Taxpayers and advisers make widespread use of HMRC's guidance when interpreting the tax legislation. However, the guidance is often of limited value in a dispute with HMRC, and there is an increasing trend of HMRC 'clarifying' guidance, sometimes with purported retrospective effect. Taxpayers and advisers should properly distinguish between statements on which reliance can be placed, and mere expressions of HMRC's opinion. Only reliance on the former is generally capable of protecting taxpayers from future challenge. When taxpayers do rely on guidance, they should clearly document this reliance and retain that documentary evidence in case of a later challenge.
The UK has, depending on who you ask, either the longest or one of the longest tax codes in the world. It might be thought that this length is due to rules being drafted with such a high level of specificity that any uncertainty is minimised. Unfortunately, as the readers of this article will be aware, that is not the case; the UK's tax legislation is littered with subjective tests, broad antiavoidance rules narrowed by guidance, and discretionary powers awarded to HMRC.
Alongside the extensive legislation sits an equally comprehensive body of guidance, including guidance expressly aimed at the public, memoranda of understanding with industry bodies, and internal guidance published by HMRC under their freedom of information publication scheme. The purpose of the guidance is partly to help the public by being an accessible guide to the tax legislation. However, it is also the primary vehicle used by HMRC in exercising their broad managerial discretion of the administration of the tax system.
At the risk of stating the obvious, HMRC's guidance is not law. While in some cases it can be persuasive, such as technical guidance published alongside draft legislation intended to inform Parliament's deliberations, in most cases it will have only limited bearing, or indeed no bearing at all, on a court's interpretation of the legislation.
Notwithstanding this, some parts of HMRC's guidance have become so well established they are treated as de facto legislation in the minds of some advisers and taxpayers. The archetypal example of this is the 20% test for 'substantial' non-trading activities applied in HMRC's guidance on the application of the substantial shareholding exemption (HMRC's Capital Gains Manual at CG53116).
Unfortunately, when push comes to shove, taxpayers can be surprised at the steps that they needed to have taken in order to be able to rely on HMRC's guidance. In this article we discuss the practical difficulties faced by taxpayers seeking to rely on HMRC's guidance, and how these difficulties should inform the approach of taxpayers and advisers when reading HMRC's guidance.
To what extent are HMRC bound by their guidance?
The best way to understand the approach taxpayers should take to HMRC's guidance is to understand the remedies taxpayers can seek where HMRC act contrary to, or change, their guidance.
Given that HMRC's guidance is not law, whether or not HMRC adhere to that guidance is not usually a matter for the tax tribunal.
Instead, where HMRC seek to resile from guidance previously provided to a particular taxpayer or the world at large, a taxpayer's primary remedy is to make an application to the High Court for judicial review on the grounds they had a legitimate expectation that HMRC would respect their guidance. There are two main difficulties with this.
First, making an application for judicial review is generally expensive and must be conducted promptly (and no later than three months from the decision being contested). Unlike appeals in the tax tribunal, almost all of the expense is upfront because it is necessary to obtain permission from the court to bring judicial review and, as part of that process, essentially the whole of the case must be laid out. This generally means that the amount of tax at stake has to be relatively significant before it becomes worthwhile to take such a challenge. Taxpayers relying on HMRC's guidance for day-to-day compliance matters therefore have only limited routes to redress where HMRC resile from their guidance.
Secondly, it is necessary to show that HMRC have behaved 'unfairly', which means that it is generally difficult to win a judicial review claim on legitimate expectation grounds. This is especially the case when relying on public guidance (as opposed to a clearance).
What kinds of statement can be relied on?
A taxpayer will broadly have a legitimate expectation where:
- they have an expectation of being treated by HMRC in a particular way favourable to the taxpayer;
- HMRC have caused the taxpayer to have that expectation by words or conduct;
- the taxpayer's expectation is legitimate; and
- it would be an unjust exercise of power for HMRC to frustrate the taxpayer's expectation.
When trying to demonstrate an enforceable legitimate expectation based on guidance given to the world at large (rather than a clearance given to a particular taxpayer) there are several common difficulties faced by taxpayers.
The first is that HMRC must have caused the taxpayer to have an expectation. The well-known formulation here in the context of a ruling is that the relevant statement(s) on which the taxpayer seeks to rely must be 'clear, unambiguous and devoid of relevant qualification' (R v IRC, ex parte MFK [1990] 1 WLR 1545).
In the context of public guidance the position is (arguably) more difficult. In the leading case of R oao Aozora v HMRC [2019] EWCA Civ 1643 the Court of Appeal confirmed that the relevant statement on which a taxpayer seeks to rely must 'go beyond a mere expression of [HMRC's] opinion as to the law'. Instead, the relevant guidance must, by way of example:
- create a 'bright line' or safe harbour from HMRC challenge where the legislation is drafted in a subjective or unclear manner;
- describe how HMRC will exercise a power or discretion; or
- state what the law is (as opposed to merely expressing an opinion as to the law).
