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The OTS strategic review on HMRC guidance

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HMRC guidance is an important and desirable feature of the tax system, on which the recent strategic review from the Office of Tax Simplification provides critical and timely recommendations. Key recommendations include a ‘new model’ for guidance that makes greater use of technology and clearly identifies three levels of complexity: simple for the majority of individual taxpayers; more advanced for businesses; and technical for tax advisers. Though only one recommendation expressly refers to the ability to rely upon HMRC guidance, the other proposals (if implemented) will lead to greater protection for taxpayers in terms of reliance.

When you search HMRC’s website for those publications with the title ‘Guidance’, there are over 1,500 hits. There are another 1,030 policy papers, 370 notices and 854 forms. Scratch the surface and there are around 150 manuals, containing sometimes hundreds of pages of detailed guidance. 
It is apparent that HMRC guidance must serve some function, but it has only now become an important talking point for policymakers. The financial secretary to the Treasury, Mel Stride, has taken a keen interest in the topic of HMRC guidance. The representative bodies – CIOT, ATT and LITRG – have engaged in a cross-tax project on the issue, while HMRC is conducting an internal project on guidance. 
Importantly, the Office of Tax Simplification (OTS) at the beginning of October produced a strategic review on HMRC guidance, entitled Guidance for taxpayers: a vision for the future. The OTS review provides a ‘strategic vision’ for the future, which focuses on the purpose of taxpayer guidance and the ways it might best be delivered in the future.
This article assesses the recommendations set out by the OTS in the review in light of concerns over when taxpayers can and cannot rely on HMRC guidance. 
Although only one recommendation expressly refers to the ability to rely upon HMRC guidance, the other proposals (if implemented) will lead to greater protection for taxpayers. It should be disclosed that the author of this article met with the OTS to discuss HMRC guidance before the report was produced.

The OTS review

The review notes that good guidance plays a vital role in explaining the tax system by enhancing compliance and reducing costs. Indeed, one could go further and note that guidance is important from the perspective of the rule of law, as it advises taxpayers of the legal consequences of their actions. The ultimate merit of the rule of law in this sense is that it values human dignity – treating humans as ends in themselves capable of making their own decisions.
The review proposes 12 recommendations to be adopted, 11 of which relate to three different elements of guidance: 
  • the substance of guidance (i.e. what goes into HMRC guidance); 
  • the framework for its production and amendment; and 
  • the use of technology to meet user needs. 
The remaining recommendation is that HMRC should undertake a consultation on the circumstances in which a taxpayer can rely on published guidance and the extent to which a taxpayer will be subject to interest, penalties and the tax in dispute where guidance is found to be incorrect (recommendation 11). 

What about reliance?

It is critical that HMRC guidance should be reliable, and thus that taxpayers should have a mechanism for binding HMRC to its word. Without such a mechanism, HMRC guidance does not ‘guide’ in any real sense. However, taxpayers have found to their detriment that there are significant hurdles to legally binding HMRC to its guidance. 
Take, for instance, the case of HMRC v Hely-Hutchinson [2017] EWCA Civ 1075. In 2003, the Inland Revenue issued guidance in respect of the calculation of capital gains tax on sales of share options. In 2009, HMRC acknowledged that the guidance contained an error of law and revised it. As regards closed cases in which the 2003 guidance was relied upon, HMRC applied the terms of the 2003 guidance. What, however, about instances where there was an open enquiry in 2009? This question was pertinent to the case of Hely-Hutchinson, who relied upon the 2003 guidance but whose case was still open in 2009. HMRC refused to treat him in accordance with the 2003 guidance, instead applying the less favourable 2009 guidance. 
The Court of Appeal found that HMRC’s decision to do so was lawful, critically noting that the taxpayer did not rely upon the guidance (as he amended his tax returns after the 2003 guidance was produced); and that HMRC had ‘good reason’ to depart from it. This particular case raises important questions about the overarching utility of guidance and in particular when guidance can be followed. 
The issues litigated in the case have been central to discussions about the extent to which guidance can be relied upon. For instance, these led to a meeting between HMRC and members of the representative bodies on the status of guidance and legitimate expectation in 2013. 
Despite the importance of reliance in relation to HMRC guidance, the review only recommends HMRC to engage with and consult with stakeholders on the issue. The review further makes clear that it does not wish to deal with the issue of binding rulings, which it notes would require further research. The desire to avoid discussing the issue of binding rulings is understandable. Proposals in this area have a long pedigree, and a comprehensive system for binding rulings was seriously contemplated in the 1990s before being quietly shelved. No doubt the OTS recognised that proposals in relation to rulings might be a distraction, would require a great deal more consultation and ultimately would require legislative action, which might be difficult to obtain.

