By Mark McLaughlin
Taxpayers (and advisers) strive for certainty when dealing with tax issues. The legislation is often unclear, and taxpayers may therefore resort to seeking comfort from guidance published by HM Revenue and Customs (HMRC), such as in booklets or its manuals. This guidance does not carry the force of the law. But can it be relied upon, if its statements are clear and unequivocal, and are followed to the letter?
There is very little legislative assistance for taxpayers wishing to establish their residence status in the UK. The taxation principles of residence have largely been derived from a substantial amount of case law. Heavy reliance is therefore often placed on HMRC's guidance in Booklet HMRC6 ('Residence, domicile and the remittance basis'). HMRC released a new version of HMRC6 on 6 January 2011. The previous version included the following disclaimer:
"This guidance outlines our (HMRC) view and interpretation of legislation and case law. The material is guidance only. It has no legal force, nor does it seek to set out regulation or practice."
On the face of it, such a disclaimer presents a real problem for taxpayers and advisers. Most will know that HMRC6 does not carry the force of law. However, HMRC's guidance normally sets out its policy and approach on the tax issue in question. If HMRC6 did not even set out HMRC's policy or practice, what use would it be if taxpayers could not rely on it?
It was therefore reassuring to note that the above disclaimer has been removed from the latest version of HMRC6, which now states the following:
"This guidance outlines our (HM Revenue & Customs) application and interpretation of legislation and case law."
This is a welcome change. However, the statement in the original HMRC6 raises the issue of the extent to which taxpayers cannot rely upon (or ignore) HMRC guidance in general, as an explanation of HMRC's policy or approach. It also suggests that HMRC can point to guidance when it supports their case, but ignore it when it suits them to do so. Can HMRC be forced to comply with its own guidance if this favours the taxpayer?
In the judicial review proceedings concerning Robert Gaines-Cooper  EWCA CIV 83, the Court of Appeal considered (among other things) whether HMRC could be bound by the guidance in the predecessor to HMRC6, booklet IR20. The following statement was made (by Moses LJ):
"But the undoubted need to recognise how dependant questions of residence are upon the facts of individual cases does not and should not detract from the utility and effect of the guidance the Revenue chose to promulgate. IR20 contains statements of normal practice, as acknowledged by the Revenue in its Brief 01/07, following reports of the Gaines-Cooper decision. It sets out a limited number of specific situations in which a taxpayer will be treated as non-resident. If a taxpayer falls within the situation described by the Revenue, the Revenue has given an assurance that it will treat the taxpayer in accordance within the terms of the guidance. If a taxpayer comes, for example, within the terms of 2.2, the Revenue has given an assurance that it will treat the taxpayer as not resident and not ordinarily resident. It will not be permitted to resile from that assurance, unless and until it announces that it purposes, for the future, to alter the circumstances in which it will accept non-resident status."
Of course, the Judge was referring to the specific guidance in IR20, which was replaced by HMRC6. However, the Judge's comments in the Gaines-Cooper case hopefully provides the taxpayer with a helpful response to potential HMRC 'disclaimers' that its guidance does not seek to set out its regulation or practice.
There is a general law principle of 'legitimate expectation' where there has been unfairness amounting to an abuse of power or irrationality. The question arises: does HMRC guidance create a legitimate expectation that taxpayers can rely upon it, and if so, to what extent?
In Hanover Company Services Ltd v CRC  UKFTT 256 (TC) TC00550, Hanover was assessed to VAT on the basis that it had made a single supply of standard rated company formation services, as opposed to separate supplies of company formation services (standard rated) and printed material (zero rated), and that statutory registration fees in forming 'off the shelf' companies were not disbursements outside the scope of VAT.
The company's director and sole shareholder had previously sought advice from the company's accountants, who consulted published guidance from HM Customs & Excise (as it then was) and confirmed that Hanover had adopted the correct VAT treatment. This guidance consisted of a 'Business Brief', VAT Information Sheet and a HMCE manual. A VAT assurance visit by the Revenue on 16 May 2006 drew the company's attention to HMRC Business Brief 01/2006 (published on 19 January 2006), following which Hanover changed its practice to account for VAT at the standard rate for printed material from the date of publication of the Business Brief. However, the company appealed against the VAT assessments, on the basis that it should not be required to adopt the same VAT treatment for periods before that time.
The company argued that it had a legitimate expectation that HMRC would apply its earlier guidance. However, the tribunal held that Hanover had not consulted or relied upon any HMCE or HMRC publication, but relied on the company's accountant, and that there had been no written confirmation from HMRC that the VAT treatment adopted by Hanover was correct. It therefore followed that the company did not rely on a practice of HMRC, and that it was not unfairness amounting to an abuse of power for HMRC to raise an assessment which was inconsistent with its earlier published guidance. The company's appeal was dismissed.
The following factors were apparently significant in the tribunal's decision:
- The taxpayer had not consulted or relied upon any publication of HMCE or HMRC, but relied upon the company's accountant;
- There had been no written confirmation from HMRC that the VAT treatment adopted by the company was correct;
- In any event, the introduction to HMRC's manuals contains a 'health warning', which meant that the guidance relied upon by the company did not give rise to a legitimate expectation as it was not devoid of a relevant qualification.
Professional advisers will invariably refer to HMRC guidance when advising their clients, particularly where there is some uncertainty about the point at issue. The decision in the Hanover case suggests that advisers should draw their clients' attention directly to any HMRC guidance being relied upon, perhaps providing extracts from it. Even then, the tribunal's reference to a 'health warning' in the HMRC manuals would appear to cast some doubt over whether guidance in the HMRC manuals is capable of giving rise to a legitimate expectation, if HMRC's actual approach differs from its guidance on a particular issue.