CO/2173/2015 
Neutral Citation Number: [2015] EWHC 2810 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION 
THE ADMINISTRATIVE COURT 
Royal Courts of Justice 
Strand
London WC2A 2LL 
 
Friday 14 August 2015 
 
B e f o r e: 

MR JUSTICE IRWIN
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Between: 
THE QUEEN ON THE APPLICATION OF SCOTT 
Claimant 
v 

HM REVENUE & CUSTOMS 
Defendant 
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Computer‑Aided Transcript of the Stenograph Notes of  
WordWave International Limited
A Merrill Communications Company 
165 Fleet Street  London EC4A 2DY
Tel No: 020 7404 1400 Fax No: 020 7831 8838
(Official Shorthand Writers to the Court)
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Mr Michael Firth (instructed by Direct Public Access) appeared on behalf of the Claimant 
Mr Simon Pritchard (instructed by HM Revenue & Customs) appeared on behalf of the Defendant 
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J U D G M E N T

1.	MR JUSTICE IRWIN:  In this case the claimant, on 13 May 2015, applied for permission for judicial review of the defendants' decision dated 13 February 2015 regarding the level of capital gains tax, or the rate of capital gains tax applicable to the claimant's chargeable gains, in the tax years 2006‑2007 and 2007‑2008.  Over that period the claimant's total income and capital gains chargeable to tax were, for 2006‑2007, £44.16 million income on which tax is due and £8.84 million capital gains.  In respect of the tax year 2007‑2008 the income on which tax was due totalled £7.98 million and the capital gains £14.71 million.  
2.	Despite those large figures, the claimant submits that he had a legitimate expectation to pay tax on his chargeable gains at the lower rate of 20 per cent as opposed to the higher rate of 40 per cent.  The claim of legitimate expectation is founded on the working out or use of application by the claimant of tax calculation software for the two years in question.  The software was commercially produced but was based on computational information supplied by HMRC.  It is important to bear that in mind.  There has been in this case no statement by the defendants HMRC as to how corresponding deficiency relief (or CDR) was to be calculated or applied, no statement about the claimant's tax affairs or how they were to be approached.  We are concerned with the supply of computational information or algorithms which the claimant has never seen but which were incorporated into the commercially available software used to calculate the tax.  
3.	Behind this claim ‑ or perhaps one should say in parallel with it ‑ there is a prospective appeal to the First Tier Tribunal against contested closure notices which followed on the defendants' inquiries into the self‑assessment tax returns for the two relevant years.  Some £4.4 million of capital gains tax liability is in question.  The issue in those proceedings I describe only briefly.  The claimant entered into a series of transactions concerning gains from contracts for life insurance policies.  The court has been shown a quotation from a letter of December 2012 from the claimant's representatives, in the course of which they wrote:
"We accept that tax benefits arose from the sale or redemption of ..... policies and this was the motivating factor in [the claimant's] acquisition of the policy."
4.	Section 98 of the Finance Act 1988 unified the rates of tax on income and capital gains with (said the Chancellor of the time) the intention that "the indexed gain will be taxed at the income tax rate that would apply if it were the taxpayer's marginal slice of income".  
5.	The claimant's claim before the First Tier Tribunal is ‑ and here it may not be controversial ‑ that corresponding deficiency relief (or CDR) was given by way of a reduction from a person's total income for the purpose of ascertaining the taxpayer's liability to the higher rate of tax (see Section 102 (2) of the Finance Act 1988).  
6.	The issue which arises in the Tribunal is the outcome when the CDR is greater than the taxpayer's total income.  The claimant says one simply reduces the total income by the full amount of the CDR giving a negative amount of income for the purposes of Section 98 (4).  Only the amount of gains which exceeds that figure is taxed at the higher rate.  The defendants say that is quite wrong because it is not possible to have "negative income".  That dispute cannot of course be resolved here.  But the summary of the dispute and the background may explain, at least in some measure, what happened when the software was used.  
7.	The essence of the claim before me is that the claimant says the provision of the computational information deployed in the commercial software constituted a representation giving rise to a legitimate expectation on the part of the taxpayer who used ‑ or whose advisers used ‑ the software.  In the information age, says the claimant, there can be no valid distinction between written guidance printed on paper, as it was in the age of steam, and guidance communicated electronically to be used by the taxpayer to calculate his tax.  Put simply like that, I agree with and accept the proposition.  However, in my judgment, it does not decide this application.  
8.	For a legitimate expectation to arise there must be a clarity and a certainty in what is stated, whether orally, in print or by electronic means.  
