Taxpayers will sometimes rely on information or advice given by HMRC, which subsequently turns out to be incorrect. The question then arises whether HMRC can be bound by that incorrect information or advice, particularly if it favours the taxpayer.
HMRC’s information and advice broadly falls into two categories. First, there is ‘taxpayer specific’ advice. This might be written advice given in response to a clearance application, based on a taxpayer’s particular circumstances, or possibly advice given in a meeting or over the telephone. Secondly, there is HMRC’s guidance material. This could be material published in the HMRC manuals, or for example in booklets, helpsheets or frequently asked questions on HMRC’s website. HMRC’s written guidance may be aimed at the general taxpaying public, or possibly at particular categories of taxpayer.
Taxpayer specific advice
The most common form of advice given to taxpayers is probably in writing. For example, taxpayers (or their advisers) can write to HMRC for clearance on the tax treatment of certain transactions, e.g. on a company purchase of own shares. Sometimes, the tax legislation will require HMRC to provide clearance facilities in respect of certain events and transactions (i.e. ‘statutory clearances’). Where a tax adviser makes a written clearance application to HMRC on a company purchase of own shares, that would be an example of a statutory clearance application.
In addition to clearance facilities required by law, HMRC offers a non-statutory clearance facility in certain circumstances. Until recently, HMRC provided separate non-statutory clearance services for business and non-business taxpayers. However, HMRC has now merged these services into a single, non-statutory clearance regime. Details of this new, streamlined service are available on HMRC’s website (http://www.hmrc.gov.uk/cap/nscg.htm).
What if such written advice given by HMRC is incorrect – can the taxpayer (or his adviser) rely upon it? HMRC has published guidance on its website: ‘When you can rely on information or advice provided by HMRC’ (http://www.hmrc.gov.uk/pdfs/info-hmrc.htm). This guidance applies in general and not specifically to instances where HMRC’s information or advice is wrong.
HMRC states in the guidance that in order for information or advice to be considered binding: “you must set out all the relevant facts and draw attention to all the issues. This is being described by the courts as the need for the applicant to place all his cards face up on the table.” HMRC then goes on to list certain circumstances in which it will not consider itself bound by advice previously given. For example, HMRC will not be bound if advice has been given before a transaction has taken place and the nature of the transaction later changes in a material way. Another example is where incorrect or incomplete information was provided by the taxpayer or adviser when the advice was requested. Other circumstances include where a court or tribunal judgment changes the interpretation of the law, or where the tax law changes retrospectively.
Admin Law manual
Where HMRC provides incorrect information or advice, HMRC’s guidance states that it will be bound by that advice, provided that it is “clear, unequivocal and explicit.” In addition, taxpayers need to demonstrate that they reasonably relied on the advice, full disclosure was made of all the relevant facts, and the application of the law would result in financial detriment. Even if all these conditions are satisfied, HMRC’s position is that its primary duty is to collect the correct amount of tax as required by law, and that in some circumstances HMRC will not be bound by the advice it has given. So what might those circumstances be?
In addition to the general guidance given on HMRC’s website, there is more detailed guidance in its Admin Law manual. The Admin Law manual includes a section on ‘incorrect advice to customers’ (www.hmrc.gov.uk/manuals/admlmanual/ADML1000.htm). ADML1300 lists six tests, all of which must be satisfied before HMRC will be bound by its incorrect advice:
- “The customer made it plain he or she was seeking fully considered advice and indicated what it would be used for
- The customer provided all information relevant to the query
- The advice given by HMRC was clear, unambiguous and without qualification
- The customer acted in reliance on the advice (i.e. he or she did or refrained from doing something as a direct consequence of the advice)
- The customer would suffer detriment if the correct statutory position were applied; (e.g. he would be financially worse off than if the correct advice had been given in the first place)
- To apply the correct statutory position would be so unfair as to constitute an abuse of power”
Note that that the first of these tests (i.e. “The customer made it plain he or she was seeking fully considered advice and indicated what it would be used for”) does not apply if HMRC gives the taxpayer unsolicited advice, such as in a letter following a compliance intervention. The tests are broadly similar to those mentioned in the general guidance on HMRC’s website. However, the Admin Law manual then goes on to instruct HMRC staff: “If you feel that these tests are met, a higher net return to the Exchequer might be achieved by sticking with the tax treatment of the incorrect advice for the past.”
The above statement could be interpreted as meaning that HMRC would only be bound by its incorrect advice if it resulted in a higher tax bill for the taxpayer! But that is not what HMRC means. What it actually means is that if the taxpayer has an additional liability of (say) £100 as a result of HMRC’s incorrect advice, and it would cost (say) £1,000 for HMRC to collect that tax, HMRC has discretion not to collect it, on the basis that there would be a higher net return for the government in not doing so.
This discretion by HMRC is given by law, which is contained in the Commissioners for Revenue and Customs Act 2005. The legislation states (at s 5) that HMRC is responsible for the collection and management of revenue. Unfortunately, HMRC’s guidance suggests that it will only be bound by its incorrect advice if all the relevant tests listed at ADML1300 have been satisfied, and it would be cheaper for HMRC not to collect the additional tax due.