Tangential impact on guidance

This does not mean that the recommendations from the OTS would have little impact on reliance. In order to explain this, it is necessary to understand the doctrine of legitimate expectations, which is the most robust form of legal protection for taxpayers where HMRC seeks to renege on its previously stated position. There are two strands to a successful claim. 
The first is that the taxpayer must demonstrate that a legitimate expectation arose (R (Gaines-Cooper) v HMRC [2011] UKSC 47, at paras 25-29). For this, there must have been some HMRC representation or assurance, either through express wording or implied through practice, which was clear, unambiguous and devoid of relevant qualification. A taxpayer must additionally have placed all their cards up on the table if HMRC was approached. 
The second is that frustrating this legitimate expectation was unlawful (United Policyholders v AG of Trinidad and Tobago [2016] 1 WLR 3383, at para 38) because, for instance, it was unreasonable (though older cases use the words ‘unfair’ or ‘conspicuously unfair’). The fact that an HMRC representation may be predicated on an incorrect understanding of the law may be a good reason for HMRC to renege on it (as in Hely-Hutchinson) and, as a result, the frustration may be lawful. These two strands to the doctrine are not entirely mutually exclusive; for instance, the clearer the representation, the more unreasonable it would be to renege on it. 
The importance of the OTS’s recommendations in terms of the doctrine are that they would hopefully lead to the production of HMRC guidance which has greater clarity and that is less likely to be incorrect. Clearer, correct guidance produces a greater chance of successfully binding HMRC. For instance, the OTS recommends that guidance should be elevated to a key departmental priority (recommendation 2), thereby placing greater emphasis on ensuring that guidance is of a sufficient quality in terms of clarity and correctness. 
The OTS recommends that a new ‘advice and guidance panel’ (recommendation 3) should be established (consisting of senior HMRC officers, respected tax specialists and academics), which would give advice about interpretative matters, technical accuracy and related issues. Such focus on HMRC guidance and the addition of technical expertise would reduce the likelihood of mistakes and ambiguity.
This is allied to the recommendation to engage by way of consultation with industry and representative bodies on HMRC guidance (recommendation 10). 
Several of the recommendations seek to remove some of the traps that taxpayers might fall into which undermine the ability to rely on guidance, such as:
  • being out of date (recommendation 8); 
  • guidance being inappropriate for the user (recommendation 4); or 
  • contentious views being mingled with generally accepted practice (recommendation 12).
Further, a prerequisite to relying upon some piece of HMRC guidance is that the taxpayer is actually able to find the relevant guidance. To this end, the OTS makes several recommendations which if implemented would lead to taxpayers being directed to relevant guidance on which they could then rely. For instance:
  • a new model of guidance should focus upon taxpayers’ needs (recommendation 1), building upon new ways of delivery; 
  • new technology should be used to direct people to guidance appropriate for their needs (recommendation 5); and 
  • the governmental digital service should work with HMRC in order to ensure that the guidance managed by both is connected in order to fulfil user needs (recommendation 6).

Concluding remarks

In short, if adopted, the proposals of the OTS, which focus primarily on the substance of HMRC guidance, the framework for its production and the use of technology to meet user needs, would nevertheless have a beneficial impact upon the reliability of HMRC guidance. The OTS recommendations to this end are to be welcomed.
The review is significant too for the fact that it brings to the fore the important and desirable role that guidance plays in the administration of the tax system. Going forward, tax advisers will continue to have a role in assisting HMRC in producing guidance and should build upon existing practice of engaging with HMRC on the substance of guidance.