SHARES ACQUIRED BEFORE 10 APRIL 2003 BY EXERCISING EMPLOYEE SHARE OPTIONS ALLOWABLE DEDUCTIONS AND CAPITAL LOSSES

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1 Tax Guide MANSWORTH V JELLEY REVISITED SHARES ACQUIRED BEFORE 10 APRIL 2003 BY EXERCISING EMPLOYEE SHARE OPTIONS ALLOWABLE DEDUCTIONS AND CAPITAL LOSSES GUIDANCE ON THE PRACTICAL IMPLICATIONS OF HMRC S CHANGE OF VIEW Issued on 21 January 2010 Contents Paragraph(s) Introduction 1 9 What was Mansworth v Jelley all about? The January 2003 Revenue Guidance Finance Act 2003 changes from 10 April Revenue & Customs Briefs 30/09 and 60/ The practical implications of the change in HMRC s view Summary of the position for losses crystallised prior to 12 May The meaning and relevance of legitimate expectation A brief consideration of legitimate expectation case law Legitimate expectation and pre-12 May 2009 transactions Our concerns about legitimate expectation and HMRC s view What do members need to consider and do? ICAEW and the Tax Faculty: who we are Ten Tenets for a Better Tax System Appendix A Appendix B Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T +44 (0) F +44 (0) E taxfac@icaew.com DX DX 877 London/City 1 of 17

2 Introduction 1. On 12 May 2009 HM Revenue & Customs (HMRC) published on its website Revenue & Customs Brief 30/09: Shares acquired before 10 April 2003 by exercising employee share options allowable deductions. This reversed the previous HMRC guidance in connection with the disposal of shares acquired before 10 April 2003 by exercising unapproved employee share options, which was issued in 2003 following the decision in Mansworth v Jelley. 2. Given the potential impact on 2007/08 and 2008/09 tax returns, this is an issue that members may have to consider by 31 January 2010 for affected clients. It could also impact on capital gains tax (CGT) planning undertaken for 2009/ In many cases, the change in guidance will have no impact. This is because the losses realised on the disposal of shares acquired under unapproved option arrangements will have become final. This applies where the losses have been claimed in a self assessment tax year which is now closed. It also applies where losses were realised prior to self assessment but have been set against gains in a tax year which is now closed. 4. There are, however, issues to address where the disposal of the shares occurred: in 2008/09; or in 2007/08 (so an amendment could still be made); or in a self assessment year which is still open (for example where the return was submitted after the normal deadline or there is an open enquiry); or in pre-self assessment years (1995/96 and prior) where the loss has not been offset against gains in a year which is now closed. 5. The action which should be taken in those situations which are not yet final is discussed in the section What members need to consider and do (paragraphs 71 83). The action will depend on the view taken in each case of whether there was legitimate expectation that the taxpayer would get the benefit anticipated from following the HMRC guidance at the time. 6. We have a number of concerns about the stance HMRC is taking in connection with this change, in particular the retroactive effect of the change in view. We consider that the very restrictive view which HMRC is taking of legitimate expectation is not in accordance with case law in this area and means that taxpayers may believe that they should recompute losses or gains when they have legitimate grounds for not doing so. 7. We have prepared this TAXGUIDE to assist members in advising clients with Mansworth v Jelley losses who may be affected by HMRC s change of view. It brings together and expands on the information and advice which we have already published in TAXline and in our newswire. It explains the background and the current guidance, and summarises the situation for earlier years and the action which may need to be taken now. In particular it discusses the meaning of legitimate expectation and its implications. 2 of 17

