Water cooler and triangular chairs.

Plain sailing for taxpayer in judicial review case

21 September 2012

Although the recent case of Cameron & others v Revenue and Customs [2012] EWHC 1174 (Admin) related to the narrow area of Foreign Earnings Deduction (‘FED’) for seafarers,...

…it is noteworthy for its wider implications for the concept of ‘legitimate expectation’ in relation to HMRC concessions, particularly where HMRC seek to alter or withdraw a concession and it may have implications for  anyone relying on HMRC guidance, including those pursuing claims for capital losses on the disposal of option shares based on HMRC’s original guidance which was published following Mansworth v Jelley [2002] EWCA Civ 1829.

The Cameron case concerned whether the claimant taxpayers (who were seafarers) were entitled to rely on statements made by HMRC in relation to the availability of FED (later the Seafarers’ Earnings Deduction) for work undertaken abroad.


Seafarers are entitled to a deduction in respect of foreign earnings (originally under Schedule 7 to the Finance Act 1977 and, as of 2006/07, under sections 378-382 of the Income tax (Earnings & Pensions) Act 2003). The qualifying period for the deduction is connected to the number of days absence from the UK. Crucially, in order to calculate a period of absence from the UK, a person would be treated as being absent from the UK on any day only if he was absent at the end of the day.

The dispute essentially concerned whether the taxpayers could rely on a concession from HMRC that for the purposes of the FED a person would be treated as being absent from the UK at the end of a day if they were on board a ship which had left its berth before midnight on a voyage which would take it outside of UK territorial waters. This was known as the ‘Broad Concession’. HMRC argued that a narrower concession applied (‘the Middle Concession’), namely, that the ship had to have left its berth before midnight on a voyage to an overseas port. In legal terms, the question to be considered was: did the taxpayers have a legitimate expectation that they would be taxed according to the Broad Concession?

The Broad Concession

The Broad Concession was published by HMRC by way of a number of communications on several occasions. In or around 1987, HMRC published ‘Notes on the Tax Liability of Seafarers on Foreign Voyages’, otherwise known as Form S203(New). It stated that:

‘A day of absence from the United Kingdom is any day when the seafarer is outside the United Kingdom at the end of the day, i.e. at midnight. The definition of United Kingdom is as explained previously, so that a voyage that does not extend to a foreign port may still count towards days of absence, depending on the vessel’s position at midnight in relation to UK territorial waters. A ship would normally be deemed to have left the United Kingdom at the moment at which it leaves its berth or anchorage (whichever is the later) to proceed on its voyage. Arrival times will be similarly defined.’

In 1991, HMRC introduced Form P84 which was designed to enable seafarers to make an FED claim. The Form P84 contained the following guidance:

‘A day of absence from the UK is any day when you are outside the UK at the end of that day (midnight). We normally treat a vessel as having left the UK at the moment it leaves berth or anchorage, on a voyage which will take it outside UK territorial waters 12 mile limit. Arrival times are treated in a similar way.’ (my emphasis).

Form P84 was intended to become obsolete in 1996 with the introduction of self assessment, but HMRC acknowledged during the court hearing that in practice Form P84 continued to be used for many years after 1996, probably up until 2005 at least.

In 1993 HMRC published a booklet: ‘Seafarers – Notes on Claims for 100% Foreign Earnings Deductions’ (commonly known in the trade as the Blue Book). It stated that:

‘A day of absence from the UK is any day when you are outside the UK at the end of that day (midnight). We normally treat a vessel as having left the UK at the moment it leaves berth or anchorage, on a voyage which will take it outside UK territorial waters. Arrival times are treated in a similar way.’

The Middle Concession

HMRC argued that the Middle Concession arose from a number of communications since 1980.

First, in July 1980 a Mr Eccles of HMRC wrote to a firm of accountants in response to a specific query and said:

‘Finally, it should be remembered that while paragraph 7 specifies certain duties which are to be treated as performed outside the UK, where the number of qualifying days is relevant for the purposes of paragraph 2 or 4(3)(a), paragraph 6 provides that a person shall not be regarded as absent from the UK on any day unless he is so absent at the end of it, i.e. at midnight. For this purpose, the casting off from a UK berth (allied to passage for overseas port) would be taken as the time of departure from the UK, and equally a ship would be regarded as arriving in the UK at the time of berthing.” (my emphasis).

