“Health warnings” and legitimate expectations: Samarkand

In the recent Samarkand case, the Court of Appeal upheld the conclusions of the Upper Tribunal, thereby dismissing the taxpayers’ appeals and judicial review claims, in addition to dismissing HMRC’s cross appeal. The case itself has gained attention generally for being one of the many cases concerning schemes which attempted to utilise the now notorious film tax relief. Whilst the discussion in the case primarily turned on whether the relevant entities were engaged in a “trade”, the taxpayers also sought to rely upon the argument that HMRC’s internal manual, the Business Income Manual, had given rise to a legitimate expectation. It was claimed that the taxpayers had simply followed the advice in HMRC’s Manual.

The Court of Appeal succinctly summarised at paras 118 and 119 what the taxpayers would have to demonstrate in order for their claim to be successful:

“The pioneer decision in this area was R v IRC, ex p. MFK Underwriting Agencies Ltd [1990] 1 WLR 1545, where a strongly constituted Divisional Court (Bingham LJ and Judge J) gave important guidance on the circumstances in which a taxpayer might be able to found a legitimate expectation on rulings or statements of practice issued by the Revenue…Of particular relevance to the present case are the following observations of Bingham LJ at 1569:

“I am, however, of the opinion that in assessing the meaning, weight and effect reasonably to be given to statements of the Revenue the factual context, including the position of the Revenue itself, is all-important. Every ordinarily sophisticated taxpayer knows that the Revenue is a tax-collecting agency, not a tax-imposing authority. The taxpayer’s only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law … No doubt a statement formally published by the Inland Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them. But where the approach to the Revenue is of a less formal nature a more detailed inquiry is in my view necessary. If it is to be successfully said that as a result of such an approach the Revenue has agreed to forgo, or has represented that it will forgo, tax which might arguably be payable on a proper construction of the relevant legislation it would in my judgment be ordinarily necessary for the taxpayer to show that certain conditions had been fulfilled. I say “ordinarily” to allow for the exceptional case where different rules might be appropriate … First, it is necessary that the taxpayer should have put all his cards face upwards on the table … Secondly, it is necessary that the ruling or statement relied upon should be clear, unambiguous and devoid of relevant qualification.”

For such a claim to succeed, the taxpayers would have had to demonstrate that there was a representation from HMRC in the Manual which was “clear, unambiguous and devoid of relevant qualification” and that frustrating such a resulting legitimate expectation would be so unfair as to amount to conspicuous unfairness.”

The problem for the taxpayers case however was that the relevant HMRC Manual which they sought to rely upon was “permeated with qualifications relating to tax avoidance” (para 126). In essence, the taxpayers lost their case on the basis that the Manual was not “devoid of relevant qualification” as it provided that taxpayers could not rely upon the Manual if it were to be used for tax avoidance.

This is not the first time that a “health warning” relating to tax avoidance has helped to defeat a taxpayer’s public law claim. In R v Inspector of Taxes, ex parte Fulford-Dobson [1987] 1 QB 978, the taxpayer concerned attempted to take advantage of an “Extra-Statutory Concession”, but was foiled in the attempt to do so by virtue of a health warning which preceded the text of the Extra-Statutory Concession. The proviso stated that a “concession will not be given in any case where an attempt is made to use it for tax avoidance” and in the circumstances, the court held that the taxpayer was attempting to abuse the concession in such a manner. The relevant parts of the judgment are found at pages 991-992:

“Mr. Moses submitted for the revenue that the rubric [i.e the proviso to the ‘Extra-statutory concession’] was to be construed as part of the concession, and I have already indicated that I so regard it. As I have said before the rubric is part of each concession and is so to be read…. It seems to be plain as a pikestaff upon the facts that this was tax avoidance as that term is used in the rubric [i.e the proviso to the concession]. The taxpayer here, Mr. Fulford-Dobson, suffered no reduction in income, suffered no loss, incurred no expenditure…[nothing which] Parliament intended to be suffered by any taxpayer qualifying for a reduction in his liability for tax…What was done was done deliberately for the admitted purpose of tax avoidance, but in total disregard of the clear words limiting the availability of the concession.”

In truth, health warnings are to be found in most HMRC publications and the Samarkand case provides just another example of how difficult it is to establish a legitimate expectation on the basis of publicly available HMRC advice and guidance. A trio of blogs (here, here and here) from last summer deal generally with the issue of legitimate expectations in the hands of taxpayers.

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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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