R (on the application of Hely-Hutchinson) v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Whipple |
| Judgment Date | 11 November 2015 |
| Neutral Citation | [2015] EWHC 3261 (Admin) |
| Docket Number | Case No: CO/3457/2014 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 11 November 2015 |
[2015] EWHC 3261 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mrs Justice Whipple
Case No: CO/3457/2014
Mr Rory Mullan and Ms Harriet Brown (via the Direct Access Scheme) for the Claimant
Mr Nawbatt (instructed by HMRC Solicitors Office) for the Defendant
Hearing dates: 15 October 2015
Approved Judgment
INTRODUCTION
This is an application for Judicial Review brought by Ralph Hely-Hutchinson (the "Claimant") against HM Commissioners for Her Majesty's Revenue and Customs (the "Commissioners"). Permission was granted by Patterson J following a renewal hearing on 12 February 2015. Following that hearing, the Claimant lodged a Consolidated Statement of Facts and Grounds dated 19 February 2015. The Commissioners have filed detailed Grounds of Defence dated 21 May 2015 in response. A Protective Costs Order in the Claimant's favour was granted by Mostyn J on 20 April 2015. Before me, Mr Rory Mullan and Ms Harriet Brown represented the Claimant and Mr Akash Nawbatt appeared for the Commissioners. I thank all Counsel for their clear submissions and careful preparation of this case. I thank the Claimant's counsel in particular for acting pro bono in this difficult case.
The Claimant seeks Judicial Review of four closure notices dated 30 April 2014 (the "Closure Notices"). Each Closure Notice contains a rejection of the Claimant's claim for capital losses, advanced in relation to the four tax years from 1999 to 2002 inclusive. For the years 1999 and 2000, the claims were "free standing" claims to capital losses; for the years 2001 and 2002, the claims were by way of amended self-assessment return, the amendments reflecting the effect of the claimed capital losses.
The Claimant asserts a legitimate expectation to claim those capital losses, in reliance on guidance published by the Commissioners in 2003. The Claimant contends that his legitimate expectation cannot and should not be frustrated by the Commissioners' withdrawal of the 2003 guidance by means of a Revenue and Customs Brief issued in 2009 ("RCB 30/09"), and by the Closure Notices which relied on RCB 30/09, because to do so would be so conspicuously unfair as to amount to an abuse of the Commissioners' powers.
The Commissioners respond that there is no conspicuous unfairness in this case and that there is an overriding public interest in collecting the correct amount of tax. They resist this challenge.
BACKGROUND
From 1989 to 2008 the Claimant was employed by ABN Amro ("ABN"). As part of his remuneration, the Claimant was granted options in a company called Armadale Ltd at a nominal exercise price (the "Armadale option scheme").
The Armadale option scheme was an unapproved employee share option scheme. The payment of remuneration via such a scheme reflected widespread practice at the time, particularly in the banking sector. The Commissioners had concerns that such schemes, particularly as they were used in the banking sector, constituted tax avoidance, being designed to avoid employers' liability to National Insurance Contributions (NICs) on the value of the options conferred. The Commissioners commenced investigations. Those investigations led to settlements, in the end, in all cases, and the issues were never litigated. But the period of investigation and settlement was protracted. I am told that the Commissioners reached settlement with ABN in 2005, but the last settlements with other employer banks were reached years later. I note that in November 2010, the Commissioners reached settlement with Goldman Sachs, which included a settlement of the outstanding NICs issue on that bank's employee share option scheme; that settlement was challenged unsuccessfully by way of judicial review in R (on the application of UK Uncut Legal Action Ltd) v Revenue and Customs Commissioners [2013] EWHC 1283 (Admin), [2013] STC 2357.
The Claimant exercised options he held in the Armadale scheme in tax years 1999 and 2000, disposing of the shares on the same day. Section 17 of the Taxation of Capital Gains Act 1992 applied to those disposals. That section provides that:
"Subject to the provisions of this Act, a person's acquisition or disposal of an asset shall for the purposes of this Act be deemed to be for a consideration equal to the market value of the asset-
…
(b) where he acquires or, as the case may be, disposes of the asset wholly or partly … in consideration for or recognition of his … services … in any office of employment …"
This is known as the "market value rule". At the time the Claimant exercised his options, the common understanding of this rule was that the base cost for capital gains tax purposes was the market value at the date of exercise of the option. Because these shares were redeemed on the same day, and on the application of the market value rule as it was then understood. The Claimant completed his tax returns for the relevant years on the basis that no gain or loss arose on disposal.
