QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| The Queen on the Application of Ralph Hely-Hutchinson
|- and -
|The Commissioners for Her Majesty's Revenue and Customs
Mr Nawbatt (instructed by HMRC Solicitors Office) for the Defendant
Hearing dates: 15 October 2015
Crown Copyright ©
Mrs Justice Whipple :
"Subject to the provisions of this Act, a person's acquisition or disposal of an asset shall for the purposes of this Act be deemed to be for a consideration equal to the market value of the asset-
(b) where he acquires or, as the case may be, disposes of the asset wholly or partly in consideration for or recognition of his services in any office of employment ..."
"3. Who is affected by the change in acquisition cost?
Most of the people affected will be employees who have sold shares that they acquired by exercising unapproved employee share options or Enterprise Management Incentive share options. The CGT acquisition cost of these shares is:
their market value at the time the option is exercised plus
any amount charged to income tax on the exercise.
The decision does not affect employees who acquired shares through approved Save As You Earn ('SAYE') schemes and approved Company Share Option Plans ('CSOPs'). Their acquisition cost stays what it was before the Mansworth v Jelley decision: the exercise price paid for the shares. Others affected would be anyone else exercising options granted otherwise than by way of a bargain at arms length or by reason of employment.
4. What happens next for people affected by the change in acquisition cost?
Self-Assessment time limits
Where taxpayers have already made Returns they can amend those Returns on the basis of the decision in Mansworth v Jelley within the time limits. These time limits run to 31 January 2003 for Returns for the tax year to 5 April 2001 and to 31 January 2004 for Returns for the tax year to 5 April 2002. Where taxpayers have not already made Returns they should include gains or losses calculated in accordance with the decision in Mansworth v Jelley.
Other open years
Where cases are open for earlier years, taxpayers can amend their Capital Gains for those years in accordance with the decision.
6. What happens next for the people affected by the change in disposal proceeds?
Where Return made before 12 December 2002, the date of the Court of Appeal judgement
We will take no action to implement the decision in Mansworth v Jelley.
Where Return made on or after 12 December 2002, the date of the Court of Appeal judgment
The Return for any tax year, should include gains or losses calculated in accordance with the decision in Mansworth v Jelley.
CGT1 Capital Gains Tax introduction and other Inland Revenue publications will be amended in due course."
"This notice expands on the one issued on 8 January 2003 but does not replace it so you may need to read both of them. The earlier notice sets out the general position. This one takes the form of answering some frequently asked questions. ".
It then set out a series of questions and answers. In particular, it stated as follows:
Q6. What is the time limit for claiming capital losses which arise as a result of the decision in Mansworth v Jelley?
A6. It depends on the year when the loss was made. For self-assessment tax years (1996/97 onwards), you have to claim capital losses within five years after the first 31 January following the tax year in which you made the loss. For example, you have to claim a capital loss for shares sold between 6 April 1997 and 5 April 1998 no later than 31 January 2004.
Capital losses are deducted from capital gains in the following order:
i. Losses in the same year as the gain,
ii. Losses brought forward from 1996/97 or a later tax year (self-assessment years),
iii. Losses brought forward from 1995/96 or earlier tax years.
A deduction for capital losses for pre-self-assessment tax years (1995/96 and earlier) can be given without a claim but see Q9.
Q7. How do I claim a capital loss that arose in a self-assessment tax year?
A7. There is guidance in the notes on the capital gains pages of your self-assessment tax return. You can amend your tax return if the amendment window (12 months from the statutory filing date for that return) has not closed. If the return is under enquiry you can ask the Inland Revenue officer to amend your return at the end of the enquiry to include your claim for a capital loss.
If the time limit for amending your tax return:
- has not yet passed, write to your tax office saying you are amending your tax return and provide figures for your capital loss,
- has passed but you are still in time to make a capital loss claim, write to your tax office and provide figures for your capital loss.
Q8. How do I amend my 2001/02 tax return to set off a capital loss? My return was issued in April 2002 and is not under enquiry.
A8. The time limit for amending your tax return for the tax year to 5 April 2002 is 31 January 2004. Before that date write to your tax office saying you are amending your tax return, provide figures for your capital loss and show how it should be set off.
Q9. How do I deduct my pre-self-assessment losses?
A9. If you have a capital gain for an 'open' tax year you can deduct losses brought forward from 1995/96 or earlier tax years after deducting:
- any losses which arose in the same year as the gain
- unused losses brought forward from 1996/97 or a later tax year (self-assessment years).
An open tax year is one where the amendment window (12 months from the statutory filing date for the tax return of that year) has not closed or where your return is under enquiry.
You have to set off pre-self assessment losses in the earliest open year.
Write to your tax office saying you are amending your tax return and provide figures for your capital loss. If your return is under enquiry you can ask the Inland Revenue officer to amend your return at the end of the enquiry to include capital losses.