3 8. Members should note that in one aspect the interpretation of legitimate expectation the Tax Faculty s view is potentially in conflict with HMRC s published guidance. Members should consider the issues carefully on a case by case basis when advising clients. The Faculty cannot be held responsible for action taken or not taken on the strength of the contents of this TAXGUIDE. 9. The Tax Faculty would like to thank Lynnette Bober for her assistance with this TAXGUIDE. Lynnette is a National Tax Consultant at Smith & Williamson and a Tax Faculty volunteer and committee member. She chairs the Faculty s Capital Gains Tax Committee. What was Mansworth v Jelley all about? 10. On 12 December 2002, the Court of Appeal published its decision in Mansworth (HMIT) v Jelley ([2002] EWCA Civ 1829, [2003] STC 53) in relation to the CGT implications of the exercise of share options. The point at issue was the base cost of shares for CGT purposes for an employee who acquired shares under an unapproved share option scheme. 11. In Mansworth v Jelley, the taxpayer argued that the base cost of the shares was their market value at the date acquired whereas the Inland Revenue (as it was then) contended that the base cost of the shares was the amount paid for the shares, that is: the value of the consideration given for the option; plus the price paid for the shares. 12. As Mr Jelley was not resident in the UK at the time of the grant of the option, he was not liable to an income tax charge when the share options were exercised. Thus, in the Inland Revenue's view of the law at the time, the base cost of his shares would only have been the amount paid for the shares and not their market value at the date of the exercise. The chargeable gain on the disposal of the shares would therefore have been much higher. 13. Before the case was decided, the view held by most, including the Inland Revenue, was that where unapproved share options were exercised the base cost of the shares comprised (ignoring any nominal consideration which the employee might pay for the option itself): the actual price paid for the shares; and the amount charged to income tax in respect of the exercise, being the difference between the exercise price and the market value of the shares at the time of exercise. 14. As the price paid for the shares would generally be the exercise price, in practice the base cost of the shares would usually be the market value of the shares on the date they were acquired. 15. The Court of Appeal held that where an option had been exercised the grant of the option was no longer treated as a disposal of an asset; the only relevant disposal was the disposal of the underlying asset and agreed with the argument put forward 3 of 17

4 by the taxpayer that the base cost for the CGT computation should be equal to the market value of the asset. 16. Following the decision in Mansworth v Jelley, the Inland Revenue published a note on 8 January 2003 (the January 2003 Revenue Guidance) setting out its view of the implications of Mansworth v Jelley. The January 2003 Revenue Guidance 17. The January 2003 Revenue Guidance stated that as a consequence of the Mansworth v Jelley case, where shares are acquired via employee share options, the CGT acquisition cost of such shares was: their market value at the time the option is exercised; plus any amount charged to income tax on the exercise. 18. The statements applied not only to shares acquired under unapproved share option schemes but also to shares acquired under Enterprise Management Incentive schemes and shares which were acquired by exercising options from approved share option schemes outside the scheme rules. 19. The result of the January 2003 Revenue Guidance was that the individual would obtain a double deduction for CGT purposes, because of the deduction for the amount of the gain which was subject to income tax. If the employee sold the shares immediately the option was exercised and there was an income tax charge as a result of the exercise, then he or she individual would always realise a capital loss. 20. In common with many commentators at that time, the Tax Faculty was surprised by the January 2003 Revenue Guidance and commented in TAXline Tax Practice No 1 that we were not convinced that it was an accurate statement of the law. However, the Inland Revenue stood by its analysis of the legal position. 21. Following the January 2003 Revenue Guidance, where individuals had exercised unapproved share options and disposed of the shares acquired, it was general practice to prepare computations in line with the January 2003 Revenue Guidance. After the guidance was issued, many individuals also amended open year returns, and where this was not possible made claims for capital losses on disposals which occurred in previous tax years (where time limits allowed). Finance Act 2003 changes from 10 April Unsurprisingly changes were introduced in Finance Act 2003 to modify the law (by introducing TCGA 1992 s 144 ZA) for shares acquired by exercising options on or after 10 April The effect of the change in legislation was that the base cost of the shares acquired reverted to the accepted position before Mansworth v Jelley in effect, the base cost is the market value on exercise of the shares. Consequently there could no longer be a double deduction for the amount charged to income tax. 23. For shares acquired before 10 April 2003 through the exercise of unapproved options, the position set down in the January 2003 Revenue Guidance for the 4 of 17

