Aozora GMAC Investment Ltd – HMRC did not breach a taxpayer's legitimate expectation
In R (oao Aozora GMAC Investment Ltd) v HMRC  EWCA Civ 1643, the Court of Appeal has dismissed the taxpayer's claim that a statement in HMRC’s International Manual created a legitimate expectation, because the taxpayer had not relied on it substantively and, even if it had done, there was insufficient "unfairness" in frustrating the taxpayer's expectation.
This blog is based on an article which was first published in Tax Journal on 5 November 2019. A copy of that article can be viewed here.
A UK resident subject to UK tax on income or gains attracting foreign tax may claim unilateral relief from double taxation. At the relevant time, this was achieved through a claim under section 790, Income and Corporation Taxes Act 1988 (ICTA). Section 793A(3), ICTA, restricted the availability of relief under section 790 if a double tax treaty contained an express provision to the effect that relief by way of credit was not to be given in particular cases or circumstances specified or described in the treaty.
Aozora GMAC Investment Ltd (the Claimant) received interest payments on loans it had made to its US subsidiary. The US imposed withholding tax on the interest. HMRC issued closure notices, which had the effect of preventing the Claimant from using the withheld tax to offset its UK corporation tax liability on the interest payments.
According to HMRC, the double tax provisions contained in section 793A, operated to prevent relief under section 790. The UK and the US had entered into a double tax treaty (the Treaty), Article 23 of which provided that UK resident companies could only benefit from double tax relief if they were "qualified persons". Article 24(4)(c) restricted the circumstances in which a qualified person could claim relief by way of credit against UK corporation tax.
The section of HMRC's International Manual (the Manual) dealing with section 790 stated that the only provisions to which section 793A applied was Article 24(4)(c) of the Treaty. This statement was subsequently removed as it was inaccurate.
The Claimant claimed that the Manual contained a representation that the scope of section 793A was limited to precluding the availability of credit relief only in one particular circumstance, which was not applicable. According to the Claimant, that representation gave rise to a legitimate expectation that it would be taxed in accordance with that interpretation of section 793A, whether or not the Manual was accurate as a matter of law.
Dismissing the judicial review claim, the High Court held that the Claimant had not relied on the representation when deciding to arrange the loans to the US subsidiary and it was not unjust for HMRC to resile from the representation in the Manual. The Claimant appealed to the Court of Appeal
The general principles relating to legitimate expectation were summarised by Lord Neuberger in United Policyholders Group v Attorney General of Trinidad and Tobago  1 WLR 3383, PC, at -. In summary, the principle of legitimate expectation is based on the proposition that, where a public body states that it will do (or not do) something, a person who has reasonably relied on the statement should, in the absence of good reasons, be entitled to rely on the statement and act accordingly. The principle is, however, subject to important limitations.
In R v IRC ex p MFK Underwriting Agencies Ltd  1 WLR 1545, Bingham LJ, made the following observations at 1569B:
“I am, however, of opinion that in assessing the meaning, weight and effect reasonably to be given to statements of the revenue the factual context, including the position of the revenue itself, is all important. Every ordinarily sophisticated taxpayer knows that the revenue is a tax-collecting agency, not a tax-imposing authority. The taxpayer’s only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law … Such taxpayers would appreciate, if they could not so pithily express, the truth of the aphorism of “One should be taxed by law, and not be untaxed by concession”: Vestey v Inland Revenue Commissioners  Ch. 177, 197 per Walton J. 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”.
Bingham LJ went on to state that where a representation had been made to a particular taxpayer following a request for a ruling, it is necessary that the ruling statement relied on should be “clear, unambiguous and devoid of relevant qualification”. In R (oao Davies) v HMRC; R (oao Gaines Cooper) v HMRC  UKSC 47, where the issue was whether taxpayers who had moved abroad could claim non-resident tax status on the basis of certain paragraphs in a published booklet, Lord Wilson confirmed that Bingham LJ’s requirement that representations should be “clear, unambiguous and devoid of relevant qualification” applied also to representations made in guidance formally published by HMRC to the world. Further, it is clear from the judgment in Davies that the content of the alleged representations is to be determined on an objective basis.
The role of HMRC's guidance
The UK tax code is one of the most complicated in the world. A conversation on the subject barely goes by without lip service being paid to the fact that 'simplifying' the tax code should be a priority. We even have an Office for Tax Simplification, designed for this very purpose. HMRC's guidance is therefore an essential component in the process of understanding and applying the tax code. As the Court of Appeal itself observed in this case, HMRC publishes manuals to assist its own staff to understand and apply the law. HMRC's guidance is regularly referred to in correspondence by HMRC officers as if it were the law, and is held up as forming the basis of their decisions and/or exercise of their discretion.