"The interaction between the recent court decision in Mansworth v Jelley, losses and self-assessment generally is under consideration. Definitive advice will be published on the Internet and elsewhere as soon as possible. Until then we are noting and acknowledging correspondence but not generally dealing with points that are not covered in the information published on the Inland Revenue Website under Featured Areas: Capital Gains Tax; Recent Developments; Tax Treatment Of Certain Options Following Mansworth v Jelley on 8 January 2003."
"The Revenue is enquiring into your participation in the ABN Amro Armadale share option scheme. One area of enquiry involves the claims arising from the Mansworth v Jelley case. The Revenue does not accept, for this scheme, that the additional losses claimed under that case are due. One consequence is that no repayments will be made. At this stage, I do not intend to ask any questions about this matter as matters are being discussed between the Revenue and your employer and their advisors. However I will advise later if I need any further information from you or if there are any amendments arising because of this enquiry."
The letter attached a schedule of figures, showing how the claims would be given effect if the capital losses claimed were found to be due.
"We have now received legal advice that HMRC's guidance is incorrect. Where the shares are treated as having been acquired at market value, that value is the full measure of their deemed cost of acquisition. The cost is not augmented by any amount chargeable to income tax on the exercise of the options. Thus in computing any capital gain or loss accruing on a disposal of the shares no deduction falls to be made of, or in respect of, any amount that is chargeable to income tax on exercising the options. Our guidance will be amended accordingly."
"HMRC will apply our new understanding of the law in cases where there is an open enquiry or appeal."
"Taxpayers who used HMRC's previous guidance
Q15. Do taxpayers who before 12 May 2009 computed their chargeable gains or losses in line with the Revenue's guidance that was published on 8 January 2003 have a open 'legitimate expectation' that their tax treatment should be more favourable than it would be under HMRC's current understanding of the law?
A15. HMRC does not accept that its published guidance alone can necessarily create a 'legitimate expectation' for a taxpayer. Whether a taxpayer has a legitimate expectation will depend upon the specific factors and circumstances of the case. Chargeable gains and allowable losses included in returns or claims should be calculated on the correct statutory basis, which HMRC now understand to be as described in Revenue & Customs Brief 30/09. HMRC's primary responsibility is to apply the law correctly and collect underpaid or under-declared tax. However, in some limited circumstances, to apply the statute may be so unfair as to amount to an abuse of power by HMRC and in these circumstances HMRC may be bound by its previous guidance. We will normally be bound by our previous guidance where the taxpayer can demonstrate that he or she:
- Reasonably acted in reliance on the previous guidance and would suffer detriment from the correct application of the statute.
- To have acted in reliance on the advice the taxpayer must have done or refrained from doing something as a direct consequence of the advice. HMRC understand that in this context 'detriment' means real loss, it is not sufficient to have merely suffered disappointment or upset."
"I would agree that changes in the law do not apply retrospectively. However, with respect, that is not what we are trying to do.
We are therefore seeking to apply our present understanding of the law as it stood at the time of the transactions in 1998/99 and 1999/00. There is no retrospection here or an attempt to backdate guidance. It is true that today's understanding of the law in 2003 is different from that which we had in 2004 (say) but the principle that we apply at today's date our current understanding of the law is consistent with [policy]."
GROUNDS FOR SEEKING JUDICIAL REVIEW
THE COMMISSIONERS' POWERS AND DUTIES
" in the daily discharge of their duties inspectors are constantly required to balance the duty to collect "every part" of tax due against the duty of good management. This conflict of duties can be resolved only by good managerial decisions, some of which will inevitably mean that not all the tax known to be due will be collected."
(R (Inland Revenue Commissioners) v National Federation of Self-Employed and Small Businesses Ltd  WLR 722, the "Fleet Street Casuals" case, per Lord Scarman at p 746 E and F).
"I am persuaded that the modern case law recognises a legal duty owed by the revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims. The duty has to be considered as one of several arising within the complex comprised in the care and management of a tax, every part of which it is their duty, if they can, to collect".
"10. There is no arguable unfairness in [the Commissioners] pursuing that duty [to collect the tax due] merely because, for some reason, they have failed to pursue their obligation in relation to the other taxpayers. Nor could it possibly be contended that there was unfairness to the other taxpayers since they have had the good fortune, if Mr Sherry's client's information is correct, to have escaped the tax. But the mere fact that two taxpayers arguably in the same situation have not in fact been charged tax does not raise a case of unfairness without more. If there was some evidence, which it would be incumbent on Mr Sherry's clients to produce, to show that there had been some unfairness; a basis for distinguishing between the taxpayers; some favour shown to the Inspector which caused the Revenue to charge his client tax but not the others; if there were some specific basis to show that the decision made was based upon some caprice or discriminatory reason; why, then the case would be different. But it is not, in my judgment, open to a taxpayer, simply because one taxpayer has been charged and another has not, simply to raise the contention and then expect the revenue to respond requiring them to disclose the private affairs of other taxpayers."
