Oxfam’s tag a bag scheme, whereby you make a claim for gift aid on donations of goods rather than just cash, has come under scrutiny from the tax community. It has been claimed by some that the scheme falls foul of the law. But HMRC’s guidance explicitly makes an allowance for it (see: Chapter 3.42 Claiming Gift Aid when goods are sold by, and the proceeds gifted to, charities of HMRC’s ‘Gift Aid’ guidance). If the scheme does indeed fail under the law, surely there is a defence in saying that HMRC took the taxpayer up the garden path?
The doctrine of legitimate expectations is the most developed tool to prevent public authorities from reneging on representations made to citizens. There are broadly two limbs to the doctrine and if satisfied, a public authority will be bound to its representation. Put in the context of tax, it means that HMRC will be to a position it has represented to a taxpayer if (i) the representation was clear, unambiguous and devoid of relevant qualification and (ii) reneging on that position would be so unfair as to amount to an abuse of power.
However, where HMRC’s representation to the taxpayer has been based upon an incorrect assessment of the law, the second limb of the legitimate expectations test will be more difficult to satisfy. As has been often quipped by the courts (first stated by the great Lord Bingham (then LJ) in MFK Underwriting), the taxpayer’s only prima facie expectation is that she will be taxed in accordance with the law. If a taxpayer has relied upon an HMRC representation to her detriment such that she would have to sell assets to pay the tax properly due, it may be considered so unfair as to amount to an abuse of power for HMRC to seek to enforce the law. As was held in the case of Hely-Hutchinson (a case on which I have written in greater detail in the second issue of this year’s British Tax Review), it may also be so unfair as to amount to an abuse of power to insist upon the strict legal position against one person, but not another where their tax affairs are identical.
If HMRC were to turn around and change its interpretation of the Gift Aid rules accordingly, applying the revised view across the board, the legitimate expectations argument would likely offer little consolation, as Oxfam already found out to its detriment in 2010 (h/t Aisling Donohue) (see the judgment here paragraphs 45-60). And if that state of affairs seems slightly unfair, then you’ll understand what inspired my PhD…