Hely-Hutchinson, legitimate expectation and judicial review

The decision of newly appointed judge Whipple J in the Administrative Court in R (oao Hely-Hutchinson) v HMRC [2015] EWHC 3261 (Admin) on 11 November 2015 (reported in Tax Journal, 20 November 2015) adds to the growing body of case law which holds that, to found a successful action for judicial review of a decision by a public body such as HMRC withdrawing or disapplying a previous statement of policy or guidance – at least where the statement was published to taxpayers at large – it is not necessary for the applicant to have relied on such statement to his detriment.  

 

Rather, the test is whether it is ‘conspicuously unfair’ for HMRC to resile from its statement, This is subject, however, to balancing the applicant’s legitimate expectations generated by the statement, and the consequent unfairness of withdrawing it, against the public interest in collecting the tax due under the statute. As stated by Lord Hoffmann in R (oao Bancoult) v Secretary of State [2008] UKHL 61 at [60], detrimental reliance is only one relevant consideration in determining whether it would be an abuse of power for the public body to frustrate the applicant’s legitimate expectation to be treated in accordance with its statement. (This position was reiterated by Wyn Williams J in R (oao Cameron) v HMRC [2012] EWHC 1174 (Admin) at [68] and [92], and by Legatt J in R (oao GSTS Pathology LLP) v HMRC [2013] EWHC 1801 (Admin) at [72].)

 

The Hely-Hutchinson decision is particularly important: the lack of detrimental reliance was central to HMRC’s case and to its whole approach to taxpayers’ claims. Further, it is the first tax case where a judicial review application based on ‘legitimate expectations’ has actually succeeded in the absence of any finding of detrimental reliance.

 

The case concerned HMRC’s rejection of the applicant’s claims for so-called ‘Mansworth v Jelley losses’. Readers will recall that in Mansworth v Jelley [2002] EWCA Civ 1829, the Court of Appeal held that, under what is now TCGA 1992 s 17(1)(b) and s 144(2), the deductible acquisition cost (base cost) of shares acquired pursuant to an employee share option was their market value at the date of acquisition. (The Revenue, by contrast, had argued that the base cost was the market value of the option when granted – generally nil – plus the price paid on exercise.)  

 

Following the Court of Appeal decision, the Revenue published a technical note in January 2003 explaining that, in consequence, in the case of shares acquired on exercise of ‘unapproved’ employee share options, the CGT base cost would be the market value of the shares at the date of acquisition plus (under TCGA 1992 s 120(4)) any amount charged to income tax on exercise. Since the amount charged to income tax on exercise was equal to the market value of the shares minus the option exercise price, this gave rise to double counting of that amount as base cost. In many cases, this created an allowable capital loss on disposal, even if the shares were disposed of for no less than their market value at the date of acquisition. A further Revenue notice published in 2003 acknowledged this and set out detailed guidance regarding the time limits for ‘claiming capital losses which arise as a result of the decision in Mansworth v Jelley’, and how to go about claiming such losses.

 

The law was changed on 10 April 2003 by the introduction of TCGA 1992 s 144ZA, restricting the base cost to the market value of the option when granted plus the price paid for the shares on exercise. However, this change only applied to options exercised on or after 10 April 2003. The 2003 guidance continued to apply to options exercised before that date.

 

The logic of the published guidance was criticised in the tax press almost immediately in January 2003. Nonetheless, HMRC continued to apply the 2003 guidance for more than six years. It was not until March 2009 that HMRC took further legal advice and published amended guidance – Revenue & Customs Brief 30/09. Brief 30/09 stated that HMRC had now received advice that the 2003 guidance was wrong, and that the base cost of shares acquired on exercise of unapproved employee share options before 10 April 2003 was only the market value of the shares at the date of acquisition. HMRC would apply its new understanding of the law in cases where there was an open enquiry or appeal.

 

Meanwhile, HMRC had allowed numerous claims in accordance with the 2003 guidance. However, it had opened enquiries into around 600 claims relating to shares acquired under certain unapproved share option schemes, mainly in the banking sector where it considered the arrangements entailed avoidance of employers’ national insurance contributions. Mr Hely-Hutchinson’s claims, relating to shares acquired on exercise of unapproved options and disposed of between 1999 and 2002, were amongst those into which enquiries had been opened; the enquiries remained open in 2009.

 

HMRC published a further Revenue & Customs Brief 60/09 in September 2009 addressing the question of whether taxpayers might have a ‘legitimate expectation’ to be treated in accordance with the 2003 guidance. Brief 60/09 set out HMRC’s official position that HMRC’s primary duty was to apply the law correctly as it currently understood it, unless, in the circumstances, departure from its previous guidance was so unfair as to amount to an abuse of power; this would only be the case where the taxpayer could demonstrate that he had acted to his detriment in reasonable reliance on the guidance.

