R (on the application of Hely-Hutchinson) v Revenue and Customs Commissioners [2017] EWCA Civ 1075
Mr Hutchinson received share options through his employer and exercised then sold these in the late 1990s. He reported the transactions in his self-assessment tax return on the basis that no capital gains tax would be incurred, in line with the then effective Taxation of Capital Gains Act 1992.
In 2003 HMRC issued new guidance, reflecting and building on a Court of Appeal decision, stating that the cost of acquisition of shares should be calculated at the date that the option was granted and that the amount of income tax payable on the exercise of the options should be added to the cost of the shares in respect of the capital gains tax base cost.
The result for Hutchinson and many other taxpayers was that he incurred a capital loss, which he could balance against his taxable income and apply retrospectively over the previous 5 years of assessments. Mr Hutchinson made and re-filed loss claims from 1998-2002 totaling over £400k.
In 2003 HMRC wrote to Mr Hutchinson warning that they did not accept his losses and his claim remained open. After much correspondence and consideration of the issue in 2009 HMRC finally decided that the 2003 guidance was wrong in law, and the beneficial treatment contained in that guidance ceased to have effect. They rejected Mr Hutchinson’s loss claims.
He successfully judicially reviewed their decision on the basis of breach of legitimate expectation and unfairness, presenting evidence of the financial detriment he had suffered as a result of his expectation that he would receive repayments. HMRC appealed the High Court’s ruling.
Court of Appeal
In her leading judgment, Arden LJ observed the well-established principle that public bodies should be entitled to a change policy if there is good reason for doing so. However the court also recognised that HMRC had created a legitimate expectation by issuing the 2003 guidance.
The public interest in correcting HMRC’s mistake had to be balanced against any unfairness to the individual caused by that correction. The court concluded that the existence of some unfairness was insufficient; it must be “outrageously or conspicuously unfair”.
Lady Justice Arden concluded that there was no unfairness in comparison to other taxpayers whose claims were closed before the withdrawal of the 2003 guidance because Mr Hutchinson was not in a position directly comparable to theirs. Further, HMRC had acted properly in withdrawing guidance that erroneously conferred a right that was wrong in law. Once those facts were established, the task for the court was to examine Mr Hutchinson’s particular circumstances to assess the level of unfairness to him.
The court found that the withdrawal of the guidance placed Mr Hutchinson back in the position he was in when he committed himself to the transactions that gave rise to the capital losses. He had been warned in 2003 that his losses were not accepted. The lack of detriment to him was a powerful, although not solely decisive, factor. The decision might be hard for Mr Hutchinson but it did not cause him conspicuous unfairness.
Comment
In this case a taxpayer’s legitimate expectation was trumped by the state’s interest in ensuring tax is collected where it ought to be within relevant statutory provisions. Although Mr Hutchinson held a legitimate expectation, the effect of the court’s ruling is in the spirit of the view expressed by Bingham J in R v Inland Revenue ex parte MFK Underwriting Agents Ltd [1990] that: “The taxpayers’ only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law”.
Taxpayers should be cautious about relying on HMRC guidance where it confers substantial benefit. If taxpayers receive information from HMRC about withdrawal of guidance whilst claims remain open, it will be prudent to plan on the basis that any beneficial arrangements will be reversed.
It appears that only in cases of very significant detriment to the taxpayer will the court be persuaded that the individual ought not to bear the cost of reliance on guidance issued in error.
Laura Stephenson
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