Revenue and Customs Commissioners v Hely-Hutchinson
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice McCombe,Lord Justice Sales |
| Judgment Date | 26 July 2017 |
| Neutral Citation | [2017] EWCA Civ 1075 |
| Docket Number | Case No: C1/2016/0153 |
| Court | Court of Appeal (Civil Division) |
| Date | 26 July 2017 |
[2017] EWCA Civ 1075
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
QUEEN'S BENCH DIVISION ADMINISTRATIVE COURT
Mrs Justice Whipple
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice McCombe
and
Lord Justice Sales
Case No: C1/2016/0153
Akash Nawbatt QC and Alice Carse (instructed by HMRC Solicitor's Office) for the Appellants
Rory Mullan and Harriet Brown (instructed by Direct Access Scheme) for the Respondent pro bono
Hearing dates: 29–30 March 2017
Approved Judgment
Issue for decision
The appellant, HMRC, now appeals from the order of Whipple J dated 11 November 2015 granting judicial review of four decisions of HMRC dated 30 April 2014. The judge quashed the decision. By these decisions, HMRC issued the closure notices in relation to the enquiries raised on the respondent's self-assessment tax returns ("SAs") for 1999 to 2002 and rejected losses which the respondent had claimed. The judge quashed those decisions and remitted the matter to HMRC to make a fresh decision consistently with her judgment.
To briefly indicate the background, in 1998 and 1999, the respondent exercised some share options and reported the transactions in his SAs for 1998/9 and 1999/2000. Subsequently he took advantage of an apparent change in the permitted treatment of those transactions which enabled him to claim additional losses in later periods following HMRC guidance (referred to below as the 2003 guidance) to that effect. This gave rise to a legitimate expectation that HMRC would be bound by that guidance. However, on 2 June 2003, HMRC opened enquiries into the respondent's SAs, warning him that they did not accept his additional losses. In 2009, HMRC, following legal advice, issued corrected guidance stating that it would not accept the additional losses unless (primarily) there had been reasonable detrimental reliance on the 2003 guidance. HMRC did not consider that the respondent had shown this and, for this and other reasons, served closure notices bringing the enquiries to an end and refusing the additional losses.
The essential question on this appeal is whether HMRC could resile from their previously expressed view in the 2003 guidance in the circumstances of this case. We are not concerned with the correctness of HMRC's view, which is the subject of a separate appeal to the First-tier Tribunal.
The parties have agreed a summary of HMRC's approach to the appropriate tax treatment of the exercise of the respondent's share options at the various material points in time. This summary can be found in Appendix 1 to this judgment. Appendix 2 to this judgment contains an abbreviated version of the agreed chronology of the events in this case for ease of reference. I will explain those events in narrative form in the next section of this judgment.
Taxpayer's capital losses and HMRC's published guidance
The respondent received share options in 1989 through his employment with ABN Amro plc ("ABN"). He exercised those options in 1999 and 2000 and shortly thereafter sold the shares. He reported the transactions to HMRC when he filed his SAs for 1998/9 and 1999/2000. He did so on the basis, as was the common understanding at the time, that no liability to capital gains tax arose. This was because section 120 of the Taxation of Capital Gains Act 1992 (" TCGA 1992") treats the amount on which income tax had been calculated as deductible when calculating the gain.
On 12 December 2002, this Court decided in Mansworth v Jelley [2003] STC 53 that the figure to use for base cost when calculating the gain which accrued on disposal of the shares was the market value at the date of exercise of the options. In many cases, this resulted in a capital loss which the taxpayer could set against his taxable income in that and subsequent years and carry back against income for the previous five years of assessment.
In 2003, HMRC issued guidance ("the 2003 guidance"). They stated that they did not intend to appeal Mansworth v Jelley. They also extrapolated from the ruling in that case that the amount of income tax payable had also to be added to the base cost and confirmed they would apply the same beneficial tax treatment that that case had upheld in relation to those who, like the respondent, had acquired shares under options linked to their employment exercised before 10 April 2003.
The judge set out the guidance in detail in her judgment, together with passages from the HMRC manuals which were to the same effect. I need not repeat these passages as it is common ground that the 2003 guidance gave rise to a legitimate expectation that in respect of share options exercised before 10 April 2003 HMRC would apply the equivalent beneficial tax treatment to that resulting from Mansworth v Jelley.
