Tax law in the UK is notoriously complex, and full of ‘grey areas’. Many tax professionals (and some taxpayers) therefore refer to guidance in the HM Revenue and Customs (HMRC) manuals on a regular basis. The manuals outline HMRC’s interpretation and practical approach to the tax legislation. This can be useful when (for example) the tax treatment of an event or transaction is unclear or uncertain.
However, the manuals do not generally carry the force of law. The question therefore arises: to what extent can taxpayers rely upon HMRC’s guidance in the manuals? HMRC gives some health warnings about the manuals (at www.gov.uk/government/collections/hmrc-manuals
‘You shouldn’t assume that the guidance is comprehensive or that it will provide a definitive answer in every case. HMRC will use their own reasoning, based on their training and experience, when applying the guidance to the facts of particular cases.
The guidance in these manuals is based on the law as it stood when they were published. HMRC will publish amended or supplementary guidance if there’s a change in the law or in the department’s interpretation of it. HMRC may give earlier notice of such changes through a [HMRC] brief or press release.
Subject to these qualifications you can assume the guidance normally applies, but where HMRC considers that there is, or may have been, avoidance of tax the guidance will not necessarily apply.’
HMRC guidance could be relied upon…
The issue of reliance on guidance in an HMRC manual was considered in Aozora GMAC Investment Ltd, R (On the Application Of) v Revenue and Customs  EWHC 2881 (Admin). In that case, HMRC enquired into the tax returns of the claimant company (AUK) for its accounting periods ended 31 March 2007, 2008 and 2009. AUK made loans to a US subsidiary (AUS) and received interest payments. The US imposed withholding tax (at 30%) on the interest received. AUK was liable to corporation tax in the UK on the interest received from AUS. Following its tax return enquiries, HMRC issued closure notices to deny AUK relief in respect of withholding tax imposed by the US.
AUK made a claim for judicial review. It contended that the terms of guidance in a page of HMRC's International manual at the relevant times contained a representation by HMRC that gave rise to a legitimate expectation that AUK would be taxed in accordance with the manual, whether or not the terms of the manual were accurate (nb HMRC removed a passage because it was incorrect). AUK argued that it would be ‘conspicuously unjust’ and an ‘abuse of power’ for HMRC to resile from the alleged representation.
The High Court considered that a statement of the law contained in HMRC’s guidance could in principle constitute a ‘relevant representation’ and concluded that there was such a representation in HMRC’s guidance in this case.
…but was not actually relied upon
However, the court went on to consider whether AUK (through its parent company) had relied upon the HMRC guidance. The court noted that professional advice had been taken from an adviser on the UK’s double tax relief rules. The expert ‘drew comfort’ from the content of HMRC’s manual in reinforcing his understanding of the relevant law. The court concluded that AUK had exclusively relied upon the professional advice given. AUK was unaware of HMRC’s manual and guidance, so did not directly rely upon any representations made in it.
Furthermore, drawing comfort or encouragement from the guidance was not sufficient; it had not been shown that the guidance played a real and substantial part in the giving of the professional advice. There was also insufficient evidence to demonstrate that, by reason of any reliance on the relevant representation, AUK had suffered substantial detriment. The claim for judicial review was dismissed.
Proceed with caution
Whilst the claimant company in Aozora was unsuccessful on the facts and evidence, it offers taxpayers some encouragement in other judicial review claims based on legitimate expectation that guidance in HMRC’s manuals can be a relevant representation.
However, if a taxpayer is relying on advice from a professional adviser, the adviser should draw the taxpayer’s attention to HMRC’s guidance as appropriate. The adviser should also (following Aozora) point out to the taxpayer that HMRC’s guidance was being relied upon in giving the relevant advice to the taxpayer. It seems that ‘reliance’ in this context means that HMRC’s guidance must play a ‘real and substantial’ part in the giving of the advice, as opposed to the adviser just being ‘supported or encouraged’ by the guidance.
In a judicial review claim based on ‘legitimate expectation’ certain legal principles would need to apply, which are beyond the scope of this article.
This article was first printed in Tax Insider in May 2018.