"The Revenue might stick to the letter of its statutory duty, declining to answer any questions when not statutorily obliged to do so and maintaining a strictly arm's length relationship with the taxpayer. It is, however, understandable if the Revenue has not in practice found this to be the best way of facilitating collection of the public revenue. That this has been the Revenue's experience is, I think, made clear by Mr Beighton, who, having described the machinery for assessment and appeal, continues:
"6. Notwithstanding this general approach in administering the tax system, the Board see it as a proper part of their function in contributing to the achievement of their primary role of assessing and collecting the proper amounts of tax and to detect and deter evasion, but they should when possible advise the public of their rights as well as their duties, and generally encourage co-operation between the Inland Revenue and the public."
"The practice exists because the Revenue has concluded that it is of assistance to the administration of a complex tax system and ultimately to the benefit of the overall tax yield."
And further at p 115 b:
" If however the taxpayer ... receives an unequivocal statement about how [his tax affairs] will be treated for tax purposes if implemented, the Revenue should in my judgment be subject to judicial review on grounds of unfair abuse of power if it peremptorily decides that it will not be bound by such statements when the taxpayer has relied on them. The same principle should apply to Revenue statements of policy".
" There can be no better introduction to this section than in the words of Moses LJ in his judgment in the decision under appeal:
"12. The importance of the extent to which thousands of taxpayers may rely upon guidance, of great significance as to how they will manage their lives, cannot be doubted. It goes to the heart of the relationship between the Revenue and taxpayer. It is trite to recall that it is for the Revenue to determine the best way of facilitating collection of the tax it is under a statutory obligation to collect. But it should not be forgotten that the Revenue itself has long acknowledged that the best way is by encouraging co-operation between the Revenue and the public co-operation requires fair dealing by the Revenue, and frank and open dealing by the public. "
"However it was clearly recognised in Ex parte Preston  AC 835 that in an appropriate case the court could direct the Inland Revenue:
'to abstain from performing their statutory duties or from exercising their statutory powers if the court is satisfied that 'the unfairness' of which the applicant complains renders the insistence by the commissioners on performing their duties or exercising their powers an abuse of power .:' per Lord Templeman, at p. 864."
Lord Wilson put it in this way in Davies and Gaines-Cooper:
"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  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: R v Inland Revenue Comrs v National Federation of Self-Employed and Small Businesses Ltd  AC 617 , 636, per Lord Diplock."
In determining what amounts to unfairness so marked that it constitutes an abuse of power, it is important to remember that "the categories of unfairness are not closed" (per Bingham MR in Unilever at p 690 f) and therefore the circumstances in which the Commissioners may be required to forgo tax can travel beyond cases of detrimental reliance (although the fact that a taxpayer has relied to his or her detriment on the Commissioners' promise is in many cases the source of the complaint of unfairness). Specifically, the Commissioners are incorrect to submit, as they do in their skeleton, that "A public authority cannot be required to continue to apply the wrong tax treatment just in order to ensure consistency of treatment" (para 23); the Commissioners can be required in an appropriate case to continue to apply the wrong tax treatment to ensure consistency of treatment, where the alternative would be conspicuously unfair, and an abuse of power.
"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."
"Where there is a substantial public interest in the public body behaving as it has done or as it intends to do then, absent the marked degree of unfairness or of disproportionality illustrated by the cases, relief of the character of judicial review against the public body can properly be and is, indeed, likely to be, withheld."
"the border [lies] between on the one hand mere unfairness - conduct which may be characterised as "a bit rich" but nevertheless understandable - and on the other hand a decision so outrageously unfair that it should not be allowed to stand."
The exercise of the options
Opening of Enquiries
" In his skeleton argument Mr Margolin acknowledges that if a taxpayer has acquired a legitimate expectation that he is entitled to the benefit of a particular concession he also has a legitimate expectation that such concession will not be withdrawn retrospectively and that any withdrawal will be managed fairly. He accepts, in effect, that the defendants should give reasonable notice of any withdrawal or alteration of a concession so as to allow the taxpayers time to make any necessary adjustments to their affairs. I agree with that approach."
The Closure Notices
FACTORS IN THE BALANCING EXERCISE
"To the extent the Claimant suggests that he has been treated inconsistently with those who were not the subject of an enquiry it is simply not possible to make any such comparison the two situations are entirely different and the general scheme of taxation provides for the situations to be treated differently."
"(2) the taxpayer shall not be assessed if the return was in fact made on the basis or in accordance with the practice generally prevailing at the time that it was made."
"where we provide you with erroneous advice that is binding on us and subsequently notify you that it is incorrect, the established legal position is that you will only be required to start accounting for tax on the correct basis from the date of notification. All cases will be subject to any statutory time limits."
It is not clear to me how the Commissioners square RCB 30/09 with this policy: RCB 30/09 required the Claimant (and others in the subset) to account for tax on the correct basis (as the Commissioners saw it) in relation to past disposals; this was not, on its face at least, a prospective correction.