As a result, only a limited number of statements in HMRC's guidance are capable of giving rise to a legitimate expectation.
Showing 'unfairness'
When relying on public guidance rather than a clearance it is also more difficult for the taxpayer to demonstrate that it would be an unjust exercise of power for HMRC to frustrate their expectation. The courts will require a high bar to be cleared before agreeing to a taxpayer being taxed otherwise than in accordance with the law. For there to be an enforceable legitimate expectation HMRC's actions in resiling from their guidance must be 'so unfair as to amount to an abuse of power' which will require their actions to be, in one formulation, 'outrageously or conspicuously unfair' (R oao Hely-Hutchinson v HMRC [2017] EWCA Civ 1075).
There are several areas of difficulty here. First, the taxpayer will generally have to show they relied on the guidance rather than (for example) advice provided by an adviser. This is generally more difficult than in the context of a clearance, where the taxpayer will have actively sought HMRC's opinion.
Secondly, the taxpayer will generally have to show that they relied on the guidance to their detriment; this will have to go beyond the taxpayer merely being subject to tax they did not expect. Instead, a taxpayer will (broadly) have to show that they could or would have done something differently had they not relied on the relevant statement.
Finally, when weighing the level of unfairness the courts will take into account the fact that there is a strong public interest in the imposition of taxation in accordance with the law (R oao Samarkand v HMRC [2017] EWCA Civ 77). This will of course be balanced against the countervailing public interest that taxpayers should be confident they can rely on HMRC's guidance (Aozora cited above).
It is the requirement to demonstrate such a high degree of 'unfairness' that means legitimate expectation claims are so difficult to win. Even if a taxpayer has followed the statement in the guidance to the letter they have to persuade a judge that it would be unfair for HMRC to resile from it.
All change: the growing trend of HMRC's changing guidance
In recent years, it has become more important for taxpayers to consider HMRC's guidance. This is partly because of reporting regimes such as the uncertain tax treatment regime which requires disclosure of significant tax positions taken contrary to HMRC's known policy. However, it is also because of the proliferation of anti-avoidance rules that, on their face, apply very broadly and could capture common commercial arrangements. Examples of legislation that has an uncertain and broad scope include 'mechanical' anti-avoidance rules such FA 2003 s 75A (in the context of SDLT), and 'tax advantage' anti-avoidance rules such as the transactions in securities rules or the loan relationship unallowable purpose rule. The breadth of such rules arguably gives HMRC discretion to decide whether or not a particular arrangement should be permitted (although this type of approach was recently criticised by the Supreme Court in Fisher v HMRC [2023] UKSC 44).
This has coincided with an increasing trend of HMRC seeking to change their guidance in a manner adverse to taxpayers. The last few years have seen taxpayers challenge HMRC on the basis that they are resiling, not only from their published guidance, but also from agreements over a number of years. HMRC's rebuttal is that such changes are merely 'clarifications' rather than a reversal of an existing policy or settled practice. Recent examples of changes to guidance include:
- HMRC's revised policy on the VAT treatment of termination payments (September 2020);
- the availability of double tax relief under TCGA 1992 s 103KE for carried interest holders (January 2022);
- the treatment of US LLCs, with HMRC taking a more robust approach in asserting that it disagrees with the FTT's finding of fact in respect of Delaware law and that taxpayers with similar facts to Anson (Anson v HMRC [2015] UKSC 44) cannot rely on the Supreme Court's decision (December 2023); and
- the application of the salaried member rules in circumstances where LLP members increase their capital contributions to fail condition C (February 2024). The impact of some of these changes was mitigated. For
example:
- HMRC's guidance on the VAT treatment of termination fee payments was subsequently amended both to narrow its scope and also to confirm that the change in guidance was prospective only; and
- legislation was introduced to enable taxpayers to make an accruals basis election for UK tax on carried interest to assist with claiming double tax relief in other jurisdictions (principally the US) by aligning the timing of the tax point in both (TCGA 1992 s 103KFA). However, in other cases, the impact has not been
mitigated, and indeed HMRC have actively sought to challenge previous filing positions based on HMRC's guidance. The difficulties created by these shifts are only heightened by the fact that, in our experience, many taxpayers have filed on the basis of positions which they considered consistent with the previous guidance for many years. In some cases, they have argued strongly (and with justification) that they were filing on the understanding that HMRC agreed, only to find such positions becoming subject to enquiries, often coinciding with a change in inspector as well as a change in HMRC's guidance.
How should this inform taxpayers' approach to HMRC's guidance?
With the increased importance of HMRC's guidance, the seemingly increased likelihood of HMRC seeking to resile from or change their guidance, and the difficulty and expense involved in holding HMRC to the letter of their guidance, how should taxpayers and advisers take HMRC's guidance into account?
