In Hely-Hutchinson the court quashed closure notices because HMRC had not properly considered whether assessing tax that was technically due would be so unfair as to amount to an abuse of power.
The taxpayer had relied upon clear, unambiguous and unqualified HMRC guidance and had a legitimate expectation of being treated in accordance with that guidance. That expectation could not be frustrated if doing so would be so unfair as to amount to abuse of power. Such unfairness can be caused by something other than the taxpayer relying upon HMRC guidance to their detriment. In this case HMRC had not properly considered the unfairness of treating taxpayers differently. So the closure notices refusing so-called “Mansworth v Jelley” losses were quashed and the matter was sent back to HMRC to reconsider.
This decision shows that the circumstances in which HMRC had previously allowed open claims for Mansworth v Jelley losses were far too restrictive because they required that the taxpayer would suffer detriment were the losses denied.
Whilst this decision may have come too late for many taxpayers, there may be other circumstances in which HMRC should not collect tax because doing so would result in its published guidance being applied discriminately. In appropriate circumstances this may offer taxpayers another defence against an HMRC assessment.
Briefly the facts were these:
- The taxpayer entered into an employment income tax planning scheme involving options.
- In 2003 HMRC published guidance setting out a view of the law that would have allowed the taxpayer to have claimed a loss on the exercise of his options (a so-called “Mansworth v Jelly” loss).
- The taxpayer relied upon that guidance and submitted a loss claim in 2003.
- HMRC opened an enquiry into the claim. The enquiry dragged on until 2009, when HMRC issued new guidance saying its 2003 guidance had been wrong and that it would apply its new view in any open enquiry.
- In the meantime the taxpayer had submitted his tax returns for subsequent tax years, in which he sought to set-off the claimed Mansworth v Jelley losses against gains made in those years.
- It took HMRC until 2014 to issue the final closure notices refusing the taxpayer’s claims. It was these closure notices that were the subject of this judicial review.
The taxpayer sought judicial review of the closure notices on the following grounds:
- He had a legitimate expectation that his claim would be dealt with in accordance with the 2003 guidance.
- HMRC’s refusal of the claims and its manner of doing so was so unfair as to be an abuse of power.
- HMRC had breached the principle that all taxpayers should be treated fairly and consistently because other Mansworth v Jelley loss claims had been allowed.
- Dragging on the enquiry into the loss claim for 11 years was an unlawful use of statutory power to enquire into a taxpayer’s affairs.
HMRC argued that the taxpayer had known since 2003 that the claims were not agreed and he could not, therefore, show any detrimental reliance.
Court’s view on the law
The court set out the following principles:
- The duty to collect tax is not a narrow duty which requires HMRC to enforce the statute come what may. It is a broad duty, exercised by means of a wide managerial discretion, within which is embedded the obligation to treat taxpayers fairly. HMRC may be required to forgo tax due if collecting it would cause such unfairness as to amount to an abuse of power.
- The circumstances in which it would be so unfair as to be an abuse of power can go beyond a taxpayer relying on HMRC guidance to their detriment. HMRC can be required to apply the “wrong” tax treatment in order to ensure consistency of treatment where the alternative would be so unfair that it would constitute an abuse of power.
- A statement by HMRC that is clear, unambiguous and devoid of relevant qualification can give rise to a legitimate expectation of a particular tax treatment.
- However, that expectation can be frustrated if there is an overriding public interest, provided that doing so would not be so unfair as to constitute an abuse of power.
- The degree of unfairness involved must be very high for judicial review to be successful.
Decision in this case
Applying these principles to the facts the court held:
- The taxpayer had relied upon clear, unambiguous and unqualified HMRC guidance and clearly fell within its terms. He, therefore, had a legitimate expectation that his claim for a capital loss would be taxed in accordance with the 2003 guidance. This was the case even though he could not have expected a tax loss would arise when he exercised his options in 1998 and 1999.
- His expectation was not lessened by HMRC changing its view of the law.
- The fact that an enquiry was opened in 2003 (and kept open) does not lessen the intrinsic unfairness of treating taxpayers who were in an identical position differently.
- The fact that the taxpayer had not suffered detriment by relying upon HMRC’s guidance was one factor to be taken into account. However, it was wrong to stop there. HMRC should have considered the comparative unfairness of different taxpayers being taxed differently.
- Some weight should be attached to the fact that HMRC took so long to rectify its mistake. The taxpayer was entitled to think his tax affairs would be settled more quickly than 11 years.
It was not the court’s job to weigh these factors and decide whether the closure notices were so conspicuously unfair as to constitute an abuse of power. That was for HMRC. However, the judge made of point of recording his instinctive response, which was that HMRC’s change of policy in 2009 was “very unfair” and discriminatory, because some taxpayers had been able to benefit from the 2003 guidance whilst others lost out.
Once a legitimate expectation had been established (as it has been in this case) HMRC was obliged to balance all the aspects of unfairness to determine whether collecting the tax would be an abuse of power. In this case it had failed to do that and so the closure notices must be quashed.
The matter was remitted to HMRC to reconsider, taking into account all the aspects of unfairness.