On 12 December 2012, the Court of Appeal handed down judgment in Mansworth (Inspector of Taxes) v Jelley [2003] STC 53. That case concerned the proper construction of what is now section 144(2) TCGA 1992 (formerly section 137(3) of the Capital Gains Act 1979), read with what is now section 17(1) of the CGTA 1992 (formerly section 29A(1) CGTA 1979). The Court concluded that the grant (or acquisition) of the option and its exercise were to be treated as a single transaction (see paragraph 32).
On 8 January 2003, the Commissioners published a Technical Note headed "Tax treatment of options following Mansworth v Jelley" (this is the "2003 Guidance"). In it, the Commissioners stated that they would not appeal the decision in Mansworth v Jelley. It recorded that the effect of Mansworth v Jelley would be to increase the capital gains acquisition cost which might mean that on a subsequent disposal of the assets, the higher cost may reduce the capital gain or turn a gain into an allowable loss. Specifically, the 2003 Guidance said this:
" 3. Who is affected by the change in acquisition cost?
Most of the people affected will be employees who have sold shares that they acquired by exercising unapproved employee share options or Enterprise Management Incentive share options. The CGT acquisition cost of these shares is:
their market value at the time the option is exercised plus
any amount charged to income tax on the exercise.
The decision does not affect employees who acquired shares through approved Save As You Earn ('SAYE') schemes and approved Company Share Option Plans ('CSOPs'). Their acquisition cost stays what it was before the Mansworth v Jelley decision: the exercise price paid for the shares. Others affected would be anyone else exercising options granted otherwise than by way of a bargain at arms length or by reason of employment.
4. What happens next for people affected by the change in acquisition cost?
Self-Assessment time limits
Where taxpayers have already made Returns they can amend those Returns on the basis of the decision in Mansworth v Jelley within the time limits. These time limits run to 31 January 2003 for Returns for the tax year to 5 April 2001 and to 31 January 2004 for Returns for the tax year to 5 April 2002. Where taxpayers have not already made Returns they should include gains or losses calculated in accordance with the decision in Mansworth v Jelley.
Other open years
Where cases are open for earlier years, taxpayers can amend their Capital Gains for those years in accordance with the decision.
…
6. What happens next for the people affected by the change in disposal proceeds?
Where Return made before 12 December 2002, the date of the Court of Appeal judgement
We will take no action to implement the decision in Mansworth v Jelley.
Where Return made on or after 12 December 2002, the date of the Court of Appeal judgment
The Return for any tax year, should include gains or losses calculated in accordance with the decision in Mansworth v Jelley.
CGT1 Capital Gains Tax introduction and other Inland Revenue publications will be amended in due course."
The 2003 Guidance did not stand alone. The Commissioners issued a number of related publications at or around the same time which substantially repeated the 2003 Guidance. Specifically, I have been shown a number of extracts from HMRC's Manuals, and a further more detailed notice (the date of which is not clear to me) headed "Further details on tax treatment of options following the decision in the case of Mansworth v Jelley", which stated:
"This notice expands on the one issued on 8 January 2003 but does not replace it so you may need to read both of them. The earlier notice sets out the general position. This one takes the form of answering some frequently asked questions. …".
It then set out a series of questions and answers. In particular, it stated as follows:
"Capital Losses
Q6. What is the time limit for claiming capital losses which arise as a result of the decision in Mansworth v Jelley?
A6. It depends on the year when the loss was made. For self-assessment tax years (1996/97 onwards), you have to claim capital losses within five years after the first 31 January following the tax year in which you made the loss. For example, you have to claim a capital loss for shares sold between 6 April 1997 and 5 April 1998 no later than 31 January 2004.
Capital losses are deducted from capital gains in the...
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