What is rectification and when will the FTT grant it?

In the recent case of Cooke v HMRC [2024] UKFTT 272 (TC), the FTT decided that it could resolve a taxpayer’s mistake in its shareholding with the result that the taxpayer could obtain entrepreneurs’ relief on the disposal of shares in a company, even though he was technically under the 5% threshold. The case illustrates that, following Lobler [2015] UKUT 152 (TCC), the FTT has jurisdiction to grant taxpayers relief on the basis of rectification, provided the FTT has a high degree of certainty about what the High Court would do.

What is rectification?

Rectification is an equitable remedy through which a document can be amended or rectified so that it accords with the intention of the parties at the time that it was made. Thus, a claim for rectification does not alter the terms agreed between the parties, but rather alters the document so that it reflects what was agreed.

Rectification is usually pursued through an application to the High Court and a series of principles have been established through these court proceedings. The core principles were set out by the Court of Appeal in Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560. Under these principles, the party seeking rectification must show four things:

1. The parties had a common and continuing intention in respect of a particular matter in the instrument, in this case, a contract, to be rectified, whether or not that intention amounts to an agreement;
2. There was an outward expression of accord, i.e. something that the parties can point to exhibiting that common intention;
3. The common intention continued at the time the contract was executed; and
4. The contract did not reflect the common intention, by mistake.

Some additional principles have also been established in other cases, including that the standard of proof is on the balance of probabilities. There has also been some discussion of whether rectification can be sought if the only effect of the order for rectification will be to secure a fiscal or tax benefit. In Racal Group Services [1995] STC 1151, the conclusion was reached that rectification will not be ordered if the parties’ rights will be unaffected and the only effect is a fiscal benefit.

Should clients pursue rectification separately, or rely on FTT powers?

Where a taxpayer finds themselves in a position, such as Mr Cooke, where the tax treatment of a transaction, income or gain is not as expected as a result of a mistake in an instrument, the question arises whether they should pursue a claim for rectification in the High Court or could instead rely upon the FTT using this power to consider what the High Court would have done.

It may be appealing to taxpayers to try to consolidate the question into a single tax appeal, particularly if there are other elements of the tax dispute, not least because the costs of pursuing two pieces of litigation are inevitably higher. However, taxpayers would require overwhelming evidence of the intentions to not pursue a High Court claim for rectification first. As pointed out by the FTT, the bar for the FTT to grant this deemed rectification is arguably higher than an actual High Court claim, because the FTT have to be satisfied that the High Court would have granted it. It may also be the case that obtaining rectification in fact resolves the tax dispute without a further hearing in the tribunal.