Can a taxpayer require HMRC to do what it has said it will do, even if it is wrong or based on a mistaken view of the law?
This interesting question crops up from time to time; for example, if a taxpayer relies on some incorrect piece of guidance on the GOV.UK website. For instance, in Beardwood v HMRC  UKFTT 99 (TC), the First-tier Tribunal gave HMRC short shrift when it tried to levy a penalty on the taxpayer because he had followed wrong guidance on the official website that he did not need to file a tax return for a particular year. I covered this case in more detail in my blog dated 14 November 2018. However, cases like it raise a broader question of just when the courts will insist on HMRC honouring a representation it makes to a taxpayer, even if it means it is prevented from collecting tax that is due to the Exchequer?
When I was studying for the law, I was greatly intrigued by the judgments of the late Lord Denning. In contrast to most of the judgments we were directed to, Denning’s were a most entertaining read. Some of the legal concepts he developed were far in advance of their time, such as the doctrine of promissory estoppel – i.e. that A should be required to keep his promise to B if, in relying on it, B has acted to his own detriment – which he set out obiter in Central London Property Trust Ltd v High Trees House Ltd  KB 130).
It may be thought that doctrines of equity have no place in tax which, after all, is a creature of statute, and bearing in mind Rowlatt J’s oft-cited dictum ‘there is no equity about a tax’ (Cape Brandy Syndicate v Inland Revenue Commissioners (1921) 12 TC 358). However, that was nearly a hundred years ago, and the law moves on. In 1982 Lord Scarman said ‘I am, therefore, of the opinion that a legal duty of fairness is owed by the revenue to the general body of taxpayers’ (R v IR Commrs ex parte National Federation of Self-Employed and Small Businesses  AC 617), and in R v IR Commrs, ex parte Unilever & Anor  BTC 183, Bingham LJ reflected that ‘the categories of fairness are not closed, and precedent should act as a guide not a cage’.
Hence the rule has developed that the courts may compel HMRC to abide by a clear statement it has made, even if it means giving up tax, if it has raised a ‘legitimate expectation’ that it will act in accordance with its statement.
There are four conditions that must be satisfied before a legitimate expectation is raised. They are:
- The taxpayer has made full disclosure of all relevant information.
- HMRC has made a representation that is ‘clear, unambiguous and without relevant qualification’.
- The taxpayer is within the class of persons to whom the representation was made or it is otherwise reasonable that the taxpayer should rely on it.
- The taxpayer did indeed rely on it to his or her detriment.
Where those four conditions apply, the taxpayer may be able to hold HMRC to its word, if to renege on it would be so unfair as to amount to an abuse of power.
Apart from Unilever, the three leading cases on legitimate expectation in tax are R v IR Commrs ex parte Preston  1 AC 835; R v IR Commrs, ex parte MFK Underwriting Agencies Ltd & Ors  BTC 561; and R v IR Commrs, ex parte Matrix Securities Ltd  BTC 85. It says much for the difficulty of securing a satisfactory result for the taxpayer that in none of those three cases did the taxpayer succeed. In Preston and Matrix Securities, the taxpayers lost because the Revenue’s representations to them had been based on incomplete disclosures by the taxpayers.
‘First, it is necessary that the taxpayer should have put all his cards face upwards on the table. This means that he must give full details of the specific transaction on which he seeks the Revenue’s ruling, unless it is the same as an earlier transaction on which a ruling has already been given.’
(Per Bingham LJ in MFK Underwriting, quoted by Lord Jauncey of Tullichettle in Matrix Securities).
In Unilever, on the other hand, the taxpayer won, not so much because of a representation by the Revenue, as on the basis that a course of dealing had led to certain expectations that the Revenue would continue to act in the same way. The taxpayer had been making late claims for loss relief for a number of years, and the Revenue had nevertheless accepted them. Then, totally without warning, the Revenue disallowed a claim for the accounting year ended 31 December 1988 on the grounds that it was outside the two-year time limit. The Court of Appeal drew a distinction between conduct that was ‘a bit rich’ but understandable, and a decision that was ‘so outrageously unfair that it should not be allowed to stand’.
The Revenue’s conduct in suddenly disallowing a loss relief claim that was out of time, when it had acquiesced in similarly late claims for the previous 20 years, fell into the latter category. (See also R oao Hely-Hutchinson v HMRC  EWCA (Civ) 1075). But for a taxpayer to show that ‘conspicuous’ degree of unfairness is a tall order indeed.
Finally, the taxpayer must be able to show that he or she relied on the representation to his or her detriment; that he or she would not have so acted but for the representation. In Aozora GMAC Investment Ltd v HMRC  EWCA Civ 1643, the taxpayer lost because it could not show that it had suffered any detriment by relying on an incorrect statement in an HMRC manual, and therefore for HMRC to insist on applying the strict law did not result in conspicuous unfairness.
If proving a legitimate expectation is fraught with difficulty, enforcing it against HMRC raises a different set of problems which I propose to return to in a later blog.