Late on Wednesday afternoon, the Court of Appeal handed down judgment in the case of R (Hely-Hutchinson) v HMRC  EWCA Civ 1075. It is the latest twist in the long running saga concerning what has come to be known as ‘Mansworth v Jelley losses’ (and has been the subject of this blog here, here and here, in addition to being the subject of a case note by the author in the British Tax Review (downloadable here)).
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?
R (Hely-Hutchinson) v HMRC
That is precisely the issue which arose for Ralph Hely-Hutchinson in the R (Hely-Hutchinson) v HMRC case. The taxpayer relied upon the 2003 guidance, but the case was not closed by 2009 (owing to a dispute between HMRC and the applicant’s employer 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.
Court of Appeal judgment
The Court of Appeal opened its consideration of the factual matrix by first setting out the general principles which apply in cases of legitimate expectation, and in particular where the expectation arises from HMRC and its guidance. Precedence holds that HMRC is a public body invested with the power to collect tax and in doing so may provide guidance to assist the collection of tax. However, the duty to collect tax must be balanced with the duty of fairness owed to taxpayers. This duty is itself imbued with the considerations that a) not all taxpayers must be charged with tax which is strictly owed due to interests of good management and b) the public body must retain the ability to correct past mistakes, even if this results in inconsistent treatment. When balancing the duty of fairness against the duty to collect tax, the taxpayer needs to demonstrate conspicuous unfairness in order for a claim that tax ought not to be paid to succeed. Thus, it needed to be demonstrated in this case that there was unfairness which mounted to an abuse of power by reason of HMRC resiling from its previously published position.
However, as stressed in a previous blog, this was not an orthodox case concerning legitimate expectations where a citizen is given an assurance directly by a public authority and changes her position in reliance upon that assurance. Rather it was a case concerning consistency. The taxpayer thus was ultimately arguing that he did not receive the same treatment as similarly placed taxpayers. Before the court, this argument was split into two sub-arguments (although the author’s opinion is that they collapse into one). The first was that HMRC’s action produced comparative unfairness. The second was that, even if it was not comparatively unfair, it was nevertheless conspicuously unfair thus amounting to an abuse of power.
In respect of the first argument, the court responded that HMRC are entitled to change policy where the body has realised that a mistake was made. This amounts to a ‘good reason’ to depart from previous policy. Further, the Court found that in terms of consistency, HMRC were required to compare taxpayers at the time of assessment, not the time that the guidance was produced. In other words, the treatment of the taxpayer in the case should be compared with the treatment offered to other taxpayers whose cases were ‘open’, not those whose cases were ‘closed’. In this way, there was no inconsistency. The taxpayer was treated similarly to other taxpayers in materially similar circumstances. Thus, the Court found that there was not comparative unfairness in resiling from the previously published position.
The second argument was dealt a killer blow by the failure to land on the first. The fact that there was no comparative unfairness in turn meant that in the circumstances, it could not be said that there was conspicuous unfairness. The taxpayer’s second argument also introduced the idea that conspicuous unfairness could arise by virtue of breach of the taxpayer’s human rights. The taxpayer’s arguments on the basis of discrimination under Article 14 ECHR however and the right to enjoyment of private property under A1P1 ECHR were dismissed in short shrift on the basis that such rights were not established in the case.
The taxpayer deployed a further third argument which sought to set aside HMRC’s decision not to apply the 2003 guidance to the taxpayer on the basis that it was unlawful having regard to the considerations taken into account when HMRC made the relevant decision. The Court was being asked to set aside the decision itself, thus requiring conspicuous unfairness to be demonstrated. The taxpayer argued that
- HMRC took an overly narrow view of the concept of detrimental reliance, ignoring the fact that respondent’s expectation that the 2003 guidance would be applied to him was reinforced by the passage of time. HMRC’s policy today in respect of Mansworth v Jelley losses is that the 2003 treatment will be applied where the taxpayer can demonstrate inter alia detrimental reliance.
- HMRC failed to take account of the fact that the enquiry remained ‘open’ for reasons not personal to the taxpayer, but to his former employer.
- HMRC did not take into account the fact that the 2003 guidance was thought to be correct when the taxpayer made his Mansworth v Jelley loss claims.
- HMRC did not take into account the delay of 11 years from the opening of the enquiry to refusal of the taxpayer’s claim.
The Court found that there was no unlawful decision. The taxpayer was returned to the position he was in when he exercised his options. He was warned since 2003 that HMRC did not accept his claims. His enquiry was ‘open’ and not ‘closed’ and thus the fact that there was different treatment applied to the different categories was immaterial. And the relevant HMRC officer did consider the detriment, a powerful factor, to the taxpayer when arriving at the decision. The taxpayer’s detriment was caused by financial difficulty, not reliance upon the 2003 guidance.
The taxpayer’s fourth and final argument, that the High Court should not have remitted the decision to HMRC but should have substituted its own judgment instead, was academic in the context but nevertheless rejected by the Court.
There is much that can be said about this case, and will be explored elsewhere in more detail. Some matters however stand out for comment. First, the Court’s finding appears to apply the orthodox understanding of the relevant public law principles. The decision to withdraw the previous guidance is one which falls squarely within HMRC’s managerial discretion to which courts will generally give significant leeway. To this end, the taxpayer was in the unenviable position of having to overcome the significant ‘conspicuous unfairness’ threshold. That is not to say that one cannot find sympathy with the taxpayer – the length of the dispute and its consequences are particularly unfortunate. Secondly, the case raises much broader questions about the limitations of the legitimate expectations doctrine. One aspect in particular relates to HMRC publications. The doctrine is the best legal protection for taxpayers who seek to rely upon assurances produced by HMRC. However even in this case (where the guidance was clear as day and had been in place for many years), HMRC was found to be entitled to resile from the previously published assurance. Taxpayers will now legitimately ask what is the utility of an HMRC publication, if at some unspecified time in the future the body can simply reverse its position? Thirdly and following from this point, the Court provided little guidance on when HMRC will be entitled to do so. The Court’s approach was that HMRC was entitled to reverse its position in order to correct a mistake. Must the Court be satisfied that a mistake was in fact made (something which the Court does not seem to have interrogated)? What about the case where it is highly unclear that HMRC has made a mistake of law in its publication? How grave must the mistake have been? Further, what counts as a mistake – does internal legal advice pointing out a possible mistake suffice? What about if a tribunal or other judge finds against an HMRC interpretation? One reading of this omission on the Court’s part would be that the error on HMRC’s part was particularly obvious such that it would go without saying that HMRC was entitled in such an obvious case to reverse its position (h/t @AislingTax). Indeed, the tax press in 2003 expressed amazement at HMRC’s mistake (see para 12 of the High Court judgment). But if this formed part of the Court’s reasoning, then it ought to have formed part of the judgment. Moreover, the Court at the beginning of the judgment wrote that “We are not concerned with the correctness of HMRC’s view”.
These issues may be given a further hearing in the Supreme Court if the taxpayer decides to appeal, something which this blog will keep an eye on. A final comment should be made about the taxpayer’s legal representation. It is clear from reading the judgment that the taxpayer has had unfortunate financial difficulties in the past decade, and it is to their credit that Rory Mullan and Harriet Brown of Old Square Tax Chambers represented him pro bono.