Listed for hearing before Mrs Justice Philippa Whipple (appointed on the 1st of October) in the High Court today is the case of R (Hely Hutchinson) v HMRC. The case revolves around the controversial Mansworth v Jelley claims.
The Mansworth v Jelley (2003) case concerned an assessment to CGT. The taxpayer in this case was granted options to purchase shares in JP Morgan at the market price of those shares. He duly exercised the options and thereafter, promptly sold the shares. The issue in dispute, between the taxpayer and HMRC, was whether the chargeable gain or loss ought to be calculated by reference to the proceeds from the sale of the shares, (a) minus the market value of the options when originally granted (which was nil) or (b) minus the market value of the options when exercised. The Court of Appeal ultimately held in favour of the latter construction, in other words, in favour of the taxpayer.
Following the case, the Inland Revenue issued guidance on the matter in 2003 to the effect that the chargeable gain or loss in such circumstances should be calculated on the disposal of shares acquired by such options by deducting both: the market value of the shares at the time the option was exercised; [and (controversially)] any amount chargeable to income tax on the exercise of that option
In 2009, Dave Hartnett and HMRC acknowledged this to be incorrect. The guidance was revised to provide that all that would be deductible would be the market price of the shares and not, additionally, the income tax that would be paid. As regards closed cases in which the earlier guidance was relied upon, HMRC’s position was that the revised 2009 guidance could not be applied and thus that the position created by the 2003 guidance would not be revisited.
The question thereafter turns to open cases.
A freedom of information request from August 2014 revealed that there are 650 taxpayers who have been affected by Mansworth v Jelley. 525 cases have closed in favour of HMRC, 42 cases have been closed in favour of the taxpayer and 83 cases remained unresolved as at June 2014. Of the 42 cases closed in favour of the taxpayer, 38 were closed for reasons such as no valid enquiries and 3 were accepted as falling within the doctrine of legitimate expectations.
Mike Truman helpfully sets out the details of the Hely-Hutchinson case in an article for Taxation magazine. The applicant relied upon the 2003 guidance, but the case was not closed by 2009 (owing to a dispute between HMRC and the applicant about the tax treatment of the scheme used to distribute the shares to him). Accordingly, the taxpayer was refused the 2003 guidance treatment, and subjected to the harsher (albeit correct) 2009 guidance. Patterson J gave the applicant leave to apply for Judicial Review on the basis of arguments put forward by Rory Mullan and Harriet Brown (acting pro bono), which (from a reading of the Taxation article, seem to) revolve around abuse of power, unfairness, delay and failure to apply guidance consistently between taxpayers. The judge was “just persuaded” that there was an arguable case. Now the full hearing is taking place before Mrs Justice Philippa Whipple.
The importance of the case stems from the fact that many issues of HMRC practice will be subjected to judicial light. For instance, can HMRC retroactively apply changed guidance? How far is HMRC constrained by the doctrine of legitimate expectations as regards changing its policy in light of a change of understanding of the law? It should not be taken lightly the fact that HMRC got it plain wrong in 2003 and so taxpayers, and as such, should taxpayers have known better? Can HMRC apply inconsistent treatment to taxpayers simply because some taxpayers have had their cases closed?
However, the applicant will probably be discouraged by the fact that there have only ever been 4 successful legitimate expectations cases against HMRC (Unilever, Cameron, Greenwich University and GSTS). In this area of law, given constraints upon the public purse, and the need to close cases for the sake of a consistent stream of revenue to the exchequer, there is a significant hurdle to be overcome to force HMRC to be bound by a practice which is inconsistent with the primary law.
One thing going in Hely-Hutchinson’s favour however is the judge. Mrs Justice Whipple has written about the apparent exceptionalism to human rights applied to tax avoiders. Human rights, like privacy, should apply to all, she opines. Equality of treatment might likewise come within this bracket. Moreover, Whipple J represented the taxpayer in one of the 4 successful legitimate expectations case, namely GSTS.
A judge with an acute understanding of the vagaries of HMRC practice is undoubtedly reason for the applicant to be hopeful.