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Hely-Hutchinson and legitimate expectation

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Although it is not evident from the Supreme Court's permission to appeal page, the Supreme Court refused permission to appeal in the case of Hely-Hutchinson v HMRC ([2017] EWCA Civ 1075). This brings to an end the saga around the Mansworth v Jelley ([2003] STC 53) losses.

In effect, HMRC (Inland Revenue at the time) produced some poor guidance in 2003 in which it had erroneously misrepresented the law, allowing taxpayers to claim capital losses where no losses were actually made. The mistake was only realised in 2009, thus creating a saga: what should HMRC could do in relation to those persons who relied upon the 2003 guidance? HMRC decided that it would not touch 'closed' cases, but would apply the 2009 guidance to those taxpayers who had ongoing enquiries.

Ralph Hely-Hutchinson was a taxpayer who amended his tax returns on the basis of the 2003 guidance, but his returns were still 'open' in 2009 so HMRC applied the 2009 guidance. In the High Court, Hely-Hutchinson successfully argued that he had a legitimate expectation to be treated in accordance with the 2003 guidance. The Court of Appeal found otherwise and the Supreme Court, by refusing to grant permission, has rendered that decision final.

Ultimately, I would argue that the Court of Appeal decision is defensible as an orthodox application of the law as it stands. HMRC can resile from a previously promised position where it has a good reason for doing so and overturning a mistaken view is a good reason. However, a different result could have been arrived at if the case had gone to the Supreme Court.

What is unfortunate about the decision is that it undermines the value of HMRC guidance, which performs an important rule of law function. By virtue of HMRC guidance, taxpayers are better informed of the legal consequences of their actions which is desirable as it respects the autonomy or human dignity of taxpayers (even where the taxpayer is a legal entity, it is ultimately humans that make decisions on its behalf). On this basis, HMRC would also be justified in not reneging on its previous position.

Of course, HMRC should strive to ensure that it collects the correct amount of tax. But mistakes happen. Provided that HMRC follows good processes and does not act in an outrageously misguided way, it is not unlawful for HMRC to fail to collect tax which might ultimately be due. In the case of Hely-Hutchinson, it would have been lawful for HMRC to accept that some tax due would not ultimately be collected (see the recent case of R (Vacation Rentals) v HMRC [2018] UKUT 383 (TCC), for example). In fact, HMRC bore its own costs in the litigation, which certainly would have added up and likely been greater than the tax ultimately payable (the taxpayer claimed capital losses of £428,000, meaning the tax due would be far less than this figure). HMRC has the power to get it wrong and there is virtue at times then in allowing mistakes to perpetuate.

Stephen Daly, lecturer, Dickson Poon School of Law, King's College London (