Stephen Daly examines instances when HMRC has made retrospective changes to its guidance and what this means for the tax system.
For the tax system to function efficiently, it is necessary for the tax authority to provide advice to taxpayers. What are consequences where the advice is predicated on an error of law, and HMRC then later seeks to correct this error?
That is precisely the question that came before the Court of Appeal in HMRC v Hely-Hutchinson  EWCA Civ 1075, but the case also raises broader issues about the system in place for the promulgation of advice.
Share options guidance
In 2003, the Inland Revenue (as HMRC was then) issued guidance in respect of the calculation of capital gains tax on sales of share options. In 2009, HMRC acknowledged that the guidance contained an error of law and produced revised guidance.
As regards to closed cases in which the 2003 guidance was relied upon, HMRC’s position was that the application of the 2003 guidance would stand.
But with those cases which were still open in 2009, HMRC’s position was that the 2009 guidance would be applied unless the taxpayer could demonstrate significant unfairness as would arise where there was detrimental reliance.
Ralph Hely-Hutchinson was one such taxpayer whose case was still open in 2009 and so subjected to the position set out in the 2009 guidance. The High Court reprimanded HMRC for unfair treatment of the taxpayer, but the Court of Appeal held that HMRC was entitled to go back on its previous position and apply the 2009 guidance. HMRC is entitled to change policy where the body has uncovered a prior mistake.
What is a prior mistake?
The Court of Appeal gave little guidance as to what will suffice in terms of a mistake. Will internal advice setting out that an error of law has been made alone suffice? What about where HMRC is held by a court or tribunal to have adopted an incorrect position?
In a recent blog post, I proposed that this judgment will undermine the general utility of HMRC publications, as it permits HMRC at some unspecified time in the future to reverse its position where an error of law (according to HMRC) has been made.
It might be said on the other hand that this is an exceptional case on the facts. A point that HMRC stressed in the appeal was that the taxpayer did not rely upon the 2003 guidance per se. The 2003 guidance post-dated the taxpayer’s actions and the taxpayer retrospectively amended his tax claims. He did not rely upon the guidance when he undertook the taxable transaction and to this end, did not change his position in reliance upon the guidance as occurred in cases such as Gaines-Cooper (IR20 leaflet to determine non-residence) and Cameron (guidance for seafarers).
Not normally retrospective
Another unique aspect of the case is the fact that the error of law contained in the 2003 guidance was glaringly obvious. Further it is notable that HMRC’s orthodox approach when it discovers an error in its guidance or publications is generally not to seek to apply the change retroactively.
In 2016 for instance, HMRC changed its policy in respect of mixed partnerships and the CGT incorporation relief (TCGA 1992, s 162). Its previously promulgated 2014 view was reversed prospectively only, thus only applying to incorporations from 30 April 2016.
A similar approach is adopted where HMRC identifies Extra-Statutory Concessions which fall outside the scope of its managerial discretion. HMRC does not seek to remove the concession with immediate effect, but rather provides a window in which taxpayers can rearrange their affairs.
What is undoubtedly clear is that these instances of amended guidance raise broader issues about the provision of HMRC advice, whether that is in the form of individualised or general advice, directed internally or to the public. It is each taxpayer’s responsibility to comply with the tax laws. It is HMRC’s responsibility to manage that compliance and it has long recognised that doing so requires the body to offer advice to taxpayers. That is a good thing. More problematic, however, is the structure in place for the promulgation of that advice.
System of tax rulings
Many countries have a general, formalised rulings system for individuals and companies. These systems generally contain a means of binding the revenue authority to that advice (even if predicated upon an error of law). In the UK, binding rulings are issued in highly limited circumstances.
A system for the production of tax advice from the revenue authority should be concerned with issues other than whether the advice is binding. There should also be consideration of how to ensure that advice is consistent with the underlying law, is clear and accessible; and how the revenue authority can be held to account and checked in respect of that advice.
Australia offers an interesting example of a country which acknowledges these important issues in respect of tax advice and has accordingly developed a sophisticated regime for what it terms “Public Rulings”. These are pieces of generalised advice promulgated by the Australian Tax Office that go through a comprehensive development process before being released in final form. This includes significant public consultation, including publication of drafts, and consultation with an independent, expert body made up of lawyers, senior Australia Tax Office officials and academics.
Reforms could bring about a streamlined system in which general and individual advice promulgated by HMRC is recognised for the important and authoritative source of information, which for taxpayers, it is in practice.
About Stephen Daly
Lecturer in Corporate Law at the Dickson Poon School of Law (King's College London) and Social Sciences Tutor with the Brilliant Club. He is also an active blogger at https://taxatlincolnox.wordpress.com/