Normative underpinnings and the public interest in tax collection
The judgment of the Court of Appeal in the Aozora case ([2019] EWCA Civ 1643) was handed down on 8 October (as reported in Tax Journal, 19 October). In dismissing the taxpayer’s appeal on similar grounds to the High Court, Rose LJ made three remarks about legitimate expectation claims.
First, that detrimental reliance is not determinative, nor is it irrelevant to establishing that a public authority acted unlawfully in resiling from a legitimate expectation. But in explaining this orthodox point, the court revealed the normative reason why detrimental reliance is important in cases of substantive legitimate expectation, but not in procedural expectation cases (paras 34–44). The gist of the Court of Appeal’s approach is that detrimental reliance will be an important factor in cases where a substantive legitimate expectation is claimed, but not procedural expectation cases, because humans ought to be able to plan their lives in reliance on representations as to how their actions will be treated by a public authority. But for the representation of the public authority, a different action may have been pursued by the person making the decision. Thus, substantive legitimate expectations claims ought to be protected because of the importance of human dignity – that humans ought to be treated as ends in themselves capable of making their own decisions affecting their lives.
That is not controversial – but in a tax case there is an argument that there are two actions that are relevant when considering the choices that the relevant persons have made. The first action is the decision to engage, or to refrain from engaging, in a particular transaction which has taxing consequences. If a taxpayer has received a representation from HMRC as to how that transaction will be treated, then the Court of Appeal would suggest that HMRC should not resile from that representation. But the second action is the decision which relates to a tax return. If a taxpayer receives a representation as to how a transaction will be treated after the event but before a tax return has been submitted (or even before the deadline for amendments to the tax return has passed), does that not factor into an individual planning their lives?
Second, Rose LJ rejected the argument that once a representation capable of giving rise to a legitimate expectation has been identified, the burden shifts to the public authority to adduce evidence to the court showing some public interest in it being able to resile from the representation (para 46). This formulation, however, is misleading. Once a legitimate expectation is established, the burden shifts to the public authority to justify resiling from it (see para 37 in Paponette [2010] UKPC 32). Ultimately Rose LJ was trying to make a valid point: that there is a strong public interest in the collection of taxes due, and thus the taxpayer must be able to adduce extra evidence to persuade a court that the legitimate expectation should be given effect. Rose LJ is essentially making a distinction between the legal burden and evidential burden of proof.
Third, Rose LJ noted that a high degree of unfairness needs to be demonstrated, even outside ‘reasonableness’ claims (para 48 onwards). It is slightly confusing for the Court of Appeal to have used the term ‘unfairness’, given that Gallaher [2018] UKSC 25 proposes that it is not a legal term: ‘Fairness, like equal treatment, can readily be seen as a fundamental principle of democratic society; but not necessarily one directly translatable into a justiciable rule of law’ (Lord Carnwath, para 31). But again, the point that the court is trying to make is uncontroversial and follows from the previous point. Once a legitimate expectation has been established, the onus shifts to the public authority to demonstrate that there is good reason for frustrating it.
Given the significant public interest in collecting tax prescribed as due by Parliament, this is a ready-made ‘good reason’ for HMRC where the underlying representation contained a mistake of law. So a taxpayer will have to displace this ‘good reason’ by providing further reasons as to why frustrating the expectation should not be permitted.
At the same time, however, it should be made clear that a high degree of unfairness does not always need to be demonstrated in a legitimate expectation case. For instance, if HMRC simply failed to even consider the legitimate expectation, a claim against HMRC would not need a demonstration of a high degree of unfairness.
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The doctrine of legitimate expectation in Aozora
Normative underpinnings and the public interest in tax collection
The judgment of the Court of Appeal in the Aozora case ([2019] EWCA Civ 1643) was handed down on 8 October (as reported in Tax Journal, 19 October). In dismissing the taxpayer’s appeal on similar grounds to the High Court, Rose LJ made three remarks about legitimate expectation claims.
First, that detrimental reliance is not determinative, nor is it irrelevant to establishing that a public authority acted unlawfully in resiling from a legitimate expectation. But in explaining this orthodox point, the court revealed the normative reason why detrimental reliance is important in cases of substantive legitimate expectation, but not in procedural expectation cases (paras 34–44). The gist of the Court of Appeal’s approach is that detrimental reliance will be an important factor in cases where a substantive legitimate expectation is claimed, but not procedural expectation cases, because humans ought to be able to plan their lives in reliance on representations as to how their actions will be treated by a public authority. But for the representation of the public authority, a different action may have been pursued by the person making the decision. Thus, substantive legitimate expectations claims ought to be protected because of the importance of human dignity – that humans ought to be treated as ends in themselves capable of making their own decisions affecting their lives.
That is not controversial – but in a tax case there is an argument that there are two actions that are relevant when considering the choices that the relevant persons have made. The first action is the decision to engage, or to refrain from engaging, in a particular transaction which has taxing consequences. If a taxpayer has received a representation from HMRC as to how that transaction will be treated, then the Court of Appeal would suggest that HMRC should not resile from that representation. But the second action is the decision which relates to a tax return. If a taxpayer receives a representation as to how a transaction will be treated after the event but before a tax return has been submitted (or even before the deadline for amendments to the tax return has passed), does that not factor into an individual planning their lives?
Second, Rose LJ rejected the argument that once a representation capable of giving rise to a legitimate expectation has been identified, the burden shifts to the public authority to adduce evidence to the court showing some public interest in it being able to resile from the representation (para 46). This formulation, however, is misleading. Once a legitimate expectation is established, the burden shifts to the public authority to justify resiling from it (see para 37 in Paponette [2010] UKPC 32). Ultimately Rose LJ was trying to make a valid point: that there is a strong public interest in the collection of taxes due, and thus the taxpayer must be able to adduce extra evidence to persuade a court that the legitimate expectation should be given effect. Rose LJ is essentially making a distinction between the legal burden and evidential burden of proof.
Third, Rose LJ noted that a high degree of unfairness needs to be demonstrated, even outside ‘reasonableness’ claims (para 48 onwards). It is slightly confusing for the Court of Appeal to have used the term ‘unfairness’, given that Gallaher [2018] UKSC 25 proposes that it is not a legal term: ‘Fairness, like equal treatment, can readily be seen as a fundamental principle of democratic society; but not necessarily one directly translatable into a justiciable rule of law’ (Lord Carnwath, para 31). But again, the point that the court is trying to make is uncontroversial and follows from the previous point. Once a legitimate expectation has been established, the onus shifts to the public authority to demonstrate that there is good reason for frustrating it.
Given the significant public interest in collecting tax prescribed as due by Parliament, this is a ready-made ‘good reason’ for HMRC where the underlying representation contained a mistake of law. So a taxpayer will have to displace this ‘good reason’ by providing further reasons as to why frustrating the expectation should not be permitted.
At the same time, however, it should be made clear that a high degree of unfairness does not always need to be demonstrated in a legitimate expectation case. For instance, if HMRC simply failed to even consider the legitimate expectation, a claim against HMRC would not need a demonstration of a high degree of unfairness.
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