5 computation of the chargeable gains continued to be the accepted practice, as evidenced by various independently-produced textbooks. Revenue & Customs Briefs 30/09 and 60/ Some time prior to 12 May 2009 HMRC was advised by Leading Counsel that its view was incorrect and meant that taxpayers were paying too little CGT because the base cost used for CGT computations was incorrectly inflated. This led to HMRC publishing on 12 May 2009 Revenue & Customs Brief 30/09: Shares acquired before 10 April 2003 by exercising employee share options allowable deductions ( 25. HMRC s revised interpretation is that where the shares are treated as having been acquired at market value, that value is the full measure of their deemed cost of acquisition. In other words, there is no deduction for any amount charged to income tax. 26. Revenue &Customs Brief 30/09 did not provide any details of the technical argument which had led to its change of view. However, in response to representations from the Tax Faculty and other professional bodies HMRC did provide details of the technical analysis in Revenue & Customs Brief 60/09: Questions arising from Revenue & Customs Brief 30/09 published on 11 September 2009 ( 27. The only comment in Revenue &Customs Brief 30/09 with respect to the practical implications for taxpayers who had disposed of relevant shares prior to 12 May 2009 was: Those affected by the change may need to make or amend a Self Assessment return or loss claim provided they are in time to do so. HMRC will apply our new understanding of the law in cases where there is an open enquiry or appeal. This sentence caused considerable concern to some members who feared that this meant that losses had to be re-computed, even for closed years. 28. The Tax Faculty and other professional bodies put to HMRC various practical issues concerning losses crystallised prior to 12 May 2009 (see TAXREP 34/09). In Revenue &Customs Brief 60/09 HMRC provided answers to questions raised together with examples. 29. The Tax Faculty does not consider that it would be appropriate to challenge the technical merit of HMRC s revised interpretation of how the base cost is calculated. This means that where shares were acquired through the exercise before 10 April 2003 of unapproved options and are disposed of on or after 12 May 2009, the chargeable disposal calculation should be computed in accordance with the new guidance in which the acquisition cost of the shares is their market value at the date acquired. 30. We also accept that HMRC is obliged to abide by the strict interpretation of the law as it now understands it to be unless legitimate expectation is present so that it is then bound by its January 2003 Guidance. We do, however, consider that the treatment of the concept of legitimate expectation in Revenue &Customs Brief 5 of 17

6 60/09 is narrower than the generally accepted view, having consideration to the leading cases in the area. The concept of legitimate expectation and its implications are discussed further below (paragraphs 41 70). The practical implications of the change in HMRC s view 31. There is a fundamental difference between capital losses realised before self assessment and those realised in 1996/97 and later. For losses realised in pre-self assessment tax years (up to and including 1995/96) there is no statutory mechanism for agreeing the amount of a capital loss on a disposal. The quantum of the loss is not agreed until a gain arises against which the loss can be set. Accordingly, to be final, a pre-1996/97 loss must have been set off in a tax year for which the enquiry window is closed. 32. Ignoring the time limit changes which come into force from 1 April 2010 and so are not relevant in this context, a taxpayer had five years and 10 months following the end of the tax year to make a loss claim. This is done as follows: where a tax return has not been submitted for the tax year, the claim should be made on the return; where the return has been submitted and the amendment window has not passed the loss should be reported by way of an amendment to the tax return; and where the amendment window has passed a stand-alone claim has to be made. 33. The standard enquiry and amendment window for the self assessment tax years between 1996/97 and 2006/07 was one year after 31 January following the tax year for which the tax return was prepared. Different rules applies were a return was filed late. An amendment to the return which was filed after the filing deadline only extended the enquiry window with respect to matters to which the amendment related or which are affected by the amendment. 34. For 2007/08 and subsequent tax years where a return is filed on time the enquiry deadline is limited to one year after the return is submitted. The amendment window is, however, still fixed at one year after 31 January following the tax year for which the tax return was prepared. An amendment to the return still only extends the enquiry window with respect to the issues that the specific amendment relates to or affects. 35. Where a tax return is filed late HMRC has an extended period during which to enquire into the tax return. This extended period runs from the filing of the return up to and including the first quarter day next following the first anniversary of the filing of the tax return. 36. Where an amendment to a self assessment tax return is filed HMRC has a specified period to enquire into that amendment. The amendment enquiry period runs until the first quarter day next following the first anniversary of the filing of the tax return. 37. A stand-alone claim has to be made where it is too late to make the claim on the relevant year s self assessment return or to amend the return for the relevant year. The provisions of Sch 1A Taxes Management Act 1970 apply to determine the 6 of 17