9.	In the course of his judgment in R (Davies and Another) v Commissioners for HM Revenue & Customs [2011] UKSC 47, Lord Wilson, who gave the leading judgment, set out in paragraphs 26 to 29 of the report his conclusions to that effect:
"26 The primary duty of the Revenue is to collect taxes which are properly payable in accordance with current legislation but it is also responsible for managing the tax system: section 1 of the Taxes Management Act 1970.  Inherent in the duty of management is a wide discretion.  Although the discretion is bounded by the primary duty (R(Wilkinson) v Inland Revenue Comrs [2005] 1 WLR 1718 para 21 per Lord Hoffmann), it is lawful for the Revenue to make concessions in relation to individual cases or types of case which will, or may, result in the non‑collection of tax lawfully due provided that they are made with a view to obtaining overall for the national exchequer the highest net practicable return: Inland Revenue Comrs v National Federation of Self‑employed and Small Businesses Ltd [1982] AC 617, 636 per Lord Diplock.  In particular the Revenue is entitled to apply a cost‑benefit analysis to its duty of management and in particular, against the return thereby likely to be foregone, to weigh the costs which it would be likely to save as result of a concession which cuts away an area of complexity or likely dispute.
27 The Revenue accepts first that, were it in the booklet to have made the representations about the circumstances necessary for the achievement of non‑residence for which either the first appellants or the second appellant contend, such would have been within its powers; and second that, for so long as the representations remained operative, an individual would have had, and therefore have been able to enforce, a legitimate expectation that it would appraise his case by reference to them notwithstanding that they failed to reflect the ordinary law.
28 In this connection, however, the Revenue refers to the decision of the Divisional Court of the Queen's Bench Division in R v Inland Revenue Comrs Ex p MFK Underwriting Agents Ltd [1990] 1 WLR 1545.  It was advantageous to members of syndicates at Lloyd's that funds required to be held for them by their underwriters should be so invested as to yield what the Revenue would accept to be capital gain rather than as income.  Prior to their investment in American and Canadian index‑linked bonds underwriters had, by their agents, inquired of the Revenue whether the uplift for indexation to be achieved on sale or redemption of the bonds would be treated as capital gain rather than as income.  They unsuccessfully contended that the Revenue's responses constituted an affirmative to which it should be held irrespective of whether such treatment of the uplift was correct as a matter of law.  Having rejected the Revenue's argument that any such affirmative response would have been outside its powers, Bingham LJ proceeded at p 1569, as follows:
'I am, however, of the opinion that in assessing the meaning, weight and effect reasonably to be given to statements of the revenue the factual context, including the position of the revenue itself, is all‑important.  Every ordinarily sophisticated taxpayer knows that the revenue is a tax‑collecting agency, not a tax‑imposing authority.  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 ....  Such taxpayers would appreciate, if they could not so pithily express, the truth of the aphorism of 'One should be taxed by law and not be untaxed by concession': Vestey v Inland Revenue Comrs [1979] Ch 177, 197 per Walton J.  No doubt a statement formally published by the Inland Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them.  But where the approach to the revenue is of a less formal nature a more detailed inquiry is in my view necessary .....  First, it is necessary that the taxpayer should have put all his cards face upwards on the table .....  Secondly, it is necessary that the ruling or statement relied upon should be clear, unambiguous and devoid of relevant qualification.'.
The court held that the Revenue's statements about the treatment of the uplift had not been clear enough to give rise to any legitimate expectation.
29 In that the representations in the booklet are formally published by the Revenue to the world rather than being its response to approaches of a less formal nature, a literal reading of Bingham LJ's judgment suggests that, although they are binding in relation only to cases falling clearly within them, the requirement that they should be 'clear, unambiguous and devoid of relevant qualification' does not apply to them.  But in my view a case would fall clearly within them only if they were clear, unambiguous etc; and in R (Bancoult) v Secretary of State for Foreign and Commonwealth Affairs (No 2) [2008] UKHL 61, [2009] 1 AC 453, Lord Hoffmann, at para 60, applied the quoted words of Bingham LJ to a formal publication, namely a press announcement, on the part of the Foreign Secretary.  It is better to forsake any arid analytical exercise and to proceed on the basis that the representations in the booklet for which the appellants contend must have been clear; that the judgement about their clarity must be made in the light of an appraisal of all relevant statements in the booklet when they are read as a whole; and that, in that the clarity of a representation depends in part upon the identity of the person to whom it is made, the hypothetical representee is the 'ordinarily sophisticated taxpayer' irrespective of whether he is in receipt of professional advice." 
