The High Court dismissed a restitutionary claim by a taxpayer for the repayment of tax paid under a mistake of law and/or pursuant to an unlawful demand, where the circumstances of the case clearly fell within the conditions laid down by TMA 1970, s. 33(1).

Facts

The taxpayer was the chief executive of M plc. On 12 May 1998 he was granted for no consideration an option to acquire 1,357,230 shares in M at an exercise price of zero. On 14 May 1998 he exercised the option and acquired that number of shares for nothing. Their market value then was £3,121,629 or £2.35 per share. On 1 May 1999 the taxpayer sold 900,000 shares in M for £7,386,955. As the acquisition and the disposal took place in different years of assessment the acquisition was dealt with in the taxpayer's self-assessment tax return for the year 1998–99 filed on or before 31 January 2000 and the disposal in his self-assessment tax return for the following year. In his self-assessment tax return for the year 1998-99 he declared a gain accruing on the exercise of the option and chargeable to tax under Sch. E pursuant to ICTA 1988, s. 135 of £3,189,490.50. He duly paid the tax due thereon on or before 31 January2000.The proportion of that gain attributable to the 900,000 shares sold on 1 May 1999 was £2,115,000.

In his self-assessment tax return for the year 1999–2000 the taxpayer declared a gain of £5,271,955 on which he paid tax of £2,108,782 on the due date of 31 January 2001.That gain was computed by deducting from the proceeds of sale (£7,386,955) the base cost attributable to the 900,000 shares sold (£2,115,000) as provided for by TCGA 1992, s. 120. In Mansworth (HMIT) v Jelley [2003] BTC 3, the Court of Appeal concluded that such a computation was wrong in law. They decided that in computing the gain the taxpayer was entitled to deduct from the proceeds of sale not only the amount on which tax had been chargeable under s. 135 but also the market value of the shares sold as at the date of their acquisition. Thus in the present case, the taxpayer paid £846,000 more in tax than was properly due from him (£2,108,782 - £1,262,782 = £846,000).

The taxpayer sought to amend his return for the year 1999–2000 on 31 January 2003 so as to reduce the amount of the gain on the disposal of the 900,000 shares in M to that properly chargeable to capital gains tax. In addition he sought repayment of £846,000 as tax overpaid by mistake pursuant to TMA 1970, s. 33.

The tax inspector refused both the applications. In respect of the request to amend the self-assessment return for the year 1999–2000 the inspector refused it on the footing that that year was by then a ‘closed year’ (TMA 1970, s. 9ZA). The inspector also refused the claim for relief under s. 33 on the grounds that, in the light of the Court of Appeal decision in Mansworth v Jelley, the taxpayer could not claim that there was an error or mistake in the 1999–2000 return since he made that return on the basis of the practice generally prevailing at the time. As the 2000 return was completed in accordance with the law as understood before Mansworth v Jelley the larger capital gain of £5,271,955 still stood and the capital gains tax paid on that gain could not be repaid.

The taxpayer sought judgment against the Revenue for the sum of £846,000, interest under s. 35A of the Supreme Court Act 1981 and costs, as a restitutionary claim for the repayment of tax paid by him pursuant to a mistake of law or as tax paid pursuant to an unlawful demand being tax collected which was not lawfully due.

Issue

Whether the taxpayer was entitled to recover the tax overpaid on the ground that it had been paid under a mistake of law and/or pursuant to an unlawful demand.

Decision

Sir Andrew Morritt C (dismissing the claim) said that it was common ground that the taxpayer was and ever since his mistake was discovered had been unable to recover the admitted overpayment of £846,000 under any provision of the Taxes Management Act. An amendment under s. 9ZA was long out of time. A claim under TMA 1970, s. 33 was precluded by s. 33(2A). The issue was whether, in those circumstances, the restitutionary claim for recovery of money paid under a mistake of law which would otherwise exist was precluded by the existence and terms of the Taxes Management Act.

Section 33 provided for a ‘qualified’ remedy. Although the time-limit for amendments to a self-assessment and the terms of s. 33(2A) were restrictive when compared with the common law remedy, those restrictions or qualifications were what Parliament considered to be appropriate. Section 33 did provide a remedy in all cases of mistake even if in cases such as the present it did not lead to an award of a money judgment. Were it otherwise, s. 33(2A) would not have excluded claims to recover tax paid under a mistake of fact in the computation of liability made in accordance with the practice generally prevailing at the time.

The court had considerable sympathy for the taxpayer. The Revenue admitted that on 30 January 2001 he paid £846,000 more than he was liable for in relation to the capital gain he had made on the sale of 900,000 shares in M plc on 1 May 1999. He claimed repayment on 31 January 2003, some six weeks after the decision of the Court of Appeal had shown the mistake of law underlying the practice generally prevailing at the time and on the basis of which he had overpaid his tax.

However, it was plain that the circumstances of the case fell squarely within the conditions laid down by TMA 1970, s. 33(1). Thus the obligations imposed on the Board by s. 33(2) arose. They had duly inquired into the matter but their power to give relief was expressly subject to the provisions of the section. One of those provisions was that contained in s. 33(2A) which, as was admitted, precluded relief in circumstances such as those of this case. It would be inconsistent with s. 33 to recognise a common law remedy in precisely the circumstances postulated by s. 33(1) but free of the limitation contained in s. 33(2A). Such a conclusion was not permissible. Accordingly the taxpayer's claim failed in so far as it was based on a restitutionary claim to recover tax paid under a mistake of law (Woolwich Building Society v IR Commrs [1992] BTC 470; Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349; Marcic v Thames Water Utilities Ltd [2004] 2 AC 42; and Deutsche Morgan Grenfell Group plc v IR Commrs [2006] BTC 781 considered).

As regards the claim for recovery of tax paid pursuant to an unlawful demand, the taxpayer's right to recover the sum of £846,000 overpaid could not depend on the label to be attached to the restitutionary remedy. The Taxes Management Act 1970, s. 33 applied in all cases where a person who had paid capital gains tax under an assessment alleged that the assessment was excessive by reason of some error or mistake in a return.

That was the situation in this case whether the cause of action on which the taxpayer sought to rely was classified as recovery of money paid under a mistake of law or as money paid to a public officer pursuant to an unlawful demand. It followed that, however the cause of action was described, if s. 33(2A) was in point then no common law claim could lie. Accordingly, the claim on the second basis failed as well.

Chancery Division.
Judgment delivered 1 February 2007.