Mansworth v Jelley still wobbling after all these years- HMRC win in CA judicial review: R (Hely-Hutchinson) v HMRC

Mansworth v Jelley still wobbling after all these years- HMRC win in CA judicial review: R (Hely-Hutchinson) v HMRC

Mon 02 Oct 2017

The Court of Appeal has ruled in the Hely-Hutchinson judicial review that Mr. Hely-Hutchinson was not entitled to rely on HMRC’s 2003 ‘Mansworth v Jelley’ guidance for his open returns relating to tax years ended before HMRC withdrew that guidance in 2009.  Hely-Hutchinson’s contention was that he had relied on HMRC guidance but was not being treated fairly and equally with other taxpayers who had relied on that guidance but whose tax returns were closed before the guidance was withdrawn remained unaffected by the withdrawal. The CA overruled the High Court which had held that HMRC were not entitled to withdraw their guidance in the way they did. The case stemmed from flawed HMRC guidance issued following their misinterpretation of the effect of Mansworth v Jelley, which case concerned the CGT base cost of employment-related shares acquired through options. Mansworth v Jelley ruled that the base cost deductible in calculating chargeable gains was the market value of the shares at the date of acquisition but HMRC’s guidance allowed for that market value to be increased by the amount on which the employee receiving the shares was taxed as employment income. The effect of this was to create artificial CGT losses because in many cases shares were sold, often immediately after acquisition, for a value close to that market value, meaning that the amount subjected to income tax became a CGT loss.
When HMRC realised their error they withdrew the guidance and said they would not reopen cases already settled but any cases that had not yet been resolved would be settled on the correct legal basis, i.e. losses claimed on the basis of Mansworth v Jelley would be refused.

Issues considered by the Court of Appeal

1. Was there comparative unfairness by reason of the withdrawal of the beneficial tax treatment of Mansworth v Jelley losses by the issue of the RCBs for taxpayers with open claims only?
No: HMRC was entitled to change its policy if there was good reason. In this case the benefit of correcting an incorrect interpretation overrode the principle that taxpayers are entitled to consistency and in this case the change of policy did not create unfairness in general or to Hely-Hutchinson in particular.
2. If the answer to (1) was no, were HMRC wrong in withdrawing the 2003 guidance from existing cases because they had created a legitimate expectation on Hely-Hutchinson’s part or, alternatively, withdrawing the guidance infringed Hely-Hutchinson’s rights under the European Convention on Human Rights?
No: the ‘unfairness’ of the difference in treatment of the two categories of taxpayer in this case was not so ‘outrageously or conspicuously unfair’ under Human Rights principles as to prevent HMRC from changing the way tax was calculated for those with open returns.
3. If the withdrawal was not unfair and was Convention compliant, was the decision in any event lawfully taken by HMRC’s officer on the basis of the RCBs and the information before her?
No: HMRC’s decision to withdraw the guidance was lawful.
Is HMRC’s stance on options correct? FTT decision awaited
As well as the JR proceedings here are open cases due for hearing by the First-tier Tribunal on technical grounds, i.e. the question whether HMRC should have accepted Hely-Hutchinson’s loss claims anyway because his interpretation, that the base cost should have been the market value plus the amount taxed as income, was correct.

How relevant is Hely-Hutchinson?

The specific legal point in Mansworth v Jelley is no longer relevant but Hely-Hutchinson raises potentially greater issues in relation to HMRC guidance. As it stands, a taxpayer who acts in good faith on the basis of HMRC guidance may be denied the result he might legitimately have expected if they change their guidance.

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