Monro v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | THE CHANCELLOR OF THE HIGH COURT,The Chancellor |
| Judgment Date | 01 February 2007 |
| Neutral Citation | [2007] EWHC 114 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC06C01481 |
| Date | 01 February 2007 |
[2007] EWHC 114 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
the Chancellor of the High Court
Case No: HC06C01481
Mr Michael Sherry (instructed by Reynolds Porter Chamberlain) for the Claimant
Mr Bruce Carr (instructed by HM Revenue & Customs) for the Defendants
Hearing dates: 23 rd January 2007
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Chancellor:
In this action the claimant, Mr Monro, seeks judgment against the defendant, HMRC, for the sum of £846,000, interest under s.35A Supreme Court Act 1981 and costs. The nature of his claim is accurately summarised in the claim form issued on 5th April 2006 as a restitutionary claim for the repayment of tax paid by him pursuant to a mistake of law or as tax paid pursuant to an unlawful demand being tax collected which was not lawfully due. The pleadings, witness statement of the claimant, on which there has been no cross-examination, and the arguments addressed to me all show that there is no dispute as to the essential facts. The only question is whether those facts entitle Mr Monro to the relief that he seeks.
Mr Monro was the chief executive of Matalan plc. On 12th May 1998 he was granted for no consideration an option to acquire 1,357,230 shares in Matalan at an exercise price of zero. On 14th May 1998 he exercised the option and acquired that number of shares for nothing. Their market value then was £3,121,629 or £2.35 per share. On 1st May 1999 Mr Monro sold 900,000 shares in Matalan for £7,386,955. As the acquisition and the disposal took place in different years of assessment the acquisition was dealt with in Mr Monro's self-assessment tax return for the year 1998/99 filed on or before 31st January 2000 and the disposal in his self-assessment tax return for the year 1999/2000 filed on or before 31st January 2001.
In his self-assessment tax return for the year 1998/99 Mr Monro declared a gain accruing on the exercise of the option and chargeable to tax under Schedule E pursuant to s.135 Taxes Act 1988 of £3,189,490.50. He duly paid the tax due thereon on or before 31st January 2000. The proportion of that gain attributable to the 900,000 shares sold on 1st May 1999 was £2,115,000.
In his self-assessment tax return for the year 1999/2000 Mr Monro declared a gain of £5,271,955 on which he paid tax of £2,108,782 on the due date of 31st January 2001. That gain was computed by deducting from the proceeds of sale (£7,386,955) the base cost attributable to the 900,000 shares sold (£2,115,000) as provided for by s.120 Taxation of Chargeable Gains Act 1992 s.120. In Mansworth v Jelley [2003] STC 53 the Court of Appeal concluded that such a computation was wrong in law. They decided that in computing the gain the taxpayer was entitled to deduct from the proceeds of sale not only the amount on which tax had been chargeable under s.135 but also the market value of the shares sold as at the date of their acquisition. Thus in the case of Mr Monro's gain on the sale of the 900,000 shares in Matalan his gain should have been computed as follows:
Net Proceeds of sale £7,386,955
Less:
(a) Amount chargeable to income tax (£2,115,000)
(b) Base value (£2,115,000)
Chargeable Gain £3,156,955
Tax thereon @ 40% £1,262,782
Thus Mr Monro paid £846,000 more in tax than was properly due from him (£2,108,782—£1,262,782 = £846,000).
It is common ground that the computation of his gain actually made by Mr Monro was in accordance with the practice then generally prevailing. Nevertheless it is, to my mind, of some significance that the argument which was upheld in Mansworth v Jelley [2003] STC 53 must have been raised at least within the year following the submission of Mr Monro's tax return for the year 1999/2000 on 31st January 2001, if not earlier. That this is so appears from the dates of the various judgments. That of the Court of Appeal was delivered on 12th December 2002. The Court of Appeal thereby dismissed an appeal from the order of Lightman J made on 20th March 2002 who had himself dismissed the appeal of HMRC from the decision of the Special Commissioner dated 5th November 2001. The significance of this point arises from the fact that a tax-payer may only amend his return within one year of the filing date, s9ZA Taxes Management Act 1970.