7 period HMRC has to enquire into the claim. This means that the period HMRC has to make an enquiry runs from the filing of the claim until the first quarter day next following the first anniversary of the day the claim was made. 38. Under self assessment capital losses are final once the enquiry window has closed (unless the discovery provisions apply). 39. The table below summarises the position for losses crystallised prior to 12 May 2009 (the date Revenue &Customs Brief 30/09 was released). Note that Mansworth v Jelley (MvJ) losses crystallise only when the shares acquired under the pre-10 April 2003 unapproved options are sold. 7 of 17

8 40. SUMMARY OF THE POSITION FOR LOSSES CRYSTALLISED PRIOR TO 12 MAY 2009 Tax year in which MvJ capital loss crystallises Pre-SA years (1995/96 and earlier) Pre-SA years (1995/96 and earlier) SA years (1996/97 onwards) SA years (1996/97 onwards) Tax returns not yet submitted where the transaction occurred before 12 May 2009 Situation MvJ capital losses from pre-sa years have been offset against gains in a tax year which is now closed to an enquiry. MvJ capital losses from pre-sa years that have not been offset against gains in a year which is now closed. MvJ capital losses claimed: on a tax return for an SA year (1996/97 onwards) which is closed to an enquiry; or through an amendment to a return or a stand-alone claim and the enquiry window has closed. MvJ capital losses claimed on a tax return for an SA year: which is under enquiry; or where there is no current enquiry but the enquiry / amendment window is still open. Or, MvJ capital losses claimed through an amendment or stand-alone claim and the enquiry or amendment window is still open. MvJ capital losses not yet claimed because the tax return has not yet been submitted. Implications for tax returns and claims No change is necessary. All capital losses set off against gains in closed years are final. The loss now has to be re-computed in line with the revised HMRC guidance unless the taxpayer can argue that he or she has a legitimate expectation such that HMRC is bound by its previous guidance. No change is necessary. Capital losses will remain as claimed in the tax return regardless of whether they have or have not yet been set off against capital gains. HMRC has stated that it anticipates that taxpayers will ensure that their returns or claims are in accordance with the law and make any necessary amendments to open returns if they are in time to do so. However, this is only where legitimate expectation is not present. The position is different if there is legitimate expectation. HMRC has stated that chargeable gains and allowable losses included in returns or claims should be calculated on the basis set down in Revenue & Customs Brief 30/09 unless the taxpayer can argue that he or she has a legitimate expectation such that HMRC is bound by its previous guidance. 8 of 17

