Court says inaccurate guidance not binding because no proof of serious detriment

However, the court said that a High Court judge had been wrong to say that to rely on guidance a taxpayer had to show a “real or substantial” reliance rather than drawing support or comfort from the guidance, and that the taxpayer had to show that it, rather than its professional advisers, had relied on the guidance. 

"It is good news that the Court of Appeal has clarified that a tax adviser does not have to specifically draw their client's attention to any HMRC guidance that has been relied on in producing the advice. However, it will still be very difficult in practice to show that it will be so unfair for HMRC to change their mind on incorrect guidance that this outweighs HMRCs obligation to collect tax that is properly chargeable," said Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-Law. 

The Court of Appeal was considering a case which concerned Japanese-owned UK company Aozora and the tax treatment of interest payments made to it by its US subsidiary. Aozora claimed that it had relied on a statement in one of HMRC's manuals which suggested that a provision denying tax relief would not apply in Aozora's circumstances. HMRC subsequently changed the statement in the manual which it said was incorrect and tried to deny Aozora the relief.

Aozora brought a claim for judicial review, contending that HMRC's 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 Court of Appeal accepted that the statement in the manual constituted a representation, rejecting an argument from HMRC that the manual only contained an expression of HMRC's opinion on the meaning of the legislation which could not be relied upon.

"Although the courts have emphasised that HMRC does not have a general discretion to remit taxes that are lawfully due, it does not follow that a statement made in guidance as to the content of the law cannot give rise to legitimate expectation or that the only kinds of statements made by HMRC on which a taxpayer can rely are those relating to a policy, or a discretion or to the question of tax management," Lady Justice Rose said giving the judgment of the Court of Appeal.

However, Aozora could only succeed in a judicial review of HMRC's conduct if it could show that it would be unfair for HMRC to depart from their published guidance. Quoting Lady Justice Arden's formulation of the test in a 2017 case concerning reliance on HMRC guidance, Lady Justice Rose said the taxpayer had to show that "it would be so unfair as to amount to an abuse of power".

She said that in order for HMRC to be bound by a view of the law that it has expressed but now believes to be wrong, Aozora had to "show a high degree of unfairness arising in its particular circumstances" in order to override the public interest in HMRC collecting taxes in accordance with a correct interpretation of the law.

The judge said that the High Court had been wrong to say that Aozora could not show it had relied on the advice because no mention of the HMRC guidance was made in advice given to Aozora by their tax advisers.

However, she said that Aozora's reliance on the representation made in the manual was "weak" because "the representation was merely as to HMRC's opinion about the construction of a relatively straightforward legal provision" and Aozora had sought and obtained specialist advice on the meaning of the legislation and how it would apply to its particular circumstances.

On this basis she said the degree of unfairness arising for Aozora if HMRC were allowed to collect tax on the correct basis was not sufficient to prevent HMRC from applying that interpretation of the law if their earlier, different interpretation was incorrect.

"The factors that are relevant to an assessment of whether Aozora UK has shown that it would be unfair to a high degree if HMRC were permitted to impose a charge on the basis of the correct interpretation of the law do not establish any unfairness here approaching an abuse of power," Lady Justice Rose said in her judgment. "Aozora Japan obtained advice from specialist tax advisers who were not at any great disadvantage compared to HMRC when coming to their own view of the law and it is that view on which Aozora Japan relied. Aozora UK has not shown that it has suffered a serious detriment as a result of any reliance on the representation."

Robins said: "We are seeing an increasing trend for HMRC to issue guidance on how they will apply complex technical provisions, rather than changing the legislation to clarify uncertainties or to narrow down its scope. This is worrying when cases like this one show how difficult it is to rely on HMRC guidance if it later decides its guidance was wrong."

Current examples of new rules that are being "narrowed or explained by guidance" are the rules implementing the EU's DAC 6 directive requiring disclosure of cross border arrangements and the new IR35 off-payroll working rules for the private sector which make a business responsible for determining the tax status of those it engages thorough intermediaries such as personal service companies, she said.