Mr Monro's accountants sought to amend Mr Monro's return for the year 1999/2000 on 31st January 2003 so as to reduce the amount of the gain on the disposal of the 900,000 shares in Matalan to that properly chargeable to capital gains tax. In addition they sought repayment of £846,000 as tax overpaid by mistake pursuant to s.33 Taxes Management Act 1970.
That section, so far as relevant and in force at the material time, provides:
“(1) If a person who has paid income tax or capital gains tax charged under an assessment (whether a self-assessment or otherwise) alleges that the assessment was excessive by reason of some error or mistake in a return, he may by notice in writing at any time not later than five years after the 31st January next following the year of assessment to which the return relates, make a claim to the Board for relief.
(2) On receiving the claim the Board shall inquire into the matter and shall, subject to the provisions of this section, give by way of repayment such relief in respect of the error or mistake as is reasonable and just:
(2A) No relief shall be given under this section in respect of –
(a) an error or mistake as to the basis on which the liability of the claimant ought to have been computed where the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when the return was made;
(b) an error or mistake in a claim which is included in the return.
(3) In determining the claim the Board shall have regard to all the relevant circumstances of the case, and in particular shall consider whether the granting of relief would result in the exclusion from charge to tax of any part of the profits of the claimant, and for this purpose the Board may take into consideration the liability of the claimant and assessments made on him in respect of chargeable periods other than that to which the claim relates.
(4) If any appeal is brought from the decision of the Board on the claim the Special Commissioners shall hear and determine the appeal in accordance with the principles to be followed by the Board in determining claims under this section; and neither the appellant nor the Board shall be entitled to appeal under section 56 of this Act against the determination of the Special Commissioners except on a point of law arising in connection with the computation of profits.
(5) In this section 'profits'—
(a) in relation to income tax, means income, and
(b) in relation to capital gains tax, means chargeable gains,”
By a letter dated 15th April 2003 the Inspector of Taxes refused both the applications made by Mr Monro's accountants in their letter dated 31st January 2003. In respect of the request to amend the self-assessment return for the year 1999/2000 the Inspector refused it on the footing that that year was by then a “closed year” (s.9ZA Taxes Management Act 1970). In respect of the claim for relief under s.33 the Inspector refused it on the grounds that:
“The Court of Appeal decision in Mansworth v Jelley was given on 12th December 2002. Your client cannot therefore claim that there was an error or mistake in the 1999/2000 return because he made that return on the basis of the practice generally prevailing at the time. As the 2000 return was completed in accordance with the law as understood before Mansworth v Jelley the larger capital gain of £5,271,955 still stands. The capital gains tax paid on this gain cannot be repaid.”
The Inspector opened the formal enquiry that Schedule 1A(5) Taxes Management Act 1970 required. He maintained his opinion when closing it by letter dated 28th August 2003.
Initially Mr Monro was minded to appeal these decisions of the Inspector to the Special Commissioners as permitted by s.33(4) and so informed the Inspector by letter dated 16th September 2003. On 16th June 2004 Mr Monro's accountants, no doubt mindful of the decision of Park J in Deutsche Morgan Grenfell Group plc v IRC [2003] STC 1017, claimed that Mr Monro had overpaid in consequence of a mistake of law and had a corresponding claim in restitution irrespective of the practice generally prevailing at the time the return was filed. By letters dated 11th November 2004 and 28th March 2006 that contention too was rejected by HMRC. In those circumstances Mr Monro had little alternative to issuing these proceedings in the form and at the time he did. The issues for my determination are whether Mr Monro is entitled to the relief he seeks on either of the bases on which he claims.
The arguments of counsel revolved round a number of recent decisions, mostly of the House of Lords. It is convenient therefore to consider them at this stage. The first is Woolwich Equitable Building Society v IRC [1993] AC 70, to which I shall refer as ' Woolwich'. In that case the Building Society made three payments to the Inland Revenue in respect of tax deducted from dividends and interest paid to its members without prejudice to its contention that the Regulations under which those sums were demanded were ultra vires and void. The Building Society was successful in its contention and the regulations were, in due course, declared to be invalid on the grounds for which the Building Society contended. The Inland Revenue then repaid the sums...
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