The High Court in this case observed that the representation in the Manual was clear, unambiguous and devoid of any relevant qualification, to the effect that the ordinarily sophisticated taxpayer was not required to look beyond Article 24(4)(c) of the Treaty when considering the potential disapplication of unilateral relief pursuant to section 793A(3). The Court of Appeal agreed with the High Court and held that the ordinarily sophisticated taxpayer would not have realised that he needed to read the statement in the Manual as dealing only with express Treaty provisions that apply to qualified persons.
Perhaps worryingly, HMRC argued in this case that the terms of the Manual identify only an expression of HMRC’s views as to the construction of that provision. The mere expression of a view as to the interpretation of a statutory provision cannot, it said, amount to a “representation” to taxpayers generally giving rise to a substantive legitimate expectation worthy of protection by the courts. HMRC framed this argument on the basis that an ordinarily sophisticated taxpayer would be aware of the critical distinction between the role of Parliament to make the law and the role of HMRC to administer the collection of taxes. This limited role means, HMRC said, that it is not reasonable for taxpayers to rely on HMRC’s interpretation of the law.
Fortunately, the Court gave short shrift to this argument. It said, at :
"I do not accept the contention that because the ordinarily sophisticated taxpayer knows that HMRC apply the law but do not make the law, there can never be a legitimate expectation arising from a statement by HMRC in published guidance as to what the law is …
… some statements issued by HMRC … go beyond a mere expression of its opinion as to the law. For example, a taxing statute may contain wording which is inherently uncertain, such as where it describes something as needing to be ‘substantial’ or ‘material’ or states that something must be done within a ‘reasonable time’. HMRC will wish to ensure that all members of staff apply the term in the same way so that taxpayers are dealt with consistently, regardless of which officer handles their case. That guidance may then be published so that taxpayers can conduct their affairs on the basis of the bright line created by HMRC’s practice. In other cases, the legislation may by its terms confer a discretion on HMRC in the exercise of some power without spelling out the criteria to be applied. Again, in order to ensure consistent treatment, HMRC may issue guidance setting out what factors staff should take into account and may publish that guidance so that taxpayers know the kind of information that will be relevant to the decision that they are inviting HMRC to make."
Having established that, construed objectively, a statement made by HMRC was capable of giving rise to a legally enforceable legitimate expectation, the Court then turned to the question of whether the statement had done so in the particular circumstances of the instant case, and concluded (in agreement with the High Court) that it did.
As to whether or not it was 'fair' for HMRC to resile from its guidance, as contained in the Manual, the Court cited the dicta from the Court of Appeal in R (Hely-Hutchinson) v HMRC  EWCA Civ 1075, where Arden LJ said at -:
"If HMRC finds that they need to resile from guidance, a taxpayer can only rely on the legitimate expectation that the guidance created where, having regard to the legitimate expectation, it would be so unfair as to amount to an abuse of power."
The question, therefore, is seemingly whether or not there has been sufficient unfairness to prevent correction of the mistake by HMRC. The authorities make clear, the Court said, that the unfairness has to reach a very high level; it has to be "conspicuously unfair".
However, the Supreme Court in R (on the application of Gallaher Group Ltd) v Competition and Markets Authority  UKSC 25. recently stated, at :
"Fairness, like equal treatment, can readily be seen as a fundamental principle of democratic society; but not necessarily one directly translatable into a justiciable rule of law. Addition of the word “conspicuous” does not obviously improve the precision of the concept. Legal rights and remedies are not usually defined by reference to the visibility of the misconduct".
Notwithstanding the decision in Ex p Unilever plc  STC 681, the Supreme Court in Gallaher held that "conspicuous unfairness" was not a free-standing ground of review. The "unfairness" claimed must, however, be so pronounced as to be "irrational".
The Court in the present case held that, irrespective of the decision in Gallaher, there was a need for a high degree of unfairness to be established by the taxpayer, given that the primary duty of HMRC is to collect tax. It said, at :
"Lord Carnwath in Gallaher was not dispensing with the need for a high degree of unfairness to be established before the court would prevent HMRC resiling from a representation, assurance or promise. I consider that wherever an express representation is established it is still essential for the court to consider all the factors relevant to whether it would be unfair to allow HMRC to frustrate an expectation arising from that promise, assurance or representation and further that a high level of unfairness is necessary to override the public interest in the collection of taxes to which I have referred".
The question the Court was asked to consider was whether the absence of any evidence as to why the statement was being resiled from required the Court to conclude that permitting HMRC to do so would be unfair (it is noteworthy that the Court did not deal with the concept of irrationality and preferred the language of "abuse of power" and "high degrees of unfairness").
In R (oao Vacation Rentals (UK) Ltd) v HMRC  UKUT 383 (TTC), the Upper Tribunal rejected HMRC’s contention that the claimant needed to show conspicuous unfairness and said, at :
"In our view it is only open to HMRC to override the legitimate expectation that it has encouraged in circumstances where there is a sufficient public interest to override it …".
HMRC's case in this appeal was that it was not for HMRC to show why it has resiled from the guidance and, on the contrary, it was for the taxpayer to establish how it had relied on the Manual to its detriment, and to make good the "high degree of unfairness" complained of.