9 The meaning and relevance of legitimate expectation 41. Where the Mansworth v Jelley capital losses are final, members need do nothing further. 42. Where losses were crystallised as a result of pre-12 May 2009 transactions but are not final or have not been claimed, members need to consider whether their client has a legitimate expectation such that HMRC should be bound by the January 2003 Revenue Guidance. This will be relevant in deciding what amendments may be needed to tax returns, claims and capital loss calculations. 43. The following sections discuss the meaning of legitimate expectation and the relevant case law, and how this might apply to pre-12 May 2009 transactions. 44. Legitimate expectation is a general, rather than a tax law, concept and is therefore not defined in the Taxes Acts. While there are a number of tax cases where the concept has been addressed, the scope of the concept should not necessarily be confined to tax cases. 45. The concept was substantially clarified in the Court of Appeal case of R v North and East Devon HA ex p Coughlan [2001] QB 213. From this case the following definition can be taken: Legitimate expectation can apply to bind a public body should that public body induce a legitimate expectation of a substantive benefit where frustrating that expectation might be so unfair as to amount to an abuse of power. 46. In Revenue & Customs Brief 60/09, HMRC states that: HMRC does not accept that its published guidance alone can necessarily create a legitimate expectation for a taxpayer. Whether a taxpayer has a legitimate expectation will depend upon the specific facts and circumstances of the case. Chargeable gains and allowable losses included in returns or claims should be calculated on the correct statutory basis, which HMRC now understand to be as described in Revenue & Customs Brief 30/09. HMRC s primary responsibility is to apply the law correctly and collect underpaid or under-declared tax. However, in some limited circumstances, to apply the statute may be so unfair as to amount to an abuse of power by HMRC and in these circumstances HMRC may be bound by its previous guidance. We will normally be bound by our previous guidance where the taxpayer can demonstrate that he or she: reasonably acted in reliance on the previous guidance, and would suffer detriment from the correct application of the statute. To have acted in reliance on the advice the taxpayer must have done or refrained from doing something as a direct consequence of the advice. HMRC understand that in this context detriment means real loss, it is not sufficient to have merely suffered disappointment or upset. 9 of 17

10 47. This narrow view as to when HMRC should be bound by previous assurances contrasts unfavourably with the approach set down in its Technical Note issued on 9 December 2009 concerning the Enterprise Investment Scheme and Partnerships. This note explains that following recent consideration HMRC has revised its view on the interpretation of s 183, Income Tax Act 2007 (ITA 2007) in a way that is unfavourable to taxpayers. However, it is stated that HMRC will not deny an investor relief where, on or before the date of the Technical Note, shares have been issued and either: the certificate of compliance authorised under the procedure in ss , ITA 2007 following receipt of an EIS1 has been issued; the issue of the certificate of compliance has not yet been authorised under the procedure in sections , ITA 2007 but HMRC has given an advance assurance in accordance with section VCM21010 of HMRC s Venture Capital Manual. 48. Where there has been explicit HMRC guidance, such as that issued in January 2003 on the ramifications of the Mansworth v Jelley case, the Tax Faculty would argue that it should have the same force as advance assurance under VCM21010 and that HMRC should be bound in the same way whether or not the individual has suffered real loss. A brief consideration of legitimate expectation case law 49. HMRC may have arrived at its statement in Revenue & Customs Brief 60/09 of when an individual is entitled to argue that he or she has a legitimate expectation from a consideration of the judgment in the case of R (on the application of Bamber) v Revenue and Customs Commissioners (No 2) [2007] EWHC 798 (Admin). In this case significant weight was put on the need for the taxpayer to have incurred real personal detriment evidenced by difficulties incurred or sacrifices made as the result of HMRC resiling from a previous agreement. This weighty emphasis on real personal detriment evidenced through difficulties incurred and sacrifices made does not, however, appear to be supported by the judgment in R v Inland Revenue Commissioners, ex parte MFK Underwriting Agencies Ltd and related applications [1989] STC 873 (readers are referred in particular to the comments of Lord Bingham). 50. Indeed, while detriment is generally present in cases where legitimate expectation is in point, there is case law from which one can infer that for legitimate expectation to apply, all that is necessary is a clear and unambiguous representation on which an individual was both entitled to and did rely. The position was clarified in the Court of Appeal case of R v Secretary of State for Education ex parte Begbie BLD where Peter Gibson LJ stated: It is very much the exception, rather than the rule, that detrimental reliance will not be present when the court finds unfairness in the defeating of a legitimate expectation. In De Smith, Woolf and Jowell: Judicial Review of Administrative Action, 5th ed. (1995) p. 574, the position is summarised in this way: Although detrimental reliance should not therefore be a condition precedent to the protection of a substantive legitimate expectation, it may be relevant in two situations: first, it might provide evidence of the existence or extent of an 10 of 17