The judge noted that there was no evidence that this letter was published to a circle wider than the firm of accountants to whom it was written. Whilst the accountants had raised the query with a view to including information in a tax guide which it was to publish, there was no evidence that this actually occurred.

An updated version of the Blue Book was published in 1996 and it referred to a help-sheet (IR205(S)) which was published from 1996 until 2002/03 and which stated:

‘The employment duties of a seafarer are regarded as being performed outside the United Kingdom if they are carried out on a vessel that is engaged on a voyage or part voyage which begins or ends outside the UK. For this purpose, the UK sector of the North Sea is treated as part of the UK. If you had more than one employment in the qualifying period, you may only claim Foreign Earnings Deduction for those in which you performed duties outside the UK.

A ‘qualifying period’ is made up mainly of days when you are absent from the UK. You are absent from the UK on a particular day if you are outside the UK at midnight at the end of that day…’.

In 1994, Tolley’s Yellow Tax Handbook published the text of Mr Eccles’ July 1980 letter.

In late 1999 the editors of the magazine Gunline, a publication by the Royal Fleet Auxillary, asked Mr Eccles to write an article about the FED for the magazine. There was some doubt as to which version of the article had been published, but the judge took the view that it was probably the case that the version published did not refer to the Middle Concession or the Broad Concession, but simply stated:

‘What is a day of absence (Q day) from the UK?

This is a day at the end of which you are outside the UK at midnight. Location at midnight is simple and decisive. You are either in or out. If you are within the areas as defined above, at midnight, then you are in the UK on that particular day. That day is clearly not then a Q day.’

In 2000 and 2002 Mr Eccles wrote two letters which set out the Middle Concession. Whilst it was claimed that these letters were sent to all known agents who acted on behalf of seafarers (20 in total), there was no evidence as to the number of seafarers who were represented by the agents and no evidence as to the number of seafarers who did not use an agent.

The decision

The judge considered R v Inland Revenue Commissioners ex parte MFK Underwriting Limited [1990] 1 W.L.R. 1545 and R (on the application of Davies) v Revenue and Customs Commissioners [2011] UKSC 47.  A clear statement published by HMRC could create ‘a legitimate expectation on the part of the taxpayers as to how they would be taxed’.

The judge concluded that it was impossible to determine the extent to which the July 1980 letter had been published. Furthermore, there was no evidence that HMRC had published the Middle Concession in any document which was intended to be available to all seafarers who were likely to make claims. This was in stark contrast to the various publications (particularly the Blue Book) which contained unequivocal statements of the Broad Concession and which were designed to assist seafarers in making FED claims.

Furthermore, once a legitimate expectation had been created, taxpayers could continue to rely on it until it was unequivocally withdrawn, and such withdrawal could only be effective if it was communicated  to the whole class of potentially eligible taxpayers.  The taxpayer’s reliance on a concession is not rendered unreasonable even if an employee of HMRC expresses a different view to that expressed in the concession.

HMRC took no effective step to revoke the Broad Concession and the taxpayers were therefore entitled to rely on it.


The Cameron case is somewhat reminiscent of the classic philosophy question: If a tree falls in the forest and no one is around to hear it, does it make a sound? If HMRC seek to limit an extra-statutory concession but do not effectively communicate it, does it have effect? It would seem not. But this case goes further than that. Once a legitimate expectation has been created, it is not sufficient for HMRC to simply make ad hoc representations to taxpayers or agents here and there if they subsequently take a different view in relation to a concession.  This decision is a timely reminder to HMRC that if they decide that a concession is to be altered or revoked it must be communicated in a similar manner to the original concession and to the same audience. 

The Cameron case may also be relevant to those taxpayers claiming Mansworth v Jelley losses, which are currently being challenged by HMRC.  In light of this decision taxpayers should be in a better position to argue that they had a legitimate expectation that their Mansworth v Jelley losses would be allowed, particularly where they had used those losses before HMRC’s guidance was revoked in May 2009.