HMRC’s decision not to grant a late claim for EIS income tax relief was flawed and did not follow its own internal guidance, a judicial review has found.
This case: Ames v HMRC  UKUT 0190 TCC was decided in the Upper Tribunal on the tax issues, and simultaneously heard as a judicial review on the soundness of HMRC’s decision not to accept a late claim for income tax relief.
In January 2005, Ames invested £50,000 in an indoor skydiving company in January 2005. HMRC accepted that Ames’s subscription for shares was eligible for relief under the Enterprise Investment Scheme (EIS). Ames’s other income was only £42 for 2004/05, and this was wholly covered by his personal allowance, so he did not make a claim for income tax relief on the subscription for EIS shares in 2004/05.
Ames sold his EIS shares in June 2011 for £333,200 and claimed exemption from CGT on the sale under the EIS CGT relief provisions. HMRC denied Ames the CGT exemption on the grounds that he had not made a claim to EIS income tax relief.
The first tier tribunal (FTT) upheld HMRC’s position that exemption from CGT under EIS rules depended upon there having been a claim for EIS income tax relief. During the course of the FTT hearing, HMRC gave Ames to understand that it had the power to allow late claims where the taxpayer had a “reasonable excuse”, although it did not accept that he had such an excuse in this case.
The FTT’s decision suggested Ames may wish to ask HMRC to reconsider its decision to refuse a late claim, so Ames duly wrote to HMRC requesting his EIS income tax relief claim be accepted on the grounds that he had a reasonable excuse. HMRC refused to allow a late claim and advised that incorrect information had been given at the hearing before the FTT, and that reasonable excuse is not something HMRC consider when deciding whether to accept late claims.
Ames appealed to the Upper Tribunal, arguing that it was not necessary for EIS income tax relief actually to be given in order for the CGT exemption to be available: all that was necessary was for the shares to be eligible for that relief. Alternatively, it was not Parliament’s intention to deny CGT relief where income tax relief was available but not claimed. Ames also sought judicial review of HMRC’s decision not to allow his late claim to income tax relief.
The UT dismissed his appeal, stating that it was clear that for the CGT exemption to apply, a claim to EIS income tax relief must have been made and given effect. It was not obvious that the link between the income tax and CGT reliefs was a mistake in law, even if it gave anomalous results for subscribers of EIS shares who had no income tax liability for the year of subscription.
HMRC has a statutory power to extend the normal time limit for some claims (for example, claims to corporation tax group relief). Failing that, HMRC has jurisdiction to admit late claims under its care and management powers on a discretionary basis.
The EIS legislation does not contain specific provisions allowing for a late claim, so Ames’s only option was to rely upon HMRC’s discretionary powers. HMRC had declined to exercise its discretion on the grounds that his circumstances did not fall within any of the cases of “exceptional circumstances” set out in its self assessment claims manual: SACM10040. In particular, “the concept of reasonable excuse does not come into consideration in accepting late claims.”
Ames misled by HMRC
Despite acknowledging that Ames had been misled at the FTT on HMRC’s ability to accept a late claim where the taxpayer had a reasonable excuse, HMRC had not considered whether Ames’s situation represented an “exceptional case” where “it may still be unreasonable for HMRC to refuse a late claim.” HMRC had not followed its own guidance and failed to consider the broader merits of Ames’s claim.
In addition, Ames had previously telephoned HMRC regarding the EIS CGT exemption and been told that this would be available. The UT considered that, if HMRC’s own technical experts had misunderstood the rules, how was Ames to understand the requirement to waive his personal allowance (itself not only counterintuitive but difficult to do as most software will allocate this automatically), and then submit an EIS income tax relief claim?
The UT was also influenced by the fact was that making a claim to EIS income tax relief made no difference to Ames’s income tax position for the year; the claim was a mere formality. The UT, therefore, held that HMRC’s decision-making process had been flawed as it had failed to consider the material facts, and remitted the decision on whether to allow Ames’s late claim back to HMRC.
The outcome of HMRC’s further deliberations is not known. I hope that the exceptional circumstances surrounding the Ames case will be acknowledged and HMRC’s discretion exercised accordingly to allow his late claim to EIS income tax relief.
A more interesting point is the clear indication from the UT that HMRC’s own guidance, although not legally binding, is open to judicial review where HMRC fail to act in accordance with it.