11 expectation. In that sense it can be a consideration to be taken into account in deciding whether a person was in fact led to believe that the authority would be bound by the representations. Second, detrimental reliance may be relevant to the decision of the authority whether to revoke a representation. 51. A further Court of Appeal case R v Newham LBC ex p Bibi (26 April 2001 and reported in part in The Times, 10 May 2001) provided guidance on the meaning of detriment with the remarks of Schiemann LJ stating clearly that for legitimate expectation to be in point it is not necessary to show any monetary loss. Schiemann LJ said: In a strong case, no doubt, there will be both reliance and detriment; but it does not follow that reliance (that is, credence) without measurable detriment cannot render it unfair to thwart a legitimate expectation. 52. This comment supports the first part of the HMRC analysis in Revenue & Customs Brief 60/09 which states that the taxpayer must have reasonably acted in reliance on the previous guidance, and would suffer detriment from the correct application of the statute. However, by saying: To have acted in reliance on the advice the taxpayer must have done or refrained from doing something as a direct consequence of the advice. HMRC understand that in this context detriment means real loss, it is not sufficient to have merely suffered disappointment or upset. Revenue & Customs Brief 60/09 sets the hurdle which taxpayers seeking to rely on legitimate expectation have to clear higher than appears to be necessary based on the Court of Appeal judgments. Legitimate expectation and pre-12 May 2009 transactions 53. HMRC accepts in Revenue & Customs Brief 60/09 that legitimate expectation might apply to certain taxpayers whose Mansworth v Jelley losses are not final. As such HMRC accepts that the January 2003 Revenue Guidance could have created an expectation of a substantive benefit (ie that the higher base cost would result in either less CGT to pay on the disposal of the shares acquired by the exercise of the option, or, as was more commonly the case, a loss which could be offset against future disposals). 54. The issue is whether the taxpayer can argue that for him or her legitimate expectation exists and whether HMRC should, therefore, be bound by its January 2003 Guidance. 55. We appreciate that HMRC is entitled, on the basis of new legal advice, to change its mind about the operation of the law in particular sets of circumstances. However, we feel that it is wrong in principle that such changes of opinion should be applied retroactively so as to disadvantage taxpayers. 56. We also appreciate the constraints within which HMRC has to work and that where expectation is not present, HMRC is legally obliged to apply the strict statutory position. 11 of 17

12 57. However, we believe that this is a case where fairness to taxpayers can be achieved by following the legitimate expectation definition given by applying the judgments in the Court of Appeal cases of R v Secretary of State for Education ex parte Begbie and R v Newham LBC ex parte Bibi (see above). 58. Given the publicity the matter received in 2003, it is likely that either a taxpayer with pre-10 April 2003 unapproved share options would have taken advice on the tax consequences or would have been provided with generic advice based on the January 2003 Revenue Guidance by his or her employer, or at least been pointed to the January 2003 Revenue Guidance by the employer or a colleague. It is much less likely that an affected taxpayer would have been unaware of the January 2003 Revenue Guidance. 59. Where the computations were carried out in line with the January 2003 Revenue Guidance and returns submitted on that basis, it is clear that the January 2003 Revenue Guidance was being relied on by the taxpayer. 60. Where the losses on a Mansworth v Jelley disposal had not been claimed prior to 12 May 2009 because the return for the relevant tax year had not been submitted, it is likely that the taxpayer would have considered the CGT outcome of the disposal following the January 2003 Revenue Guidance. For example: a capital disposal may only have been entered into because the taxpayer understood that, after taking into account the benefit of the Mansworth v Jelley losses, there would be no tax to pay; or the taxpayer may have thought that the Mansworth v Jelley losses would reduce or eliminate the tax liability on a disposal and therefore not retained as much of the proceeds as he or she otherwise would have done if there had been no reliance on Mansworth v Jelley losses to set against the gain. 61. Even if the expectation of the Mansworth v Jelley losses did not contribute to the taxpayer acting in a certain manner prior to the 12 May 2009 announcement, an affected taxpayer would probably have felt that he or she had a store of capital losses to reduce future CGT liabilities. It is likely that an affected taxpayer in considering his or her tax position would have kept that fact in mind. 62. Many taxpayers who would have to recalculate their losses if they followed the position set down in Revenue & Customs Brief 30/09 would therefore suffer some detriment by so doing. 63. Given that affected taxpayers would be likely to have known about the January 2003 Revenue Guidance and the unambiguous statement of how the base cost of the shares should be computed, they would have had an expectation that a different and more favourable tax result would apply as a result of the disposal of the affected shares than will result from applying the guidance in Revenue & Customs Brief 30/09. There is, therefore, likely to be detriment sufficient to pass the hurdle set down in the Court of Appeal cases so it is likely that legitimate expectation will exist. 12 of 17

