The Court of Appeal in The Queen (on the application of Aozora GMAC Investment Limited) v HMRC [2019] EWCA Civ 1643 (Aozora) recently upheld the decision of the High Court concerning the extent to which a taxpayer could have a legitimate expectation to be able to rely on published guidance of the UK revenue authority, HM Revenue and Customs (HMRC). In the judgment, the Court of Appeal rejected the taxpayer appellant’s argument that it had placed reliance on HMRC’s guidance to the necessary degree, and did not prove there was a sufficient degree of “unfairness” resulting from the use of relevant HMRC guidance in the case.

HMRC has a series of internal manuals concerning the interpretation and application of UK tax legislation for use by HMRC staff. These manuals have been made publicly available for taxpayers and advisors. The question therefore arises as to whether a UK company has a legitimate expectation to be able to rely on HMRC guidance (whether or not that guidance was correct).

In particular, the case concerned a UK company (Aozora UK) that received payments of interest from a US subsidiary that were subject to US withholding tax. Aozora UK was liable to UK corporation tax on the interest received but not entitled to double tax relief under the US-UK double tax treaty as Aozora UK was not a “qualified person” under the treaty. Instead, Aozora UK claimed unilateral relief from double taxation under UK domestic legislation (and in particular under section 790 of the Income and Corporation Taxes Act 1988 (ICTA 1988)). HMRC denied Aozora UK’s claim on the basis that relief under section 790 ICTA 1988 was restricted under section 793A(3) ICTA 1988 if a double tax treaty contained an express provision that relief by way of credit was not to be given. However, HMRC’s International Manual stated that the restriction on relief from double taxation under section 793 ICTA 1988 was limited to Article 24(4)(c) of the US-UK double tax treaty (concerning dividend payments only). Accordingly, Aozora UK argued that it had a legitimate expectation that unilateral relief from double taxation on interest payments was not restricted by the application of section 793 ICTA 1988.

Crucially, the Court of Appeal held that it was necessary for the taxpayer to show “a high degree of unfairness arising in its particular circumstances in order to override the public interest in HMRC collecting taxes in accordance with a correct interpretation of the law.”

In determining whether Aozora UK had satisfied this test, consideration was given to a number of factors. While the Court of Appeal held that the statements in the HMRC guidance did constitute a representation which could give rise to a legitimate expectation, the Court of Appeal ultimately concluded that Aozora UK did not itself have a legitimate expectation that it could rely on HMRC’s guidance because Aozora UK (or Aozora UK’s tax advisors) had not placed sufficient reliance on the guidance in question. The Court of Appeal noted that the relevant guidance merely represented HMRC’s opinion as to the law and that Aozora UK’s tax advisers were at no great disadvantage in comparison to HMRC in their ability to form their own view as to the correct position. Furthermore, the Court of Appeal noted that Aozora UK had not demonstrated that it had suffered serious detriment in reliance on the HMRC guidance, including in relation to the structuring of the particular transaction and the significance of the tax analysis to the commercial decision-making. 

While Aozora may provide taxpayers (and their advisors) a salient reminder of the importance of appropriately documenting any reliance on HMRC guidance, it is also (perhaps unsurprisingly) clear from the Court of Appeal decision that a very high degree of “unfairness” will be necessary to displace the right and obligation of a revenue authority to collect the correct of amount of tax.

The decision in Aozora places into some uncertainty the developing approach of HMRC to issue guidance on how it will interpret recently enacted, highly complex legislation. Many commentators have pointed towards an environment of complex taxing legislation in which the high watermark of taxation is lowered by HMRC guidance. Aozora illustrates that it can be very difficult to rely on that guidance if HMRC later decides that the guidance is incorrect.