When can taxpayers rely on legitimate expectation?
The doctrine of legitimate expectation was considered in the recent case of Karen Rotberg v HMRC ( TC03780).
Legitimate expectation may apply where a taxpayer relies on statements or guidance provided by HMRC even if that advice later proves to be incorrect on the basis that there is a legitimate expectation that the rules would apply in the manner previously agreed.
However, the doctrine of legitimate expectation is based on a principle of fairness, this swings in both directions and in order to demonstrate legitimate expectation the taxpayer must act fairly towards HMRC by disclosing the full relevant facts.
In the case of R v Board of Inland Revenue, ex parte MFK Underwriting Agencies Ltd and others the judge noted that whilst HMRC can give advice and guidance to taxpayers, this could only give rise to a legitimate expectation that HMRC should be held to that advice where the taxpayer approaches HMRC with clear and concise proposals, makes full disclosure and makes it plain that a considered ruling is being requested.
Where such a request is made and HMRC give an unequivocal statement about the taxpayers affairs then the test for legitimate expectation should be met.
In the Rotberg case, the taxpayer sold shares over a number of years and claimed rollover relief. However a subsequent enquiry found that relief was not available. The taxpayer claimed legitimate expectation on the basis that either:
a. The taxpayer’s accountant had called HMRC and been advised that rollover relief should be available on the share disposal, or alternatively
b. During the enquiry process HMRC informed the taxpayer that they had considered whether any other CGT reliefs would be available and concluded they were not. It later transpired that at that time a claim for EIS deferral relief could have been made in respect of the latest disposal.
The tribunal concluded that it was not within its jurisdiction make a ruling as to legitimate expectation which would need to be heard by way of judicial review, but in case their decision was wrong they also published theirs views in relation to whether the bar for legitimate expectation would have been met.
The tribunal concluded that in this case legitimate expectation would not have been available because; (a) in respect of the telephone conversation this was felt to be of a general nature with no evidence that details of the taxpayers name, the amounts involved etc were disclosed and (b) in respect of the comments made during the enquiry, the expressing of a view by itself is not of itself sufficient to bind HMRC.
See our December 2014 Tax Update for more recent cases.