Legitimate expectation and HMRC guidance

The Court of Appeal has confirmed that a statement by HMRC in its manuals is capable of giving rise to a legitimate expectation in appropriate circumstances: R (Aozora GMAC Investment Ltd) v HMRC [2019] ECWA Civ 1643. However, the Court rejected the appellant’s contention that they had relied on the statement to the necessary degree or that there was sufficient unfairness in the particular circumstances of the case.

Indeed, the decision requires a case by case analysis of the factors and sets a high bar for taxpayers to overcome when seeking to hold HMRC to incorrect guidance, especially in cases where the taxpayer has employed external advisers.

Background

The appellant received payments of interest from a US subsidiary, subject to US withholding tax. The appellant was also liable to UK corporation tax on the interest received, but was not entitled to double tax relief under the UK/US treaty as it was not a "qualified person". Instead, the appellant claimed unilateral relief from double taxation under ICTA 1988 s.790. HMRC denied the claim on the basis that s.793A(3) restricted the availability of relief under s.790 if a double tax treaty contained an express provision to the effect that relief by way of credit was not to be given. The UK/US treaty contained provisions restricting the availability of unilateral relief and, in particular, Article 24(4)(c) restricted the availability of unilateral relief in the context of dividend payments.

However, the taxpayer pointed to HMRC’s International Manual which stated that the only provisions to which s.793A applied was Article 24(4)(c) of the UK/US treaty. It argued that this statement gave rise to a legitimate expectation that the provision did not affect its right to unilateral relief in relation to interest received as it had relied on the statement to its detriment. This statement was subsequently removed from the manuals as it was inaccurate.

The Upper Tribunal rejected the taxpayer’s claim to legitimate expectation and the taxpayer appealed to the Court of Appeal.

Court of Appeal decision

HMRC contended that the information in the Manuals was to assist staff apply the law and did not contain any representation that HMRC would refrain from applying the rules in accordance with the law. As such, the mere expression of HMRC’s view as to the interpretation of a provision could not amount to a “representation” to taxpayers giving rise to a substantive legitimate expectation. The Court of Appeal rejected this argument and confirmed that a statement of HMRC’s opinion set out in the manuals could give rise to a legitimate expectation. Indeed, the Court held that the content of the manuals in this case did contain a clear and unambiguous representation.

The second question addressed by the court was as to the nature of that representation. In particular, was the representation one that was sufficient to give rise to a legitimate expectation on the part of the taxpayer. In turn, this depended on whether it would be “so unfair as to amount to an abuse of power” for HMRC to resile from that guidance. On this point, it was clear from the guidance of the court in Hely-Hutchison that “the unfairness has to reach a very high level” for it to prevent correction of a mistake by HMRC - it must be “outrageously or conspicuously unfair”. This high burden arises from the fact that it is HMRC’s role to collect, not to forgive tax. In determining the level of unfairness, both knowledge of the representation and detrimental reliance are powerful factors.

Turning to the facts, the Court considered that the Upper Tribunal had been correct to consider how far the taxpayer had been influenced in deciding the structure of the loan by the existence of the guidance. If a taxpayer is unaware of the existence of guidance or if… he only becomes aware of it after he is committed to the transaction” then “that may well prove fatal to his claim”. However, the Court considered that there was no bright line between the degree of reliance that will and will not suffice.

In addition, the Court rejected the Upper Tribunal’s suggestion that the fact the taxpayer had instructed an external adviser who looked at and relied on the guidance was fatal. However, the Court did agree that the use of an external adviser was a relevant factor especially, where, as here, the case involved the kind of representation which simply states what the law is. “If a taxpayer engages a specialist adviser to advise on the correct tax position that greatly diminishes the extent to which the taxpayer can then say that his view of the law was influenced by a representation of the kind given in this case.” This situation is different to the “kinds of statements relating to how they interpret inherently uncertain terms used in the legislation or the criteria according to which they will exercise their discretion”. However, this was a case where the provision was relatively straightforward and an expert adviser was not at so much of a disadvantage compared to HMRC when it came to interpreting the provisions. Accordingly, in this case the taxpayer received advice on the law from their appointed expert rather than HMRC. On this point, it would not make any difference whether the expert actually did a thorough analysis or simply read and repeated HMRC guidance.

Overall, therefore, the Court concluded that the taxpayer’s reliance on HMRC guidance in this case was weak, based on the fact that the guidance was merely HMRC’s opinion about construction of the provision and secondly because the taxpayer obtained external expert advice. Moreover, the taxpayer had failed to show that they had relied on the guidance in structuring their investment. The evidence as to the importance of the tax position on the structure was “sparse” and “unconvincing” so that it was “simply speculation” as to what they would have done if they had believed that universal double tax relief had not been available.

Accordingly, the Court concluded that the degree of unfairness on the facts was not sufficient to prevent HMRC applying the law correctly.

Comment

The decision indicates that the test for whether a taxpayer may rely on incorrect HMRC guidance is a multifactorial one. Much will depend on the nature of the guidance, the nature of the reliance and whether the taxpayer has used external advisers. Indeed, it may be important in appropriate cases for taxpayers to document the degree of reliance on HMRC guidance in structuring transactions.

Overall, however, the Court has endorsed the idea that the level of unfairness necessary for a taxpayer to succeed in such a case is very high indeed.