In The Queen oao Aozora GMAC Investment v HMRC [2019] EWCA Civ 1643 (8 October 2019), the Court of Appeal found that a company, which had relied on HMRC guidance, had not established a legitimate expectation.
Aozora UK had set up Aozora US, which was tax resident in the US. Aozora UK made loans to Aozora US and received interest payments in respect of the funds advanced. The US imposed withholding tax on the interest payments, whilst Aozora UK was liable to corporation tax in the UK on interest received. HMRC denied unilateral credit relief under ICTA 1988 s 790 so that Aozora UK was not allowed to offset US withholding tax against its liability to UK corporation tax. This was on the basis that the provisions of ICTA 1988 s 793A prevented the availability of unilateral credit relief.
Aozora UK contended that the terms of HMRC’s international tax manual contained a representation by HMRC that the scope of s 793A was limited to precluding the availability of credit relief only in one particular circumstance which, it was common ground, did not apply to Aozora UK. Aozora UK therefore argued that the representation gave rise to a legitimate expectation.
The court agreed that the manual contained a clear and unambiguous representation that s 793A did not apply in Aozora’s circumstances. Furthermore, the court rejected HMRC’s contention that because ‘the ordinarily sophisticated taxpayer knows that HMRC apply the law but do not make the law’, HMRC guidance cannot give rise to a legitimate expectation. It was ‘inherent in the nature of guidance that it only fulfils the function of assisting in the management of the collection of taxes if taxpayers can rely on it’.
The court went on to consider whether the representation had given rise to a legitimate expectation. It noted that ‘wherever an express representation is established it is still essential for the court to consider all the factors relevant to whether it would be unfair to allow HMRC to frustrate an expectation arising from that promise, assurance or representation and further that a high level of unfairness is necessary to override the public interest in the collection of taxes’.
Disagreeing with the High Court, the Court of Appeal rejected the notion of a ‘precise dividing line between the degree of reliance that will be sufficient, namely real and substantial reliance, and the degree that will be insufficient, namely merely “drawing support or comfort” from the representation. Reliance could not be treated in a binary way as being present or absent, depending on ‘a close textual analysis of how the witness expresses his different levels of awareness of the representation at any particular time’.
Similarly, the court did not consider that the fact that Aozora had instructed an external adviser who had relied on the representation, rather than relied on it directly itself, was fatal to its claim of legitimate expectation. In addition, the existence of Aozora’s legitimate expectation did not depend on whether its adviser had expressly mentioned HMRC’s guidance.
The court found, however, that Aozora’s reliance on the representation made in the manual was weak because ‘the representation was merely as to HMRC’s opinion about the construction of a relatively straightforward legal provision; and Aozora sought and obtained specialist advice on the meaning of the legislation and how it would apply to its particular circumstances’. As Aozora’s specialist tax advisers were not at any great disadvantage compared to HMRC, when coming to their own view of the law, there was no unfairness.
Why it matters: This is a rather convoluted decision on legitimate expectation. It brings much needed clarification, for instance, by rejecting the notion that the taxpayer must show a high degree of reliance to his detriment. But it also suggests that relying on HMRC guidance is not sufficient to establish legitimate expectation in circumstances where specialist tax advice on the meaning of the law is obtained.
In The Queen oao Aozora GMAC Investment v HMRC [2019] EWCA Civ 1643 (8 October 2019), the Court of Appeal found that a company, which had relied on HMRC guidance, had not established a legitimate expectation.
Aozora UK had set up Aozora US, which was tax resident in the US. Aozora UK made loans to Aozora US and received interest payments in respect of the funds advanced. The US imposed withholding tax on the interest payments, whilst Aozora UK was liable to corporation tax in the UK on interest received. HMRC denied unilateral credit relief under ICTA 1988 s 790 so that Aozora UK was not allowed to offset US withholding tax against its liability to UK corporation tax. This was on the basis that the provisions of ICTA 1988 s 793A prevented the availability of unilateral credit relief.
Aozora UK contended that the terms of HMRC’s international tax manual contained a representation by HMRC that the scope of s 793A was limited to precluding the availability of credit relief only in one particular circumstance which, it was common ground, did not apply to Aozora UK. Aozora UK therefore argued that the representation gave rise to a legitimate expectation.
The court agreed that the manual contained a clear and unambiguous representation that s 793A did not apply in Aozora’s circumstances. Furthermore, the court rejected HMRC’s contention that because ‘the ordinarily sophisticated taxpayer knows that HMRC apply the law but do not make the law’, HMRC guidance cannot give rise to a legitimate expectation. It was ‘inherent in the nature of guidance that it only fulfils the function of assisting in the management of the collection of taxes if taxpayers can rely on it’.
The court went on to consider whether the representation had given rise to a legitimate expectation. It noted that ‘wherever an express representation is established it is still essential for the court to consider all the factors relevant to whether it would be unfair to allow HMRC to frustrate an expectation arising from that promise, assurance or representation and further that a high level of unfairness is necessary to override the public interest in the collection of taxes’.
Disagreeing with the High Court, the Court of Appeal rejected the notion of a ‘precise dividing line between the degree of reliance that will be sufficient, namely real and substantial reliance, and the degree that will be insufficient, namely merely “drawing support or comfort” from the representation. Reliance could not be treated in a binary way as being present or absent, depending on ‘a close textual analysis of how the witness expresses his different levels of awareness of the representation at any particular time’.
Similarly, the court did not consider that the fact that Aozora had instructed an external adviser who had relied on the representation, rather than relied on it directly itself, was fatal to its claim of legitimate expectation. In addition, the existence of Aozora’s legitimate expectation did not depend on whether its adviser had expressly mentioned HMRC’s guidance.
The court found, however, that Aozora’s reliance on the representation made in the manual was weak because ‘the representation was merely as to HMRC’s opinion about the construction of a relatively straightforward legal provision; and Aozora sought and obtained specialist advice on the meaning of the legislation and how it would apply to its particular circumstances’. As Aozora’s specialist tax advisers were not at any great disadvantage compared to HMRC, when coming to their own view of the law, there was no unfairness.
Why it matters: This is a rather convoluted decision on legitimate expectation. It brings much needed clarification, for instance, by rejecting the notion that the taxpayer must show a high degree of reliance to his detriment. But it also suggests that relying on HMRC guidance is not sufficient to establish legitimate expectation in circumstances where specialist tax advice on the meaning of the law is obtained.