10.	Clarity of the statement concerned is an essential ingredient in the formation of a legitimate expectation.  As the defendant has advanced in written submissions, the same point was made by Mr Justice Leggatt in R (GSTS Pathology LLP and Others) v Revenue & Customs Commissioners [2013] EWHC 1801 Admin at paragraphs 72 and 73.  
11.	In my judgment there was no such clarity here.  There was simply computational information which, if fed the information which the claimant and/or his advisers considered consistent with their view of how CDR should be applied, given the claimant's tax planning, produced the outcome it did.
12.	In refusing leave on the papers, Mr Justice Blair said:
"As regards the three grounds: (1) there has been no clear representation that the claimant can point to and software cannot make good that gap in the legal analysis; (2) nothing is added by the abuse of power argument; (3) as was accepted in correspondence dated 26 November 2013, the claimant's position is unique but there is no arguable basis for the suggestion that a decision was taken to target him.  This decision does not of course affect the claimant's appeal to the First Tier Tribunal and only deals with the public law complaint."
13.	I agree with those observations.  If there was nothing to found a legitimate expectation, there was no abuse of power in the Revenue re‑opening the tax calculations.  
14.	The claimant complains that other taxpayers reached similar erroneous outcomes, similar, that is to say, in their quality and in the nature of the error using this or similarly founded software.  And that is true.  It is clear that the Revenue went back to the returns for 2006 to 2007 and, no doubt electronically, mounted a search for other such errors.  Twelve taxpayers were found where computational errors of a similar quality were discovered.  However, all were in hugely different sums involving deficiencies of tax paid of £10,000 or less.  It seems to me that no abuse of power can be founded in seeking to re‑open a case where £4.4 million is in question whilst not seeking to do so for a handful of other cases, all small, in respect of many of which, one imagines, quite possibly the cost of re‑opening the matter would exceed the tax yielded.  On this point, I bear in mind the remarks of Mr Justice Moses (as he then was) in R (Weston) v HM Revenue & Customs [2004] EWHC 1069 Admin (paragraphs 8 to 10).  
15.	Given the conclusions I have reached, there is, strictly speaking, no need to consider the fall‑back position adopted by the defendants, namely that it would be proper, on these facts, to frustrate a legitimate expectation if such had arisen.  Had I been constrained to rely upon that aspect of the defendants' submissions, I would have been inclined to find on these facts it was indeed proper to frustrate such a legitimate expectation.  This was a very large windfall, and provided always that the Revenue interpretation of the underlying law is correct, it seems to me that such an outcome would have been proper.  There is no evidence before me of reliance on the outcome of the computation initially accepted or of detriment.  
16.	For all these reasons permission to apply for judicial review is refused.
17.	MR PRITCHARD:  I am obliged.  There is an application for costs.  It was made on paper, I recall, in the sum of £3,000.  They had probably been assessed.  We ask for that sum in costs.
18.	MR JUSTICE IRWIN:  Do you have anything to say on costs?
19.	MR FIRTH:  I do not resist the principle of the costs of responding to our claim, but the amount ‑ I do not think I have seen any.
20.	MR PRITCHARD:  It is recorded in the order.
21.	MR FIRTH:  We have seen the 3,000 but a breakdown ‑ ‑ ‑ ‑ ‑
22.	MR JUSTICE IRWIN:  It would be a little surprising if that could not be justified on a case of this nature, would it not?  Do you want to risk the costs of an investigation of £3,000 worth of costs?
23.	MR FIRTH:  When you put it like that, I suspect not.
24.	MR JUSTICE IRWIN:  I thought that was the commonsense view.  Yes, I sustain the costs order that was made below.
25.	I am grateful to both of you for your submissions and your attendance.
26.	MR PRITCHARD:  Would you like us to draft the order?
27.	MR JUSTICE IRWIN:  I would.  I hope that in about forty‑five minutes I would have left the building for a period of weeks.  Can you draw it up on the assumption that as soon as I can attend to it I will sign it.  Is there likely to be any difficulty?  Is there anything I can deal with?
28.	MR FIRTH:  If the date for appealing that order would run from the date of signing that would be very helpful to the claimant.
29.	MR JUSTICE IRWIN:  I simply do not know when I will be back in the building; even when I am, it will be out of term.  Your period continues, does it not?  It is vacation.  I certainly extend the period for appeal to ‑ is it twenty‑one days?
30.	MR FIRTH:  It is seven days.
31.	MR JUSTICE IRWIN:  I will extend the period to seven days after the order is signed otherwise we will have all sorts of needless complications to face.
32.	MR FIRTH:  To clarify, you do not expect it to be signed for a few weeks.  Is that right?
33.	MR JUSTICE IRWIN:  I do not expect it to be signed for something like three weeks but it would be wise not to let it slip.  Get it into the building.