Tax traps: When HMRC changes its own guidance

Tuesday, May 29, 2012 | Posted by: Francesca Lagerberg
Categories: Protecting your wealth | Tags: HMRC, CGT, tax policy, Gaines-Cooper, residency, Tax Investigations, non-uk residence, guidance, Mansworth v Jelley, enquiry, changing rules, capital losses, judicial review

In some recent high-profile tax cases some individuals have been caught out by HM Revenue & Customs (HMRC) changing its mind or perhaps ‘clarifying its view’. With ongoing uncertainty over the Mansworth v Jelley case guidance, it begs the question: how much can you rely on what HMRC says in its guidance?

In the case of Robert Gaines-Cooper, his belief that he had completely relied on the advice of HMRC cost him dearly. Gaines-Cooper spent many years living abroad and in his view dutifully followed the advice provided by HMRC. At that stage this was found in its IR20 booklet, which offered general guidance on the defining terms of UK residence for tax purposes.

His argument was that at no time did he fall foul of the instructions within the booklet, yet ultimately this was not enough to secure non-UK tax residence. He took his case to the Supreme Court but lost partly on the basis that there was an implied term within the booklet that required a distinct break from the UK which he had failed to prove.

Another recent issue is the claiming of losses following the 2002 case of Mansworth v Jelley and subsequent guidance issued by HMRC. Many taxpayers made capital loss claims relying specifically on the official guidance but, in 2009, HMRC changed its mind, announcing a change in its interpretation of how to calculate the capital gains tax (CGT) base cost of the shares in question. This change applied retrospectively, so some taxpayers who had relied on HMRC’s original guidance were left in a quandary over where they stood. Three years later, some taxpayers still aren’t sure where they stand.

So what options are available to taxpayers looking for finality?

Judicial review is an option and is being considered by some taxpayers who claimed Mansworth v Jelley losses after relying on HMRC’s initial guidance.

Judicial review is the process by which the courts can supervise the exercise of power by government authorities, such as HMRC. Where a taxpayer considers that his or her rights have been infringed, they may apply to the courts for a judicial review as to whether they have a legitimate expectation of relying on HMRC’s original guidance. 

But even if the court does find in favour of the taxpayer and accepts that HMRC has acted unfairly, any remedy is at the court’s discretion. So not having certainty over the final position is likely to be off-putting to potential claimants when you consider that the judicial review process can be costly. There would need to be a lot of tax at stake to warrant using this process.

Both tax law and HMRC’s guidance should be clear, reliable and certain. Ideally, individuals should be able to plan their tax affairs with certainty and then get on with their lives without having to look over their shoulder wondering whether the taxman is creeping up behind them waving an enquiry letter. But life is complicated and it is not always possible to marry the competing interests of absolute certainty with other policy objectives. However, moving tax goalposts should be avoided wherever possible.

There has been a marked improvement from the Government in regards to tax policy-making over the past few years, with a great deal more consultation taking place on proposed new measures. Yet a system that allows HMRC to retrospectively change the rules regarding its own published guidance is unlikely to ever provide the levels of certainty and clarity that the UK’s taxpayers deserve.

For further information on HMRC enquiries, visit our Tax Investigations help page.

Image: (CC) Ramberg Media Images

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