The case of C.I.R. v CG Lighting Limited was never allowed to proceed to the Court of Final Appeal. Many issues arise from the conduct of this case, but the most galling, in my opinion, was the Commissioner’s insidious instruction to his legal counsel, Mr Eugene Fung, to depart from the guidance given to taxpayers in the “Departmental Interpretation and Practice Note No.21 (Revised)” (“DIPN21”). As explained in past “Roddy’s Rants”, CG Lighting Limited had structured its affairs in accordance with the criteria provided in DIPN21 that would entitle it to benefit from the 50% tax concession on its offshore manufacturing profits.
The Introduction to DIPN21, as with all other DIPNs issued by the Inland Revenue Department, states:
“These notes are issued for the information of taxpayers and their tax representatives. They contain the Department’s interpretation and practice in relation to the law as it stood at the date of publication.”
Given these remarks, a taxpayer has a legitimate expectation that the Inland Revenue Department will actually stand by the information and guidance it is providing. Otherwise, what is the point of issuing DIPNs in the first place? The introduction continues with the following advice:
“Taxpayers are reminded that their right of objection against the assessment and their right of appeal to the Commissioner, the Board of Review or the Court are not affected by the application of these notes.”
The introduction gives no indication that the Inland Revenue Department can choose whether and when it will follow its own stated practice.
The issue of “Revenue guidance” was also considered in the case of R (Davies and James and Gaines-Cooper) v HMRC [2011] a case better known for its decision on the determination of residency for UK tax purposes. Nonetheless, the taxpayer was reliant on the HMRC practice stated in its booklet, “IR20”.
In considering the issue of “Revenue guidance”, Lord Wilson, in his judgment on the Supreme Court hearing, referred to the judgment of Moses LJ in the Court of Appeal:
”12. The importance of the extent to which thousands of taxpayers may rely upon guidance, of great significance as to how they will manage their lives, cannot be doubted. It goes to the heart of the relationship between the Revenue and the taxpayer. It is trite to recall that it is for the Revenue to determine the best way of facilitating collection of the tax it is under a statutory obligation to collect. But it should not be forgotten that the Revenue itself has long acknowledged that the best way is by encouraging co-operation between the Revenue, and frank and open dealing by the public.”
Lord Wilson later states:
“27. The Revenue accepts first that, were it in the booklet to have made the representations about the circumstances necessary for the achievement of non-residence for which either the first appellants or the second appellant contend, such would have been within its powers; and second that, for so long as the representations remained operative, an individual would have had, and therefore have been able to reference, a legitimate expectation that it would appraise his case by reference to them notwithstanding that they failed to reflect the ordinary law.”
It is very clear that CG Lighting Limited had a legitimate expectation that the Inland Revenue Department would accept that CG Lighting Limited’s mode of operation was in accordance with its own DIPN and that it should have applied the concession stated in DIPN 21 to CG Lighting Limited’s tax affairs. This should have been done “notwithstanding that (the DIPN) failed to reflect the ordinary law”.
In my opinion, there is no doubt that the behaviour of the Commissioner in this case left a lot to be desired. CG Lighting Limited should have been entitled to press its case for the 50% concessionary tax treatment. The Commissioner’s denial of this right was, at best, unfortunate.
