one such case, where the First-tier Tribunal held that the taxpayer had legitimate expectation that certain VAT should be repaid, but on appeal the Upper Tribunal concluded that the First-tier Tribunal had exceeded its jurisdiction.
While Mansworth v Jelley has provided a useful testing ground for legitimate expectation, it would be wrong to regard the concept as restricted to such cases. The principles of legitimate expectation in tax law are well established by case law and rehearsed in the Hely-Hutchinson judgment.
In R v Board of Inland Revenue, ex p MFK Underwriting Agencies Ltd in 1990, Bingham LJ said: “No doubt a statement formally published by the Inland Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them.”
In R (oao Davies and Gaines-Cooper) v HMRC in 2011, Lord Wilson was more specific when he clarified that a “statement formally published … to the world” must also be clear, unambiguous and devoid of relevant qualification to give rise to a substantive legitimate expectation of particular tax treatment.
The degree of ‘unfairness’ or ‘disproportionality’ must be demonstrably very high if judicial review is to be granted.
A taxpayer’s legitimate expectation to be treated in a particular way can be frustrated if there is an overriding public interest in imposing different treatment, and Lindsay J summarised it thus in R (oao Bamber) v HMRC in 2005: “Where there is a substantial public interest in the public body behaving as it has done or as it intends to do then, absent the marked degree of unfairness or of disproportionality illustrated by the cases, relief of the character of judicial review against the public body can properly be and is, indeed, likely to be, withheld.”
The degree of ‘unfairness’ or ‘disproportionality’ must be demonstrably very high if judicial review is to be granted. In other words, the proposed departure from earlier assurances must be so unfair as to constitute an abuse of HMRC’s powers. The decision must be so outrageously unfair that it should not be allowed to stand.
Accordingly, there is a need to carry out a ‘balancing exercise’ at the point where a legitimate expectation has been identified, to determine whether there is an overriding public interest.
Article supplied by Taxing Words Ltd