Judgment of the Court of Appeal in the Aozora case ([2019] EWCA Civ 1643) was handed down on 8 October. The Court of Appeal upheld the decision of the High Court and thus dismissed the appeal. In the process however, Rose LJ made some interesting remarks in respect of the doctrine of legitimate expectation.

The background to the dispute is as follows. The taxpayer had been issued closure notices, the effect of which was to deny the taxpayer relief under section 790 of the Income and Corporation Taxes Act 1988 in respect of withholding tax imposed by the US. This was on the basis that, as HMRC contended, s. 793A of the Act operated to prevent the availability of the relief. The taxpayer however argued that HMRC guidance (in this instance HMRC’s international manual) gave rise to a legitimate expectation that it would be taxed in accordance with the guidance.

In this case, HMRC’s guidance set out the meaning of the legal provisions but then also, significantly, added that ‘At 1 April 2003 the only provisions to which s.793A applies is Article 24(4)(c) of the new UK/US DTA’. This was removed in 2011. Article 24(4)(c) of the UK-USA Double Taxation Convention is a very specific provision which the judge in the High Court read ‘several times, in a futile endeavour to understand its purpose’ but, in essence, is an anti-avoidance provision in respect of tax on dividends. It was this limitation to section 793A that the taxpayer was seeking to rely upon in the case as creating a legitimate expectation.

In dismissing the taxpayers 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 it is 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 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 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 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?

Further, is it necessary to only consider the ‘planning one’s life’ aspect of human dignity when explaining the normative underpinnings of the doctrine of legitimate expectations? The courts’ focus on detriment generally overlooks the possibility of developing the doctrine on the basis of what David Owens calls ‘authority interest’. The basic idea is that once a promise has been given, the control over that promise shifts to the promisee and so the promisee should control whether the promise is not given effect. The virtue of this position is that ‘human beings often want such authority for its own sake (not just to facilitate prediction or coordination)’.

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 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 expectations 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.