Court of Appeal finds for the taxpayers in an important judicial review

A significant win on the interpretation of Extra-Statutory Concessions, with implications for taxpayers seeking to rely on HMRC documents

A key win on interpretation of HMRC documents

In Murphy v Revenue and Customs Commissioners [2023] EWCA Civ 947 the Court of Appeal found for the taxpayers on their judicial review claim of HMRC’s decision to reject their application for income tax credit under extra-statutory concession (ESC) B18. The Court held that there was no time limit in ESC B18 for the making of a claim for credit, as properly interpreted. The Court also provided guidance on the proper approach to interpretation of published government documents, including ESCs and the understanding of the ‘ordinarily sophisticated taxpayer’. Of particular note, the Court concluded that it is right to disregard HMRC’s long-standing practice when interpreting such documents where that practice is not in the public domain. The guidance is likely to be of wider relevance.

The taxpayers commenced judicial review proceedings in the Administrative Court against HMRC’s decision to reject their claims for an income tax credit in respect of income received from a non-UK resident trust and on which tax had already been paid by the trustees. The essential issue in the claim was whether ‘Concession 3’ of ESC B18, properly construed, included a six-year time limit or not.

The taxpayers’ claims were dismissed by the Administrative Court, who accepted that there was a six-year time limit.

On appeal, Newey LJ (giving the leading judgment of the Court of Appeal) reversed that decision and held for the taxpayers. In essence, the Judge accepted the taxpayers’ arguments on the construction of ESC B18 and that, as a result, no time limit existed. In coming to that conclusion, the Judge gave a succinct and helpful summary of the legal principles governing the basis of ESCs and the proper approach to their interpretation.

The judgment in Murphy is important for two reasons. Firstly, the substantive finding has obvious implications for other UK resident beneficiaries of non-UK resident trusts who are in receipt of trust income, which would otherwise be taxable. The decision confirms that there is no time limit for which credit may be claimed under ‘Concession 3’ of ESC B18. Taxpayers in the same position should consider with their professional advisors whether historic claims can be submitted.

Secondly, and more broadly, Murphy emphasises that the proper interpretation of any HMRC document, such as an ESC, is an objective matter, by reference to what the ‘ordinarily sophisticated taxpayer’ would understand the relevant document to mean. In this regard, the Judge made three significant findings.

First, he found that EU law could be a relevant consideration, concluding that an interpretation which leans toward compliance with EU law should be favoured over one which doesn’t, on the basis that the ordinarily sophisticated taxpayer would expect HMRC documents to observe EU law principles. This will likely be of relevance for years to come.

Second, in considering the genesis of ESC B18, the Judge found that the ordinarily sophisticated taxpayer would not be expected to research previous versions of the ESC to inform its understanding. Previous iterations of an HMRC document may therefore be irrelevant to interpretation of the current document.

Third, the Judge commented that HMRC’s reliance on their own long-standing practices should not bear on the proper interpretation of ESCs where the ordinarily sophisticated taxpayer could not be aware of those practices. Critically, this essentially bars HMRC from pleading in their defence that they have always interpreted an ESC in a particular way. If that knowledge is secret and not in the public domain, “it must be right to disregard it”.

The principles of law identified by the Judge in Murphy will be of relevance across all taxes. They will also be relevant to the proper construction of any ESC and other HMRC documents, such as guidance and manuals.

Murphy is also an example of the efficacy of judicial review in tax disputes. It showcases that where public law arguments are available and efficiently identified, they can be a fruitful means of achieving a taxpayer success.

KPMG Law has a market-leading specialist Tax Disputes team (awarded Best Tax Disputes Team in the Tolley’s Taxation Awards 2023). It has significant experience of judicial review and our multi-disciplinary team of barristers and solicitors would be pleased to assist with matters in which public law issues are engaged, in respect of HMRC’s decision making.