Gabelle Tax Analysis: Legitimate expectation

The High Court – in the joint matter of Cameron and others v Revenue and Customs Commissioners [2012] EWHC 1174 (Admin) published on 9 May 2012 – considered the doctrine of legitimate expectation in an application for judicial review. Although the case was concerned with the deductions available for seafarers based on a concession published by HMRC, the application of this case is much wider and will affect anyone relying on HMRC guidance, including those claiming Mansworth v Jelley losses.

In the Cameron case, HMRC had published a concession on which the individuals had relied. The individuals argued that at the time they made their claims to a deduction they held a legitimate expectation that they would be allowed by HMRC on the basis of the concession. HMRC argued that they were not bound to apply the concession where the Inspector had written to the individuals concerned to inform them that the deduction was not allowable.

The Court found that the individuals were entitled to rely upon the published statement unless or until HMRC revoked or altered it or suggested that it was obsolete or superseded. The concession published by HMRC gave rise to a legitimate expectation because (a) the individuals relied on it; (b) the publication was aimed at a class of taxpayers, which included the individuals and (c) reliance on the statement was not unreasonable just because the Inspector stated a contrary view.

This case is a boon to many taxpayers claiming ‘Mansworth v Jelley’ losses, which claims are currently being challenged by HMRC. Broadly speaking, due to the wording of the legislation if an employee acquired shares which gave rise to a charge to income tax (e.g. the exercise of a non-approved share option) the base cost of the shares was not the market value on acquisition or the market value on the date of acquisition but was the aggregate of the two amounts (as decided by the courts in Mansworth v Jelley). Not surprisingly in many cases, this ‘double’ base cost gave rise to losses. In January 2003, HMRC published a statement stating that these ‘Mansworth v Jelley’ losses were available to offset against future gains. This statement was then revoked in May 2009. In February 2012 HMRC wrote to taxpayers, whose ‘Manswroth v Jelley’ losses are under enquiry inviting them to withdraw their losses.

In light of the High Court decision in Cameron 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.

Priya Dutta is a Senior Tax Consultant at Gabelle LLP. She can be contacted at priya.dutta@gabelletax.com or via TaxDesk on 0845 4900 509.