HMRC’s original guidance, contained in an October 2016 draft technical note, indicated that non-UK taxes were creditable. Many taxpayers made credit claims on that basis. The new guidance states that only UK tax may be credited.

How will HMRC approach the past?

HMRC’s change of position raises the question of whether they will challenge credit claims made by taxpayers for previous years in accordance with the original guidance.

There is a known difference between HMRC’s new position and the basis on which taxpayers have returned. Given this, HMRC’s Litigation and Settlement Strategy (LSS) makes it difficult for them not to enquire into the past unless there’s a compelling reason – for example if the amounts at stake aren’t worth the resource commitment. We’ve already seen some enquiry letters, and expect to see more ahead of the 31 January enquiry deadline for the 2020/21 tax year.

However, the early signs are that HMRC recognise, at least tacitly, that the position for the past is uncomfortable. This isn’t a case of ambiguous guidance that’s now being clarified; the October 2016 note is explicit that foreign tax can be credited, and HMRC’s position has changed fundamentally.

HMRC may therefore be willing to take a pragmatic approach. This is hinted at in some enquiry letters we’ve seen, which strike a non-confrontational tone, acknowledge that the guidance has changed, and invite taxpayers to explain why a credit would be just and reasonable.

Legitimate expectation?

One angle worth considering is legitimate expectation, i.e. whether as a matter of administration HMRC should accept previous years’ claims where the taxpayer relied in good faith on the clear statement of the technical position in HMRC’s original guidance.

Whether a legitimate expectation arose will depend on the facts of each case. The argument will be strongest where taxpayers can show that they relied on the original guidance when making decisions about location or fund/carry structuring that would be to their detriment if the new guidance was applied.

Often HMRC gives legitimate expectation arguments short shrift, and prefers to see tax questions decided on substantive grounds. However, the fact pattern in this instance is one of the stronger ones for the taxpayer that we’ve seen. We consider that, in responding to enquiry letters, legitimate expectation will often be worth raising when justifying why a credit would be just and reasonable.