Court of Appeal allows appeal on conspicuous unfairness

R (Hely-Hutchinson) v HMRC [2017] EWCA Civ 1075

In a judgment handed down on 26 July 2017, the Court of Appeal has allowed HMRC’s appeal and provided valuable analysis of the principles of legitimate expectation and conspicuous unfairness in tax cases where HMRC is said to have resiled from published guidance.

The case concerned HMRC guidance on the basis for calculating chargeable gains where an employee exercises share options.  In 2003, HMRC published guidance in which it expressed the view – following the Court of Appeal judgment in Mansworth v Jelley [2003] STC 53 – that employees who had exercised options and sold the shares would be entitled to claim allowable losses.  HMRC invited amendment of self assessment returns and submission of loss claims.  In 2009, HMRC received advice that the tax treatment in the 2003 Guidance was wrong in law and that the exercise of employee share options in those circumstances should not give rise to losses which the employee could set off against other gains.

As at 2009, some 600 taxpayers were subject to open enquiries into loss claims made under the 2003 guidance at the time the new advice was received.  Mr Hely-Hutchinson was one of them. HMRC duly refused his loss claims.  He issued judicial review proceedings challenging the refusal on the basis that it was conspicuously unfair for HMRC to refuse his claim when, before 2009, it had accepted similar claims from other taxpayers.

Mr Hely-Hutchinson was successful before Whipple J.  She held that HMRC had failed to consider or give due weight to the comparative unfairness between (1) taxpayers whose claims had been accepted before HMRC’s change of view and (2) those in the position of the claimant whose claims were refused.  The judge remitted the matter for further consideration of the matter having regard to all aspects of unfairness.

The Court of Appeal has unanimously allowed HMRC’s appeal and reversed the decision of Whipple J.  Taxpayers in the position of Mr Hely-Hutchinson, whose claims, as at 2009, had not been resolved were not in materially similar circumstances to taxpayers whose claims had been accepted and could not be re-opened.  Furthermore, withdrawal of the 2003 guidance was not otherwise unfair under the law governing legitimate expectations and was not incompatible with Article 1 Protocol 1 of the ECHR (protection of property).  HMRC’s decision to frustrate the legitimate expectation, on its change of view, was not unlawful. 

The judgment can be read here.

Akash Nawbatt QC and Alice Carse represented HMRC.

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