Claim that taxpayer relied on HMRC manual failed

Out-Law Legal Update | 24 Nov 2017 | 3:14 pm | 4 min. read

LEGAL UPDATE : A claim for judicial review of HMRC's decision to refuse tax relief failed. The judge said the taxpayer was entitled to rely on HMRC's manual, but there was no evidence that the taxpayer or its advisers had actually relied on it. The taxpayer did not show it would have adopted a business structure with more favourable tax consequences if it had not been for HMRC's representation. In order to be able to rely on HMRC's manual, it must be referred to explicitly in the tax advice given to the client and must have been relied on by the adviser when giving the advice.

A recent case considered whether a taxpayer could rely on an incorrect statement in an HMRC manual. The taxpayer failed because it could not show that it had relied on the statement or that it had suffered substantial detriment as a result of the statement.

HMRC denied Aozora unilateral double tax relief in respect of US tax withheld on interest paid to Aozora by its US parent. HMRC argued that section 793A of the Income and Corporation Tax Regime (ICTA) prevented the relief.

At the relevant time HMRC's international manual said: "ICTA 1988/s793A provides a restriction to credit relief under s.790. It provides that where a double taxation treaty contains an express provision to the effect that relief by way of credit shall not be given in particular cases or circumstances specified or described in the agreement, then neither shall credit by way of unilateral relief be allowed in those cases or circumstances. The provision has effect for arrangements made after 20 March 2000. At 1 April 2003 the only provisions to which s.793A applies is Article 24(4)(c) of the new UK/US DTA".

Aozora argued it had relied upon the last sentence. Subsequently, the manual was amended to exclude the sentence, which HMRC later said was incorrect.

Aozora brought a claim for judicial review, contending that HMRC's international manual contained a representation by HMRC that gave rise to a legitimate expectation that it would be taxed in accordance with the manual, whether or not the terms of the manual were accurate; and that it would be conspicuously unjust and an abuse of power for HMRC to resile from the representation.

The judge, Sir Kenneth Parker, accepted that the guidance constituted a representation by HMRC that s793A(3) had application only to the circumstances set out in Article 24(4) (c) of the tax treaty and Article 24(4)(c) had no relevance to Aozora. Since Aozora was not seeking to rely upon the guidance in order to engage in tax avoidance, the judge said that the company was entitled, in principle, to rely on the guidance.

However, the judge dismissed Aozora's application for judicial review because he said there was no evidence that the company had actually relied on the guidance, or even if it had, that it had suffered substantial detriment as a result of its reliance.


In this case there was no written tax advice from Deloitte, the tax advisers, and no evidence that the manual was mentioned in oral advice. The judge therefore said that the only conclusion he could draw was that Aozora was exclusively relying on Deloitte's advice, was unaware of the statement in the manual and therefore did not rely on it.

In order to show that Deloitte relied on the representation, Aozora would have to show that it played a real and substantial part in the giving of the advice. The judge said it was insufficient to show that the adviser was "supported or encouraged" in giving the advice by reason of the representation.

He said: "The truth of the matter is that at the time neither [the Deloitte tax partner], nor anyone else in Deloitte, believed that Article 23, or any Article of the Tax Treaty other than Article 24(4)(c), fell, or could plausibly be regarded as falling, within the scope of s. 793A(3). If no representation had been made, the advice would have been the same, namely, that s. 793A(3) was aimed exclusively at, or was 'bespoke' to, Article 24(4)(c), an Article which was irrelevant to Aozora UK's circumstances, and that unilateral tax credit was available."

He said that, even if there had been evidence that Deloitte had relied upon the representation, that alone would not be sufficient. There would have to be evidence that the tax adviser drew the taxpayer's attention to the representation made by HMRC and explicitly explained to the taxpayer that the adviser was relying upon the representation in giving the advice.

Conspicuous unfairness

Even if Aozora had been able to show that it had relied upon the representation, for its claim to succeed the judge said it would also need to show that it would be "conspicuously unfair" for HMRC to resile from the representation, even if HMRC now believed that the representation did not represent a correct interpretation of the law. 

He said that Aozora would have to produce clear and compelling evidence that, by reason of its reliance on the representation, it had suffered substantial detriment.

The judge said that in this case Aozora would have to show that, but for the advice that unilateral tax credit was available, it would not have made the business decision that it did, but would have made a business decision that was more favourable from a tax point of view. However, the judge said there was no evidence as to what Aozora would have done if it had been expressly told that no unilateral credit would be available.

The judge pointed out that no internal corporate documents had been produced in evidence to show why Aozora Japan chose to set up a wholly owned subsidiary in the UK, and to explain the role, if any, of contemplated taxation in reaching that decision. Although Aozora alleged that taxation was critical in their decision, no written tax advice was obtained at the time from Deloitte, which the judge described as "somewhat surprising" if the tax position had indeed been critical.

Practical implications

The case emphasises how difficult it is to succeed in a judicial review case against HMRC in relation to reliance on statements in HMRC's manuals. Although in this case the judge accepted that the taxpayer was entitled in principle to rely on the manual, there was insufficient evidence that the taxpayer had actually relied on the manual or that it had suffered substantial detriment as a result of the reliance.

To succeed on such a claim the following elements need to be satisfied:

  • there must be a clear statement in the manual
  • the taxpayer must not be trying to use the manual for tax avoidance
  • the representation in the manual must have been relied upon by the tax adviser
  • the tax advice provided to the client must have referred to the statement in the manual; and
  • the taxpayer would have taken another course of action with more favourable tax consequences if it had not acted in reliance on the manual.

The taxpayer would need to produce clear evidence that each of these conditions was satisfied. This is likely to be difficult to produce, when the tax problem comes to light a number of years after the event and emphasises the importance of ensuring there is contemporaneous evidence of these factors if relying on a representation from HMRC.