Following the issue of the 2003 guidance, the respondent made loss claims on the basis of Mansworth v Jelley for 1998/9 and 1999/2000 by adjusting his SAs and making loss claims. I will call these losses " Mansworth v Jelley losses". He subsequently made similar claims in his SAs for 2000/1 and 2001/2. He calculated that his total Mansworth v Jelley losses are about £428,000, of which some £326,806 remained for use after 2002.
The Finance Act 2003 amended the TCGA 1992 for options exercised after 9 April 2003. The base cost after that date was the cost of exercising the option plus any amount charged to income tax on exercise ( TCGA 1992, section 144ZA).
On 2 June 2003, HMRC opened enquiries into all the respondent's relevant SAs. At the outset the enquiries were prompted by a concern that the option scheme under which ABN had issued options to the respondent had been used by ABN to avoid paying National Insurance contributions, though it appears that those matters were settled in 2005. Significantly, HMRC's letter to the respondent dated 2 June 2003 stated that:
The Revenue does not accept, for this scheme, the additional losses claimed under [ Mansworth v Jelley] are due. One consequence is that no repayments will be made.
Substantial correspondence ensued. HMRC gave further explanations for the enquiries in correspondence. The respondent contended that his tax affairs should be treated independently of those of ABN, and noted that similar claims of colleagues had been allowed.
In July 2006, the respondent asked for an update, saying that he understood that the discussion with his employer had concluded some time previously. HMRC replied on 26 July 2006 that it intended to litigate the issues with other taxpayers, and that these proceedings were unlikely to be heard before the beginning of 2007.
The respondent claimed Mansworth v Jelley losses in his SAs for 2005/2006 and 2006/7. HMRC responded by opening enquiries into those SAs.
In April 2008, the respondent sought a further update and was told that the matter was a long way off settlement. He was also told that if he sought to use the losses, and they were found not to be due, he would have to repay them with interest.
On 12 May 2009, HMRC issued Revenue and Customs Brief ("RCB") 30/09, announcing that, following advice that its 2003 guidance was wrong in law, the tax treatment set out in the 2003 guidance would no longer apply. HMRC would thenceforth treat the base cost as the market value of the shares at the date of acquisition. HMRC stated that this treatment would apply to any enquiry or appeal open at that date relating to Mansworth v Jelley losses.
RCB 30/09 was followed in September 2009 by RCB 60/09. This stated that the corrected view of the law would be applied in all cases unless there was detrimental reliance. Thus the RCB stated:
HMRC does not accept that its published guidance alone can necessarily create a 'legitimate expectation' for a taxpayer. Whether a taxpayer has a legitimate expectation will depend upon the specific factors and circumstances of the case. Chargeable gains and allowable losses included in returns or claims should be calculated on the correct statutory basis, which HMRC now understand to be as described in Revenue & Customs Brief 30/09. HMRC's primary responsibility is to apply the law correctly and collect underpaid or under-declared tax. However, in some limited circumstances, to apply the statute may be so unfair as to amount to an abuse of power by HMRC and in these circumstances HMRC may be bound by its previous guidance. We will normally be bound by our previous guidance where the taxpayer can demonstrate that he or she:
— reasonably acted in reliance on the previous guidance and would suffer detriment from the correct application of the statute.
— to have acted in reliance on the advice the taxpayer must have done or refrained from doing something as a direct consequence of the advice. HMRC understand that in this context 'detriment' means real loss, it is not sufficient to have merely suffered disappointment or upset.
In this judgment, I use the word "open claims" to describe the claims of taxpayers who had Mansworth v Jelley losses in respect of which HMRC had opened enquiries which had not been closed before RCBs 30/09 and 60/09 were issued. We are told that there were some 600 taxpayers with open claims. Other Mansworth v Jelley losses where no enquiry was opened, or, where any enquiry opened was closed by that date, are referred to as made in "closed" years. The latter category include loss claims which were originally made in SAs which HMRC had no power to reopen, even if those losses had not then been fully utilised.
HMRC gave the respondent the opportunity to provide evidence as indicated by RCB 60/09.
On 30 April 2014, HMRC issued closure notices denying the...
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