The author of this blog has written previously about the fabled ‘Mansworth v Jelley’ losses. It has been the feature of an extended published case note and two blogposts (here and here). The Court of Appeal heard the appeal in the Hely-Hutchinson case, which concerns these Mansworth v Jelley losses, two weeks ago (at which the author was present). It is not clear when judgment will be handed down, but it will likely be another few weeks (given that we are now in the Easter recess). This blogpost seeks to set out some thoughts on the oral hearing of the case.
The case essentially boils down to whether HMRC is permitted to “go back” on its published position. HMRC produced guidance in 2003 which provided that taxpayers who engaged in particular share loss schemes would be able to generate an artificial loss (by deducting both the market price of the shares and chargeable income tax from the proceeds from the sale of the shares). In 2009, the body changed its position such that the income tax element was no longer deductible. The taxpayer, Hely-Hutchinson, fell within the terms of the 2003 guidance when published, and sought to obtain the benefit of that treatment. Unfortunately, his case (for reasons not relevant for the purposes of this post) was still open in 2009 and HMRC sought to apply the new, less benevolent 2009 treatment.
The case has in essence turned on whether the taxpayer had a legitimate expectation to be treated in accordance with the 2003 guidance. The High Court found in favour of the taxpayer. HMRC fought this point quite hard in the Court of Appeal, noting that the taxpayer had been on notice effectively since he first sought to benefit of the 2003 treatment that the Commissioners were challenging his claims (albeit not in relation to the 2003 guidance treatment specifically, but the possibility was still open that they would challenge that too). A further, important point which HMRC stressed in the appeal was that the taxpayer did not rely upon the 2003 guidance when he exercised his share options. The 2003 guidance postdated the taxpayer’s actions. In fact the taxpayer had to retrospectively amend his tax claims in order to benefit from the 2003 guidance. In this sense, the case is peculiar in that he did not ‘expect’ any benevolent treatment when he undertook the action. It was only several years later when HMRC published its guidance that he had any expectation as to the particular benevolent treatment. HMRC’s guidance did not change the way that he organised his affairs.
For this reason, it does seem a perversion of the English language to say that the taxpayer did ‘expect’ anything at the relevant time.
And indeed, this reveals a tension in the doctrine of legitimate expectations. This case is a far cry from the most famous tax cases concerning legitimate expectations whereby taxpayers received advanced assurances from HMRC and sought to arrange their affairs in accordance with those assurances, as arose in the case of Gaines-Cooper, MFK Underwriting, Matrix Securities, GSTS Pathology, Cameron, Unilver (although that was a practice rather than assurance) even the recent Veolia case. The idea underpinning these types of cases is that it would be unfair for a public authority to resile from its previous position given that the relevant party has changed their position in reliance upon the assurance, particularly where the taxpayer has incurred expenses in reliance. These are ‘reliance’ cases, in which the relevant public authority will be bound to its assurance if it would be ‘conspicuously unfair’ not to be so bound.
But that does not mean that the present case does not come within the doctrine of legitimate expectations, as the doctrine also encompasses cases where a public body seeks to depart from its guidance. The idea is that it would be unfair for a public body to fail to act consistently towards citizens. For this reason, it does not matter in the class of ‘consistency’ cases that the particular citizen was aware that a public body had adopted a particular practice towards persons in their position (see: Scheimann LJ in Bibi at para 55). The question in such cases is whether the public body could rationally apply different treatment. This can be for two reasons. The first is that different treatment is being applied to different classes of persons. The second is that different treatment is being applied to the persons within the same class, but that there are rational reasons for doing so. In the oral hearing of the case, the justices kept coming back to this point about whether it was permissible for HMRC to apply the 2009 guidance to the taxpayer when it applied more benevolent treatment to other taxpayers. What was different about this taxpayer to those persons whose cases had closed before the 2009 guidance was published (and hence benefited from the 2003 treatment).
And this is where things get particularly interesting. HMRC claimed that the taxpayers whose cases were still open after the 2009 guidance had been published could still be entitled to the 2003 treatment if they could demonstrate ‘detrimental reliance’. Several taxpayers could demonstrate such detrimental reliance. Thus, the taxpayer in the case was given the same option as these taxpayers but simply could not demonstrate detrimental reliance. In this sense, HMRC argued that they acted consistently across this group of taxpayers by applying the same standard to all that fell within the group by reason of having their cases still open in 2009.
This is the issue that it is posited the appeal will turn on. What is the relevant comparator group – is it all those who fell within the terms of the 2003 guidance, or is it only those whose cases were still open in 2009? If it is the 2003 group, was it fair to distinguish between those persons either because of the effluxion of time or by use of the ‘detrimental reliance’ criterion.
I await the judgment with interest.