13 Our concerns about legitimate expectation and HMRC s view 64. The Tax Faculty does not dispute either HMRC s revised interpretation or the analysis set down in Revenue & Customs Brief 60/09 with respect to the strict statutory position which means there is a difference between open and closed cases. 65. We also accept that HMRC can only depart from applying the law in accordance with how it now understands it in cases where the taxpayer has a legitimate expectation, such that HMRC is bound by its January 2003 Guidance. We do, however, have concerns with respect to the comments about legitimate expectation in Revenue & Customs Brief 60/ We believe that the analysis of the position provided in Revenue & Customs Brief 60/09 places a narrower interpretation on the meaning of detriment than is the generally accepted view, having consideration to the leading cases in the area. 67. We are also concerned about the message which is being given to taxpayers about the degree of reliance that can be placed on HMRC guidance. In this case there was a clear published written statement of the HMRC position which gave taxpayers an expectation of a more favourable tax position than HMRC now understands to be the case. If HMRC now contends that legitimate expectation does not apply in these cases and taxpayers are expected to amend returns already filed, it does not seem that a taxpayer can generally place any reliance on HMRC guidance. 68. Given the significant expansion in recent years of HMRC guidance, at times in place of clear and unambiguous legislation, we think that the issues surrounding the reliance that can be placed on HMRC guidance are very important. We recognise that our members may be feeling concerned whether they should routinely include in all letters, where they refer to HMRC s published stance on an issue, a warning that HMRC guidance can be changed with retroactive effect at any time. 69. There is an implicit assertion in Revenue & Customs Brief 60/09 that all taxpayers should monitor the HMRC website for changes of view so that they can make amendments to returns already filed. In reality taxpayers will consider the position at the time the return is filed and if they file in accordance with HMRC guidance will think they have discharged their responsibility. The concept of monitoring the HMRC website for changes that have retroactive effect such that they need to amend previously filed returns is unacceptable. 70. There needs to be clarity in this area. We hope to arrange a meeting with HMRC to discuss these wider issues. 13 of 17

