Legitimate Expectation

By | 27 September 2011

Can a taxpayer (A) require HM Revenue and Customs (HMRC) to apply favourable, but incorrect, tax treatment to him or her, on the basis that the same tax treatment had been allowed to another taxpayer (B)? In other words, does taxpayer A have a legitimate expectation of the same favourable but incorrect tax treatment?

What is legitimate expectation?

‘Legitimate expectation’ was described in Patel v CRC [2011] as “a doctrine of administrative law, deriving from the principle that public authorities must act fairly”.

In that case, the taxpayer subscribed for units in an enterprise zone (EZ) unit trust in 2006-07, giving rise to an entitlement to 100% industrial buildings allowances. In his tax return, the taxpayer set this loss against his profits as a dentist for income tax purposes. He also set this loss against his dentist profits in computing his liability to class 4 NICs. HMRC enquired into the taxpayer’s return, and subsequently issued a closure notice to reduce the losses claimed (which were originally overstated), and to remove relief for the losses for Class 4 NIC purposes.

The taxpayer appealed, on the grounds that HMRC had in the past allowed EZ capital allowances against trading profits for class 4 purposes. The taxpayer’s agent agreed that there was no statutory basis for this treatment, but argued that there was an established practice of HMRC to allow such relief, and pointed to a case involving another client in which EZ allowances were allowed against class 4 profits. However, HMRC contended that the case did not evidence any policy on HMRC’s part; rather it was a mistake.

Does it apply?

The tribunal held that its jurisdiction was limited to NIC (and tax) statutes, and dismissed the taxpayer’s appeal. The tribunal judge commented: “Although a formally published statement or a consistent administrative practice might bind HMRC, it does so because it gives rise to a legitimate expectation enforceable by judicial review, rather than under tax and NIC statutes.”

The tribunal pointed out that if the taxpayer did have a legitimate expectation, an application for judicial review should presently be made to the High Court. However, the judge added that there is developing case law on the jurisdiction of the tribunal regarding legitimate expectation of taxpayers. The tribunal therefore went on to consider whether HMRC’s conduct gave rise to a legitimate expectation for the taxpayer, and concluded that it did not. 

The tribunal referred to previous case law (R (oao Weston) v Inland Revenue, R (oao Esterson) v HMRC and R (oao Wilkinson) v Inland Revenue), in which Moses J said:

“There is no arguable fairness in [HMRC] pursuing that duty merely because, for some reason, they have failed to pursue their obligations in relation to the other taxpayers.  Nor could it possibly be contended that there was unfairness to the other taxpayers since they had the good fortune … to have escaped the tax.  But the mere fact that two taxpayers in arguably the same situation have not in fact been charged tax does not raise a case of unfairness without more.”

The tribunal held that just because other taxpayers were apparently allowed to set EZ allowances against profits in calculating their class 4 NICs, it did not create unfairness for Mr Patel giving rise to any enforceable rights against HMRC. The taxpayer’s appeal was dismissed. �


The beneficial NIC treatment sought by the taxpayer in the above case was not allowed by law. On that basis, it seems that taxpayers would be unable to use a legitimate expectation argument in favour of HMRC applying tax treatment which is incorrect.

However, legitimate expectation may be potentially helpful to taxpayers in other circumstances, perhaps where HMRC has formally published a statement on a particular matter, or where HMRC has not applied a recognised and consistent administrative practice in respect of a taxpayer.

 As the concept of legitimate expectation and its boundaries continues to develop, taxpayers and practitioners should be aware of its availability as a possible remedy where HMRC has dealt with a particular tax matter inconsistently. However, the potential cost of an application for judicial review will need to be taken into account.

The above article is reproduced from ‘Practice Update’ (September / October 2011), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.