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HMRC’s discretion and legitimate expectation

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The interaction between legislation and HMRC guidance is increasingly critical to the UK tax system. 

On 11 December 2014, the Institute for Fiscal Studies’ Tax Law Review Committee (TLRC) published a discussion paper entitled HMRC’s discretion: The application of the ultra vires rule and the legitimate expectation doctrine. This was written by the TLRC’s research director in her personal capacity and published to promote debate. The paper introduces a number of credible options to give much needed certainty in this increasingly fundamental area. A few can be highlighted.

One option suggested is to give ‘a clear statutory right to rely on guidance or specific forms of guidance’ (para 2.7.3). This is a practical proposal. It could be introduced by trivial legislative change. The paper suggests an extension of the GAAR guidance approach (para 7.10.3). But, on an initial view, corporation tax would simply need the amount of tax ‘chargeable’, in CTA 2010 s 4(3) Step 1, to be defined as the amount calculated based on legislation or relevant guidance. Corresponding changes could be made for other taxes. Careful drafting would be needed.

A second option is a ‘clear statement of principles, setting out what forms of HMRC guidance or clearance can be relied upon and in what circumstances’ (para 7.11). This is a gentler option than legislative change. In essence, it proposes a formal reality check. For instance, HMRC encourages reliance on its manuals, but all text in the manuals is subject to a wide-ranging caveat (consistent with their original purpose). HMRC also takes a robust and arguably incorrect line that ‘only in exceptional circumstances will HMRC be bound by incorrect advice’ (para 6.2, referring to ADML1605). If our tax system is to be heavily based on interaction between taxpayer and tax collector, to be credible there must be consensus as to the rules of that interaction, dovetailing with the legal principles that support it.

Third, the paper addresses a problem which can seem alien to many, but which is a major public law issue. HMRC’s legal constitution currently prevents it from being bound by certain guidance. To give a very compressed summary (my personal view, which may differ from that in the TLRC paper), currently HMRC generally cannot be bound by guidance in relation to tax arising at a time when it believes the guidance to be technically incorrect (or when the guidance evidently is incorrect), unless the guidance is part of a bona fide attempt to maximise tax collected overall. The paper proposes that all HMRC guidance should be equally binding, overriding the problems of HMRC’s current constitution. This raises quite significant public law issues, but could in principle be resolved by amendment or clarification of the ‘collection and management’ principle in CRCA 2005 s 5.

There is a clear case for debate on the design of our system. Currently, when UK taxpayers can rely on guidance. Where guidance runs counter to legislation, fails adequately to fill the gaps, or fills the gaps but is of uncertain legal weight, the tax system cannot be ‘prospective, open and clear’. If so, the rule of law is not in force and our system cannot remain competitive for long.

These options would not solve the problems altogether. We would still need to deal with those situations where neither legislation nor guidance is clear. But they would involve a major step forward.

Debate is needed. This paper can be a catalyst and focal point.