14 What do members need to consider and do? 71. Where shares were acquired through the exercise before 10 April 2003 of unapproved options and are disposed of on or after 12 May 2009, the chargeable disposal calculation should be computed in accordance with the new HMRC guidance in which the acquisition cost of the shares is their market value at the date acquired. 72. For capital losses crystallised by transactions prior to 12 May 2009, the table at paragraph 40 lists the possible situations. It shows when the losses can be treated as final and the situations in which changes might be necessary. 73. Where the Mansworth v Jelley capital losses are final, members need do nothing further apart from perhaps conveying this information to clients who may have heard about the issue and been concerned. 74. In situations where losses were crystallised as a result of pre-12 May 2009 transactions but are not final or have not been claimed, members need to consider whether any amendments are needed. The section above The practical implications of the change in HMRC s view (paragraphs 31 40) sets out the time limits for making amendments and claims. 75. For affected clients, members should review the position before 31 January 2010 as returns for both 2007/08 (which can still be amended) and 2008/09 may be affected by the change in guidance. The change will also affect all tax years where there is an ongoing enquiry because the amendment window for these years is open until the enquiry is closed. 76. In terms of 2008/09 tax return preparation there are two main issues which need consideration: the impact on the current year s CGT liability where the brought forward losses includes Mansworth v Jelley losses which are not final; and where the Mansworth v Jelley disposal occurred in 2008/09, the basis on which the disposal computation should be prepared. 77. In particular members will need to decide on a case by case basis whether the client is entitled to claim that legitimate expectation exists such that HMRC should be bound by its January 2003 Guidance. In such cases, for a relevant disposal prior to 12 May 2009, the taxpayer would (as appropriate) either not have to re-compute the losses in line with the Revenue & Customs Brief 30/09 or would still be able to claim losses in accordance with the January 2003 Revenue Guidance. 78. As explained above, we believe that the analysis of the position provided in Revenue & Customs Brief 60/09 places a narrower emphasis on the meaning of detriment than is the generally accepted view having consideration to the leading cases in the area. The impression given by Revenue & Customs Brief 60/09 is that it is a test which relatively few affected taxpayers will meet. In contrast, while we agree that the specific facts in each case do need to be considered, given the likely facts we would expect that many affected taxpayers would qualify as having a legitimate expectation and that where the taxpayer does qualify it would be wrong for HMRC to resile from the position set down in the January 2003 Guidance. 14 of 17

15 79. Accordingly, in deciding whether the client is entitled to claim that he or she had legitimate expectation, members may wish to look to the wider case law on legitimate expectation rather than just looking to the interpretation within Revenue & Customs Brief 60/ In some cases members may consider that their client meets the legitimate expectation criteria in Revenue & Custom Brief 60/ If not, members may still consider that their client has legitimate expectation sufficient to pass the Court of Appeal hurdle and as a result that HMRC should be bound by its previous guidance. In taking this view, members and their clients need to be aware that they are not following the currently held HMRC view of legitimate expectation which would require actual and real loss to have been suffered. Members should advise clients on making appropriate disclosure on affected tax returns. 82. Where tax returns are being submitted and members decide that legitimate expectation applies, such that the Mansworth v Jelley losses are computed in accordance with the January 2003 Guidance, appropriate disclosure should be made by way of a white space note in the supplementary CGT pages of the self assessment tax return. 83. Where legitimate expectation is not present, HMRC has stated that it anticipates that taxpayers will ensure that their returns or claims are in accordance with the law and make any necessary amendments to open returns if they are in time to do so. 15 of 17

16 ANNEX A THE ICAEW AND THE TAX FACULTY: WHO WE ARE 1. The Institute of Chartered Accountants in England and Wales (ICAEW) is the largest accountancy body in Europe, with more than 128,000 members. Three thousand new members qualify each year. The prestigious qualifications offered by the Institute are recognised around the world and allow members to call themselves Chartered Accountants and to use the designatory letters ACA or FCA. 2. The Institute operates under a Royal Charter, working in the public interest. It is regulated by the Department for Business, Enterprise and Regulatory Reform through the Financial Reporting Council. Its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory and practice of accountancy, including taxation. 3. The Tax Faculty is the focus for tax within the Institute. It is responsible for tax representations on behalf of the Institute as a whole and it also provides various tax services including the monthly newsletter TAXline to more than 11,000 members of the ICAEW who pay an additional subscription. 4. To find our more about the Tax Faculty and ICAEW including how to become a member, please call us on +44 (0) or us at taxfac@icaew.com or write to us at Chartered Accountants Hall, PO Box 433, Moorgate Place, London EC2P 2BJ. 16 of 17

17 ANNEX B THE TAX FACULTY S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1. Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament. 2. Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs. 3. Simple: the tax rules should aim to be simple, understandable and clear in their objectives. 4. Easy to collect and to calculate: a person s tax liability should be easy to calculate and straightforward and cheap to collect. 5. Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes. 6. Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear. 7. Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it. 8. Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed. 9. Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions. 10. Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK. These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99 (see 17 of 17