 

In 2014, HMRC issued closure notices accordingly, disallowing Mr Hely-Hutchinson’s loss claims on grounds that he had not provided any evidence that he had reasonably acted in reliance on the 2003 guidance and suffered detriment as a result.  

 

His claim for judicial review of the closure notices succeeded.   

 

Whipple J held that the authorities establish the general principle that HMRC should be held to its published statements, albeit in some circumstances HMRC can retreat from such statements.

 

HMRC’s central contention was that its duty was to collect the correct amount of tax: arguably, this prevailed over all other considerations – save, possibly, in cases of extreme prejudice caused by detrimental reliance. However, Whipple J considered that HMRC’s responsibility under TMA 1970 s 1 for ‘the collection and management’ of tax ‘embedded the obligation to treat taxpayers fairly’. HMRC ‘could be required to forgo tax which was due under the statute, if to do otherwise would cause such conspicuous unfairness as to constitute an abuse of [its] powers’. Such unfairness was not limited to cases of detrimental reliance. In particular, HMRC could be ‘required in an appropriate case to continue to apply the wrong tax treatment to ensure consistency of treatment, where the alternative would be conspicuously unfair and an abuse of power’.

 

She recalled Bingham LJ’s well known dictum in R v IRC, ex p MFK Underwriting Agencies Ltd [1989] STC 873 at 892e: ‘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.’ Such a statement ‘formally … published to the world’, if clear, unambiguous and devoid of relevant qualification, could give rise to a substantive legitimate expectation of particular tax treatment.

 

However, a taxpayer’s legitimate expectation to be treated in a particular way could be frustrated if there was an overriding public interest in imposing different treatment. The question was whether the unfairness tipped the scales so far towards the taxpayer as to make frustration of his legitimate expectation an abuse.

 

The 2003 guidance was a clear, unambiguous and unqualified statement formally published to the world representing the Revenue’s official view. The claimant fell within its terms and relied on it in submitting his claims. Therefore, he had a legitimate expectation that his claims for capital losses would be allowed in accordance with the guidance.

 

HMRC could not simply withdraw the 2003 guidance without considering whether, in all the circumstances, this was fair to taxpayers. Its obligation to act fairly required it to balance taxpayers’ legitimate expectations generated by 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 it now interpreted it.

 

As regards Brief 30/09, nothing on its face suggested that HMRC considered whether it was fair; and if it was unfair, how unfair, and what could or should be done to mitigate that unfairness. As regards the decision to issue the closure notices to the claimant, moreover, the issuing officer’s focus was too narrow, because she was looking for strong evidence of detrimental reliance.

 

Whipple J identified four particular features of unfairness here. The first was that of ‘comparative unfairness’. Of those who had a legitimate expectation arising out of the 2003 guidance, some at least obtained the ‘promised benefit’, but there was a subset of around 600, including the claimant, who did not. The only reason for this was that enquiries had been opened into their claims. There was obvious unfairness in subjecting that subset to a tax liability which the others had escaped. It was ‘discriminatory’. The second feature of unfairness was that Brief 30/09 took away the claimant’s legitimate expectation that past claims would be taxed in a particular way: it had retrospective effect. The third feature was that the situation had arisen because of a mistake made by the Revenue in 2003. The fourth was that HMRC took so long (six years) to recognise its mistake.

 

HMRC had failed to consider these factors, and thus failed to balance all aspects of unfairness to determine whether, overall, there would be conspicuous unfairness in collecting the tax due. Therefore, Whipple J quashed the closure notices and remitted the matter to HMRC to take a fresh decision, taking account of all aspects of unfairness. Evaluation of the balancing exercise was not for her but for HMRC, armed with all necessary information. However, she recorded her own instinctive response, that Brief 30/09 and the closure notices were ‘very unfair’.   

 

This strong judgment has significant ramifications for HMRC and taxpayers. Clear published HMRC guidance gives rise to substantive legitimate expectations of taxpayers to be treated in accordance with its terms. Withdrawal or disapplication of such guidance is susceptible to judicial review if this would result in conspicuous unfairness. HMRC’s long held view that the taxpayer has to have relied on the guidance to his detriment has been decisively rejected in this case. Conspicuous unfairness may also result from unequal or discriminatory treatment of different taxpayers, and from retrospective withdrawal or disapplication of guidance in relation to past transactions or claims. In such circumstances, HMRC cannot rely on a ‘trump card’ that its guidance was wrong and that it has an obligation to collect the correct amount of tax.