"HMRC [was] not precluded from changing its policy by the fact that not every taxpayer's losses could be reopened," Lady Justice Arden said in the Court of Appeal ruling, which overturned a High Court decision.
Heather Self, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com said: “The Court of Appeal decision will be disappointing for anyone who is seeking to challenge HMRC’s conduct on the basis of 'legitimate expectations', even where those expectations arise in reliance on clear guidance published by HMRC.”
HMRC was appealing against a High Court decision to quash HMRC's decision to deny claims for loss relief which had been made on the basis of HMRC guidance which was withdrawn after the claims were made.
In 2003 had HMRC published guidance concerning the capital gains tax base cost of shares acquired as a result of the exercise of share options, following the Court of Appeal decision in a case called Mansworth v Jelley.
In the guidance HMRC said that the case meant that the amount of income tax payable on the exercise of share options had to be added to the base cost of the shares. In many cases this had the effect of creating a capital loss. HMRC confirmed it would apply the same beneficial tax treatment to others who had acquired shares under options linked to their employment exercised before 10 April 2003. However, in 2009 HMRC announced that its 2003 guidance was wrong in law and that it would no longer apply to any 'open' returns.
"Although many in the tax profession were surprised by HMRC’s initial guidance in 2003, it is not surprising that taxpayers relied on it – for a full six years before it was changed,” Heather Self said.
Mr Hely-Hutchinson claimed losses in accordance with the HMRC 2003 guidance, before HMRC decided to change its policy. However, HMRC opened enquiries into his returns, because it was investigating the scheme under which his employer had granted the options. This meant that his returns were still 'open' when the HMRC guidance was withdrawn and so HMRC denied him the losses.
Once a self assessment tax return has been filed, if HMRC does not open an enquiry within the 12 month 'enquiry window' it can only recover underpaid tax if it can make a 'discovery assessment'. A discovery assessment can only be made in situations where the taxpayer has been careless or acted deliberately or where the HMRC officer could not reasonably have been expected, on the basis of the information available to them at that time, to be aware of the under-assessment of tax. By the time HMRC had changed its guidance many taxpayers had received the benefit of the treatment set out in the 2003 guidance and their tax affairs were no longer 'open' so that HMRC could not clawback any tax relief given.
Mr Hely-Hutchinson claimed that it was conspicuously unfair for HMRC to deny him the treatment afforded to those whose tax affairs could not be reopened. He argued that he had a legitimate expectation that HMRC would be bound by its 2003 guidance.
In a judicial review application in 2015, Mrs Justice Whipple quashed HMRC decisions relating to Mr Hely-Hutchinson and remitted the matter back to HMRC to make fresh decisions. She said HMRC should have considered whether it was conspicuously unfair to treat Hr Hutchinson differently from those taxpayers whose affairs were not 'open'.
In the Court of Appeal, Lady Justice Arden said that in deciding whether or not there had been conspicuous unfairness, Mr Hely-Hutchinson's position should not be compared with those who had received the tax relief but whose affairs were no longer 'open'.
"It is necessary to look at the time when the decision is made, that is, when the decision-maker is called upon to assess whether they should be treated as being in the same position. In the present case taxpayers … were not in the same position if they were in open years as opposed to closed years," she said.
The judge said that "it is well established that it is open to a public body to change a policy if it has acted under a mistake" but the court had to decided whether or not there had been "sufficient unfairness" to prevent correction of the mistake. For this to be the case the unfairness "had to be outrageously or conspicuously unfair," she said.
The judge acknowledged that HMRC's change of guidance was "clearly hard for those whose claims were outstanding in 2009", but she said that the level of unfairness was not that of conspicuous unfairness. She said that the detriment to Mr Hely-Hutchinson was not caused by reliance on the 2003 guidance but "general financial difficulty due to other reasons".
“While taxpayers face increasingly onerous compliance requirements and are often charged penalties when they get it wrong, it seems that the odds are stacked in favour of HMRC when they make mistakes” Heather Self said.