Listed for hearing before the Court of Appeal today is the case of R (Hely Hutchinson) v HMRC. The case revolves around the controversial Mansworth v Jelley claims. The taxpayer Ralph Hely-Hutchinson was successful before the High Court in this judicial review (which I reviewed in a lengthy case note for the British Tax Review which can be downloaded here), which HMRC are today appealing.
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.
What about open cases (in order words, instances where there is an open enquiry)? Would those persons get the same treatment?
That is precisely the issue which arose for Ralph Hely-Hutchinson. The taxpayer 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. Whipple J in the High Court found that this breached the taxpayer’s legitimate expectation that he would obtain the treatment specified in the 2003 guidance. For Whipple J, it was ultimately a question of whether HMRC could frustrate a legitimate expectation in circumstances which would lead to significant unfairness to the taxpayer. The court balanced the duty of fairness against the duty to collect taxes and held in favour of the taxpayer. One significant component of Whipple J’s reasoning was that it was intrinsically unfair to provide differing treatment to persons who had their cases closed as against those whose cases were open. A problem with this approach however is that in situations where different treatment is provided to persons in similar legal and factual positions, the proper approach for the court is to ask if there are rational reasons for the distinction in treatment. The imposition of sections 9A and 29 TMA 1970 could arguably constitute a rational reason for distinguishing between the taxpayers, although this specific argument was not put to the judge.
The appeal will be heard by a strong bench: Sales LJ, Arden LJ and McCombe LJ and is scheduled to last for 10 hours, thus spanning two days. It is a finely balanced and important case which will illuminate further upon the relationship between the duty to act fairly towards taxpayers and HMRC’s primary duty to collect and manage taxes, as well as the effect of this interrelationship with regard to HMRC guidance. In particular, the assessment will concern how this interrelationship constrains HMRC from retroactively withdrawing treatment prescribed in a publication which is based upon an incorrect interpretation of the relevant law.