The taxman all at sea - creating and revoking legitimate expectations

30 May 2012

Taxpayers have for a long time had the ability to challenge HMRC for exercising its statutory powers in a way that is incompatible with something HMRC has said or done and which means that less tax falls to be collected than would normally be the case. This was first recognised by the House of Lords in 1985 in the Preston case, where the ground of challenge was characterised as amounting to an abuse or excess of power. Now, the ground of challenge is more commonly characterised as being a breach of a legitimate expectation -  but the underlying idea, that there is such unfairness as to amount to an abuse of power, remains the same.

Although recognising the theoretical possibility that HMRC may be restricted in its ability to collect tax because of legitimate expectations, the courts have in practice been reluctant to find that such expectations have been created. A good example of this is the Supreme Court decision in the Davies case, where the majority of the Supreme Court construed a guidance booklet that had been issued by HMRC in such a way as to avoid it creating a legitimate expectation beneficial to the taxpayers in that case. Nevertheless, and as shown in the very recent Cameron case expectations can be created; and, once created, it can be difficult for HMRC to undo them.

Cameron was about the tax treatment of seafarers. The dispute concerned the taxation of earnings from work undertaken abroad and the operation of what came to be called the “Seafarers Earning Deduction”. Under the applicable statutory scheme, in order to be able to claim the deduction in relation to earnings from a particular day a seafarer had to show that he was absent from the UK “at the end of the day”. The core issue in the judicial review was whether HMRC had created an expectation that in determining absence “at the end of the day” the seafarer had to show that he was serving on a ship that had cast off from a UK port before midnight and was sailing to a foreign port (as HMRC contended) or had created an expectation so that it was sufficient for the seafarer to show that his ship had cast off before midnight and was sailing on a voyage that would go outside UK territorial waters (as the claimants in the case contended). The significance of the distinction between the two was the claimants worked on ferries that sailed between UK ports (Aberdeen to Orkney and the Shetlands in one case, Fleetwood to Larne in the other) and not to foreign ports but which nevertheless went outside UK territorial waters during their voyages. In order to be eligible for the deduction – which amounted to 100% tax relief on earnings – they needed to show that the broader expectation had been established.

The factual position was confused and contradictory. HMRC principally relied on the fact that in dealing with a firm of accountants, the requirement for a voyage to a foreign port had been made clear – and the text of the letter setting that out was subsequently published in Tolley’s Yellow Tax handbook. The claimants principally relied on the fact that a guidance booklet published by HMRC (described as “the Blue Book”) the only relevant requirement described was the need for a journey outside UK territorial waters. The judge was satisfied that the Blue Book publication, which he considered to be unequivocal in its terms and a formal publication to all eligible taxpayers, created a legitimate expectation. He did not consider that the letter to the accountants and the subsequent publication in Tolley’s handbook amounted to a formal publication by HMRC that could contradict or modify what was said in the Blue Book.

The judge also addressed what HMRC would need to do to revoke a legitimate expectation. It was accepted by HMRC that revocation could not be done retrospectively and also that it had to be managed fairly. The judges went further and said that although it was not for him to lay down “prescriptive rules”   revocation could only be effective “if there was publication in some form to the whole class of potentially eligible taxpayers”. Finally, the judge considered an argument of HMRC that one of the claimants had not actually relied on the Blue Book and so could not take the benefit of it. On the facts the judge found that there had been reliance but went on to say that in view of the fact that the Blue Book had been published to a significant class of taxpayers rather than simply to the claimant as an individual, it was “extremely doubtful” whether this actually mattered.

Although the significance of the decision in Cameron should not be overstated – the underlying factual position was unusual – it is potentially helpful to those seeking to rely on legitimate expectations, whether as against HMRC or any other public body. It sets a clear threshold to be met by a public authority if it is to withdraw or revoke an expectation.


Referenced cases:
R oao Cameron and ors v Commissioners for HM Revenue and Customs [2012] EWHC 1174 (Admin)
In re Preston [1985] 1AC 835
R oao Davies and anor v Commissioners for HM Revenue and Customs [2011] UKSC 47

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