First, and perhaps most obviously, HMRC's guidance cannot be used to justify anything that approaches tax avoidance. HMRC's guidance generally states that it will not apply in avoidance cases, but more practically no court is likely to find that a taxpayer's expectation was 'legitimate', or that it would be conspicuously unfair for HMRC to resile from its guidance in order to combat tax avoidance. Of course, what comprises tax avoidance is not always straightforward. A taxpayer may assume that an arrangement is not 'avoidance' precisely because it has been blessed by guidance. It may be that it is easier for taxpayers to ensure that their arrangements are 'commercial', rather than trying to steer clear of avoidance.
Secondly, taxpayers should be aware that in a litigated dispute a large proportion of the statements in HMRC's guidance cannot be relied on for the reasons set out above. The guidance remains useful in predicting the likelihood of an HMRC challenge, but once that challenge begins most of the guidance will not be helpful. This is a particularly important distinction where the tax at stake is significant to the business of the taxpayer.
For there to be an enforceable legitimate expectation, HMRC's actions in resiling from their guidance must be 'so unfair as to amount to an abuse of power' which will require their actions to be, in one formulation, 'outrageously or conspicuously unfair'
Finally, if a taxpayer is seeking to rely upon HMRC's guidance, they should be mindful of the conditions for judicial review. Can they demonstrate that the statements from HMRC were unequivocal and that they relied on them to their detriment? It is worth keeping in mind that judicial review claims will typically arise many years after the transaction in question and it will be for the taxpayer to prove their case. That evidence should be collated and secured from the start. Many judicial review claims stall because recollections fade, witnesses become unavailable, and the documentary evidence simply no longer exists.
Where does this leave us? Plainly HMRC's guidance supporting an opinion based on the legislation is helpful insofar as it gives an indication of the likelihood of HMRC challenge. Beyond that it will generally only have utility where the tax at stake is significant enough to justify a judicial review, and the guidance is a clear statement expressed in a form on which a taxpayer can rely. The temptation to treat HMRC's guidance as quasi-legislation should be avoided.
Tax advisers must, therefore, make clear the manner in which they have referred to HMRC's guidance in the context of providing tax advice. Usually, this will be in the form of noting whether or not guidance exists that supports the interpretation of the law, to what extent HMRC's stated position in its guidance presents a risk of challenge in the case of the taxpayer's facts, and in some cases advising that HMRC's guidance contradicts the adviser's interpretation of the law and the consequences of this for the taxpayer's reporting position.
What should taxpayers do when HMRC resile from or change their guidance?
When HMRC resile from their guidance, or change their guidance as a 'clarificatory' matter, a taxpayer will have to consider their retrospective position as well as their prospective position. This is particularly difficult where there has been a change in HMRC's guidance because this more obviously reflects a considered change to HMRC's overall policy. This brings into play a common issue with broader policy disputes; taxpayers are only worried about their own interests, while HMRC's decision making process takes into account the broader environment including overall tax at stake across all affected taxpayers.
In relation to their retrospective position this will likely involve a technical argument that HMRC's guidance is either wrong on the law or that the taxpayer's facts can be distinguished, alongside a judicial review claim that HMRC's guidance gave the taxpayer a legitimate expectation, with all the difficulties described above.
For the prospective position a taxpayer's options are more limited when it comes to any judicial review. Even where taxpayers are successful in a legitimate expectation claim as regards the past, a claim for legitimate expectation will generally only be a retrospective defence, albeit that taxpayers may be given limited prospective protection, if only to the extent required to reorganise their tax affairs.
In summary, when HMRC change their guidance taxpayers should reassess their factual position in light of the revised guidance and, if the conditions can be met, consider judicial review and / or arguments of estoppel.
In relation to their prospective position taxpayers may:
- file in accordance with the revised guidance: this will involve balancing the increased tax liability with minimising the likelihood of HMRC challenge;
- continue to file in the same way, which may now involve taking a position contrary to HMRC's guidance: this may require a disclosure under the uncertain tax treatment regime; and/or
- consider, where necessary, reorganising their affairs in light of the new guidance.
Conclusion
HMRC's guidance remains a useful tool. It helps taxpayers to understand HMRC's interpretation of the law and therefore assess the likelihood of enquiry or challenge. The use of statements in guidance will often be enough to persuade an officer that the approach or position taken by a taxpayer is correct. To this extent, HMRC's guidance is helpful, but it should be used with caution. Where HMRC decide to challenge a particular industry or practice as a matter of policy, it will only be in limited circumstances that the guidance is helpful.
Taxpayers and advisers should take this into account and ensure they properly distinguish between statements on which reliance can be placed, and mere expressions of HMRC's opinion. Only reliance on the former is generally capable of protecting taxpayers from future challenge. When taxpayers do rely on guidance, they should clearly document this reliance and retain that documentary evidence in case of a later challenge.
Originally Published by Tax Journal
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