HMRC’s Admin Law manual includes a number of examples to illustrate the circumstances when HMRC would, and would not, be bound by its incorrect advice, and it may be worthwhile having a look at them.
As mentioned, another form of HMRC information which may turn out to be incorrect is published guidance material. HMRC’s webpage dealing with when you can rely on incorrect information or advice states that the principles stated on that webpage also apply to incorrect information in the form of guidance or public notices. However, in practice, the conditions are not the same. The conditions which apply to incorrect information or advice given to individual taxpayers are more difficult than the conditions in respect of incorrect HMRC guidance or public notices. For example, the requirement for taxpayers to make full disclosure of the facts is not relevant to HMRC guidance or public notices.
Another important distinction between incorrect personal advice and incorrect published guidance is that HMRC’s Admin Law manual only deals with situations arising from incorrect specific advice given to individual taxpayers and businesses, not information given in published guidance for the general public.
What could the taxpayer do if HMRC refuses to be bound by its incorrect information or advice?
There is a legal doctrine of ‘legitimate expectation’, which the taxpayer could attempt to rely upon. Legitimate expectation is a doctrine of public law, but in the case (R v CIR ex parte MFK Underwriting Agencies Ltd and Others  1 WLR 1545 it was summed up in this way:
“If a public authority so conducts itself as to create a legitimate expectation that a certain course will be followed it would often be unfair if the authority were permitted to follow a different course to the detriment of one who entertained the expectation, particularly if he acted on it.”
A very good article in ‘Taxation’ on 22 August 2013 by Ximena Montes Manzano and Keith Gordon concerning Mansworth v Jelley  STC 53 enquiries by HMRC listed the basic requirements for legitimate expectation.
The two different types of legitimate expectation can perhaps be distinguished when looking at incorrect HMRC information and advice. The first type of legitimate expectation is one that HMRC imposes upon itself, by exercising its discretionary powers of collection and management. The second type of legitimate expectation is one that the courts may impose upon HMRC, if the taxpayer successfully applies to the court for judicial review.
There have been cases where taxpayers have asked the courts to apply legitimate expectation in their favour. A case where the taxpayer succeeded was Cameron v HMRC  EWHC 1174 (Admin). That case involved a claim by seafarers against HMRC’s disallowance of claims for the seafarer’s earnings deduction (ITEPA 2003, s 378), where the seafarers had relied on a concession contained in HMRC’s published guidance. The court held that HMRC’s published concession was capable of giving the seafarers a legitimate expectation, so the seafarers claim for judicial review was successful.
However, there have been other court cases in which the taxpayers have been unsuccessful, and which therefore indicate that there are one or two circumstances where legitimate expectation will not apply.
First, it would appear that HMRC’s guidance must be sufficiently clear for the taxpayers to be able to rely upon it. For example, in R (oao Davies and James) v HMRC  UKSC 47, the taxpayers were seeking to rely on HMRC booklet IR20, concerning residents and non-residents and their liability to UK tax. Booklet IR20 was later replaced by HMRC6, and following the introduction in Finance Act 2013 of the statutory residence test (SRT) there is detailed guidance on the SRT. Unfortunately for the taxpayers in that case, the Supreme Court broadly held that booklet IR20 was poorly drafted, and lacked the clarity required for the taxpayers to have a legitimate expectation of being able to rely upon it.
Secondly, it would seem to be necessary that taxpayers must have relied upon HMRC’s incorrect information at first hand. It is not sufficient for the taxpayer to have been given the advice from his or her agent, who obtained that information from HMRC. This follows the decision in Hanover Company Services Ltd v CRC  UKFTT 256 (TC). In that case, the company had sought advice from its accountants on a particular VAT matter. The accountants consulted published guidance from the Revenue, and confirmed that the company had adopted the correct VAT treatment. However, on a subsequent VAT visit, the Revenue pointed out that its VAT guidance had changed, and raised VAT assessments for periods before the change. The company appealed, and argued that it had a legitimate expectation that HMRC would apply its earlier guidance. Unfortunately, the tribunal held that the company had not consulted or relied upon any Revenue publication, but had actually relied on the company’s accountants instead. The company’s case was therefore dismissed.
Apart from the uncertainty that taxpayers face when seeking to have legitimate expectation applied in their case, there is a further potential problem. Following the decision of the Upper Tribunal in CRC v Abdul Noor  UKUT 071 (TCC), it would seem that the First-tier Tribunal does not have the jurisdiction to hear cases on legitimate expectation. If the taxpayer’s case has to be heard in the High Court instead, it is therefore likely to be more difficult, complicated and expensive to argue for legitimate expectation, compared to a First-tier Tribunal hearing.
Overall, it is probably fair to say that HMRC’s policy on the circumstances where it will be bound by incorrect advice is less than clear. Hopefully, HMRC will publish a clearer and more definitive statement on its current approach before too long.