The Court agreed with HMRC that detrimental reliance was relevant and indeed an important factor in cases such as the present where the issue involves HMRC’s wish to resile from guidance. It also held that the burden does not shift to HMRC to adduce evidence to the court showing some public interest in it being able to resile from the representation.
In applying this reasoning, the Court stated that the High Court was correct to consider first the issue of how influential the Manual was in the Claimant's decision-making process. It said that there were two aspects to this: first the extent to which the Claimant knew about the guidance and was influenced by it when arriving at a view on the tax position and, secondly, the extent to which its view on the tax position influenced the decision to use the Claimant for its US investment. The Court said, at :
"If a taxpayer is unaware of the existence of guidance or if, as in Hely-Hutchinson, he only becomes aware of it after he is committed to the transaction giving rise to the tax dispute, then that may well prove fatal to his claim".
The Court disagreed with the High Court, which held that "degrees of reliance" were necessary to consider when conducting its evaluative exercise. It also disagreed with the High Court on the issue of whether it mattered that the taxpayer's advisor relied on the guidance, as opposed to the taxpayer itself. The Court stated that the fact that the taxpayer's advisor, as opposed to the taxpayer itself, relied on the guidance did not affect the position. Ultimately, however, the Court implied that it would be fact-specific. Even tax specialists, fluent in the law, may advise their clients that, in light of certain published guidance, a particular interpretation of a provision is likely to be accepted by HMRC (irrespective of the what the abstract technical positon may appear to be).
The Court concluded that reliance on the representation made in the Manual was weak because (i) the representation was merely as to HMRC’s opinion about the construction of a relatively straightforward legal provision; and (ii) specialist advice was sought on the meaning of the legislation and how it would apply to its particular circumstances. It also commented that the Claimant could not point towards sufficient reliance on the Manual that led it to suffer some form of detriment. The Claimant argued that the higher rate of tax being incurred was sufficient to establish detriment. In the view of the Court, there was no evidence before it which set out how the structure would have been affected differently had the threat of an additional tax liability been material to that decision.
It is worrying that in this case HMRC sought to relegate the role of its own guidance, and argue that it is unreasonable for taxpayers to rely on HMRC's publicly stated position of the law. For some taxpayers who have access to appropriate professional advice, this may not be an issue but for the vast body of taxpayers who have no (or very little) understanding of tax law, HMRC's guidance is of vital importance to how they conduct their tax affairs. Likewise, as the Court pointed out, in circumstances where a statute contains an inherent degree of uncertainty, understanding HMRC's views on its construction is essential, even for professional advisors.
Fortunately, the Court confirmed that, in publishing guidance, HMRC is exercising a managerial discretion, as the publication of guidance is an important aspect to the way in which HMRC manages the collection of taxes. As the Court noted, at : "Guidance as to the meaning of the taxing statutes also facilitates the self-assessment process by helping taxpayers and their advisers complete their self-assessment forms correctly". The Court drew attention to Bingham LJ's comments in MFK (cited above), that a statement formally published by HMRC to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them.
The Court focussed extensively in this case on the taxpayer's reliance on HMRC's guidance. In R (GSTS Pathology LLP & Ors) v HMRC  EWHC 1801 (Admin), Leggatt J stated, in summarising the law on legitimate expectation that:
"Although it has sometimes been said to be a requirement also that the claimant has relied to its detriment on what the public authority has said, the law now seems to be clear that such detrimental reliance is not essential but is relevant to the question of whether it would be an unjust exercise of power for the authority to frustrate the claimant's expectation ...”.
The Court of Appeal in this case has perhaps elevated the need to establish detrimental reliance to the level of "essential", although it noted that in most cases that should not be an issue as decisions to, for example, effect transactions, are only made after the taxpayer has considered and relied on HMRC guidance.
The Court returned to the idea of matters having to be so unfair as to amount to an "abuse of power", which is perhaps surprising given that, in Gallaher, the Supreme Court recently stated that "Such language adds nothing to the ordinary principles of judicial review, notably in the present context irrationality and legitimate expectation". Whilst, therefore, Gallaher clearly reaffirms the principle that substantive unfairness is not a free standing ground for judicial review, in the context of a claim under breach of legitimate expectation, it will nevertheless be essential to evidence a high degree of unfairness in order to make good a case that it is not lawful for the public body to resile from its promise.
In order to establish a claim for breach of legitimate expectation, a taxpayer must be able to point towards clear guidance from HMRC (or, better yet, a written ruling) and make good in evidence that they relied on that guidance/ruling, which caused them to suffer some form of detriment and to a high degree. It is perhaps regrettable that the Court of Appeal poured cold water on the point made by the Upper Tribunal in Vacation Rentals, that HMRC should be required to justify its frustration of a taxpayer's legitimate expectation, once it has been established. Should this matter proceed to the Supreme Court, that point may be revisited.
The judgment can be viewed here.