The judicial review application was made by Aozora GMAC Investment against HMRC.
The case was in relation to a claim made by the Aozora for double tax relief in respect of US tax withheld on interest received from its US parent.
The HMRC denied the relief, arguing it is prohibited under UK law. However, an international manual produced by HMRC contradicted this and implied the relief was available after a certain date.
HMRC has now updated the manual and removed the sentence in question.
Aozora argued it relied on this information in the manual and it gives rise to a legitimate expectation that it would be taxed in accordance with it.
The judicial review judge accepted this argument but still dismissed the case, he said there was no evidence Aozora had actually relied on the guidance, or even if they had, that substantial detriment had been suffered as a result of the reliance.
A high bar to prove
Catherine Robbins, tax partner at international law firm Pinsent Masons, said the failed judicial review illustrates how difficult it is to rely on statements in HMRC manuals.
“The problem is that you have to prove (probably years after the event) that the taxpayer relied on the advice and suffered detriment as a result,” Robbins said.
“Although the judge accepted that the taxpayer should be entitled to rely on the manual, this case fell down because there was insufficient evidence.
“This is always going to be an issue when you are looking at something that happened a number of years ago,” she said.
Conditions
The judge outlined a number of conditions that would need to be satisfied to succeed in such a case, these being:
- A clear statement in the HMRC manual
- The taxpayer must not be trying to use the manual for tax avoidance
- The statement in the manual must have been relied upon by the tax adviser;
- The tax advice provided to the client must have referred to the statement in the manual; and,
- The taxpayer would have instead adopted a different business structure with a more favourable tax consequence if it had not acted in reliance on the manual.
Robbins said the taxpayer would need to provide clear evidence for each of these conditions to be satisfied.
She said this is likely to be difficult to produce when the tax problem comes to light a number of years later.
Do your research
Rachael Griffin, financial planning expert at Old Mutual Wealth, said the case is a reminder to research tax law and regulation that may apply to yourself or your company.
“We all rely on the rules outlined by HMRC in the decisions we make, and the manuals play a key part of this process, but should not necessarily be relied on in isolation.”
Griffin said it is unclear what significance this case will have on advisers going forward.
“On the one hand the judge has confirmed the taxpayer was entitled to rely on HMRC’s manual, but on the other hand the judge has ruled in favour of HMRC as the adviser failed to prove how the manual explicitly led to the tax advice provided,” she said.
