Taxpayers are entitled to rely on guidance circulated by HM Revenue and Customs and must be treated fairly and consistently. Those points were strikingly made by the High Court as it ordered reconsideration of a case in which a bank employee was refused relief on capital losses.
The man’s employers had granted him share options in a company at a nominal exercise price. He exercised those options and sold the shares on the same day. He subsequently completed his tax returns for the four relevant years on the basis that no gain or loss had arisen on disposal of the shares.
Such arrangements were in common use at the time, particularly in the banking sector, and HMRC took the view that they constituted tax avoidance in that they were designed to avoid employers’ national insurance contributions on the value of the options conferred. Lengthy investigations ensued and settlements were eventually agreed with a number of employers.
The employee later made a claim for relief in respect of capital losses arising from the share disposals. In line with then current HMRC guidance, the claimed losses arose from aggregating market value and the amount charged to tax on the exercise of the options. However, the relevant guidelines were subsequently withdrawn and HMRC refused the relief sought.
In upholding the employee’s judicial review challenge, the Court rejected HMRC’s plea that the guidance was merely an informal expression of its understanding of the law at the relevant time. The guidance had been published widely; its terms were clear and unambiguous and the employee clearly fell within those terms. He thus had a legitimate expectation that the guidance would apply to him. In those circumstances, HMRC was directed to take a fresh decision on the employee’s case, taking into account all aspects of unfairness.