Bringing Mansworth v Jelley back to life

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.

Background

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.

Hely-Hutchinson

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.

Importance

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.

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About taxatlincolnox

Tax PhD candidate, College Lecturer and Tutor at Oxford University; Researcher at King's College London and Social Sciences Tutor with the Brilliant Club. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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3 Responses to Bringing Mansworth v Jelley back to life

  1. The judgment was handed down today and Mrs Justice Whipple DBE, found, inter alia:-
    There is a general principle that the Commissioners of Tax should be held to their published statements – cf Lord Wilson Gaines-Cooper
    Judicial Review is open where a published statement is peremptorily reversed
    The duty to collect tax is not a ‘trump card’
    There must be a substantial public interest to disregard the legitimate expectation of a taxpayer and there cannot be ‘conspicuous unfairness’.
    The 2003 Guidance of Mansworth v Jelley was a formally published statement of the Revenue which was clear, unambiguous and devoid of relevant qualification
    Cameron is authority that once HMRC corrected their Guidance it cannot apply retrospectively and must manage the withdrawal fairly
    “fairness” is at the heart of HMRC’s dealings with the public and must look at all the circumstances surrounding the Guidance
    “unfairness” is not limited to Detrimental Reliance – it is one factor in the balancing exercise, but it does not stop there
    HMRC’s argument that by opening an enquiry into taxpayers, they become a subset of taxpayers, is no answer to the ‘unfairness’, and the fact of a legal and factual difference between taxpayers subject to an enquiry and those not, does not make it fair
    Comparative fairness was not properly considered by HMRC
    Rashid was also relevant in HMRC not profiting from their inaction
    Guidance 30/09 was not a prospective correction
    The delay was also relevant in deciding fairness; the taxpayer was not under an obligation to take steps to get his Inquiry closed

    This is the link to the full judgment : http://www.bailii.org/ew/cases/EWHC/Admin/2015/3261.html

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  2. Pingback: Report on the Mansworth v Jelley hearing in the Court of Appeal | taxatlincolnox

  3. Pingback: The latest twist in the Mansworth v Jelley tale | taxatlincolnox

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