The Court of Appeal upheld the dismissal of a restitutionary claim by a taxpayer for the repayment of tax paid under a mistake of law or as tax paid pursuant to an unlawful demand as tax collected which was not lawfully due, where the circumstances of this case clearly fell within the conditions laid down by TMA 1970, s. 33(1).

Facts

This was a restitutionary claim by a taxpayer for the repayment of tax paid under a mistake of law and/or pursuant to an unlawful demand. 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. The acquisition was dealt with in the taxpayer's self-assessment tax return for the year 1998–99. In that return 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 January 2000. 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. In the present case, the taxpayer paid £846,000 more in tax than was properly due from him.

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 the 1999–2000 return had been made on the basis of the practice generally prevailing at the time within s. 33(2A). 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.

The Chancellor held that, although the taxpayer's claim fell within s. 33(1), the Revenue were precluded from giving any relief because of the limitation in s. 33(2A). The recognition of a common law remedy in the circumstances covered by s. 33(1) would be inconsistent with that section and accordingly, the claim failed ([2007] EWHC 114 (Ch); [2007] BTC 325). The taxpayer appealed, further contending that the effect of the judgment below was to violate the taxpayer's right of property consisting of his right to recover moneys made under a mistake at common law under art. 1 of the first Protocol to the European Convention on Human Rights (‘A1P1’).

Decision

Arden LJ (Longmore and Mummery LJJ agreeing) (dismissing the appeal) said that, looking at s. 33 as a whole, it was clear that it created its own code for repayments to which s. 33(1) applied. It was a parallel universe to the common law remedy. It thus did not rely on the general law for limitation of actions (see s. 33(1)), or remedies (s. 33(2)) or appeals (s. 33(4)). The critical question was whether a common law claim for recovery of money paid under a mistake of law could be brought notwithstanding that parallel universe.

The authorities gave clear guidance that if Parliament created a right which was inconsistent with a right given by the common law, the latter was displaced, ‘inconsistent’ meaning that the statutory remedy had some restriction in it which reflected some policy rule of the statute which was a cardinal feature of the statute. In those circumstances, the likely implication of the statute, in the absence of contrary provision, was that the statutory remedy was an exclusive one (Deutsche Morgan Grenfell Group plc v IR Commrs [2006] BTC 781; Johnson v Unisys Ltd [2001] ICR 480; and Marcic v Thames Water Utilities Ltd [2004] 2 AC 42 considered; R & C Commrs v Total Network SL [2007] 2 WLR 1156 distinguished).

Undoubtedly, the taxpayer paid money under mistake of law, and a remedy at common law in general existed in that situation. Such a right could, however, be excluded by express words or necessary implication. In this case, the implication arose because Parliament had created a specific remedy with a limitation to exclude payments made under generally accepted practice. That limitation would be defeated if the court permitted an action to be brought at common law. That principle applied even though the statute was a taxing statute which had to be interpreted so as not to impose burdens on the taxpayer unfairly.

The critical provision in this case was s. 33(2A) which provided that if, after inquiring into the matter pursuant to s. 33(2) the position was that the error or mistake was made on the basis or in accordance with the practice generally prevailing at the time when it was made, the Revenue might not grant any relief.

The purpose of that provision was clearly to protect public finances. If there was no control over claims for repayment, there would always be the risk that a very substantial amount of tax would become repayable as a result of developments in case law possibly many years after it had been spent. That would create understandable difficulty. It would make a nonsense of that purpose if it was possible to bring an action at common law for the recovery of money in circumstances where s. 33(1) applied. The claim was within s. 33(1) and the Revenue had a statutory obligation to consider it. It was not open to the court to rewrite the structure of s. 33 and treat it as not covering his case.

It followed that the present claim could not be brought. The same would apply whenever a case which could have been brought under s. 33 could not succeed because of some restriction on such claims which reflected a policy rule of the statute and constituted an important feature of it. It would make no difference to the result even if the claim were reformulated as a claim for repayment of tax as a result of an ultra vires demand under the principle in Woolwich Building Society v IR Commrs [1992] BTC 470.

As regards the ECHR issues, any interference with property rights had to be proportionate but, in the field of tax the jurisprudence of the Convention gave a large margin of discretion to the national authorities in the determination of what was proportionate.

Section 33 did not violate A1P1 because it provided for the recovery of excessive payments of tax within the limits of what the legislature determined was reasonable. Moreover, the taxpayer had the right of appeal. The state had a legitimate interest in ensuring finality of fiscal transactions. Because under s. 33 the error had to be generally prevailing, the individual was not left to shoulder the burden of the payment. To allow for repayment where there had been a generally prevailing practice would expose the state to a large number of claims and increase the risk of disruption to public finances, shifting the burden of taxation to other groups or leading to the reimposition of the same tax on the same group in a different manner.

Legislation in relation to claims to recover payments made in error as to whether they were due as tax was subject to the same principles as the taxing legislation itself. Therefore, a wide margin of discretion had to be allowed to national authorities in the determination of policy in relation to claims to recover tax. In this case, there was an obvious and rational policy explanation for the limitation in s. 33(2A) and there was no violation of A1P1.

Court of Appeal (Civil Division).
Judgment delivered 9 April 2008.