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The Queen on the Application of Ralph Hely-Hutchinson v HMRC

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In The Queen on the Application of Ralph Hely-Hutchinson v HMRC [2015] EWHC 3261 (11 November 2015), the High Court quashed HMRC’s decision to reject the taxpayer’s claims for capital losses.

The claimant sought judicial review of HMRC’s rejection of his claims for capital losses. He asserted a legitimate expectation in reliance of HMRC guidance. HMRC considered that there was ‘no conspicuous unfairness’ and that there was an ‘overriding public interest’ in collecting the correct amount of tax.

As part of his employment remuneration, the claimant had been granted options in an unapproved employee share option scheme. He had exercised his options and disposed of the shares on the same day in tax years 1999 and 2000. It had been understood at the time that, under TCGA 1992 s 17, he was deemed to have acquired the shares at market value so that no gain or loss had arisen on their disposal. The claimant had filed his returns on that basis.

Following the Court of Appeal’s decision in Mansworth v Jelley [2003] STC 53, HMRC had issued a Technical Note in 2003 explaining that the acquisition cost of shares acquired under an unapproved share option scheme would now be the market value at the time of exercise of the option plus any amount charged to income tax on the exercise. The claimant made a claim for capital losses (by way of amendment to his tax returns) on the basis of the 2003 guidance.

FA 2003 subsequently introduced TCGA 1992 s 144ZA, which re-established the position as it had been understood before Mansworth v Jelley. HMRC eventually published new guidance in 2009 in Revenue and Customs Brief 30/09.

Claims by other taxpayers in a similar position to the claimant had been allowed; however, 600 individuals, including the claimant, had not been given the benefit of the 2003 guidance. HMRC explained that enquiries had still been open in relation to those 600 individuals at the time Brief 30/09 had been published. As a result of these enquiries, HMRC had been within time to impose the correct tax treatment, whereas it had been barred from doing so in relation to the other taxpayers by TMA 1970 s 9A. The High Court noted however that, but for the enquiries which had been open in relation to those claims, the relevant individuals would have benefited from TMA 1970 s 29(2), which provides that ‘a 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’. The differences did not make it fair for HMRC to impose tax on the claimant’s class of taxpayers; it simply gave HMRC the opportunity to do so.

The High Court also pointed out that Brief 30/09 was retrospective in its application, as it required the claimant’s cohort of taxpayers to account for tax in relation to past disposals.

Finally, some weight should be attached to the fact that HMRC had taken so long to recognise and rectify its mistake. Brief 30/09 had been published six years after the original mistake made in 2003 (and after the problem had been resolved by FA 2003). Also, the relevant closure notices had been issued 11 years after the claims had been made.

Read the decision.

Why it matters: The High Court noted that HMRC had approached the matter in line with its own guidance, which focused on detrimental reliance, and could not be criticised for doing so. However, HMRC should have balanced all aspects of fairness, in particular, discrimination.

Also reported this week:

Issue: 1286
Categories: Cases