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Examples of legal uncertainty and extracts from legal proceedings (part 3)

Published 1 September 2025

Read the other parts of these guidelines in conjunction with this part, if you have not already.

Examples of legal uncertainty

These examples consider legal uncertainty after the facts have been established. The examples are designed to convey general principles, not to illustrate HMRC’s position on the tax issues described.

Being uncertain how the law should be applied — example 1

A company with investment business was unsure a management expense was deductible for Corporation Tax. The company read HMRC’s guidance which explained in detail the types of scenario and expenses that are deductible. One of these scenarios matched the company’s circumstances. After this, the company concluded it was most likely it could claim the expense.

The company had resolved its uncertainty. The company considered it had good reason to believe a Corporation Tax return including this expense was correct and complete to the best of its knowledge.

Being uncertain how the law should be applied — example 2

A UK manufacturing company paid a large amount of money to amend the terms of a contract with an otherwise unconnected US based company. The UK company was unsure if the expenditure was capital or revenue. The company considers not resolving its uncertainty and filing its Corporation Tax return based on an assumption that it was revenue expenditure.

The company has not made best efforts to ensure the tax return is correct. The Corporation Tax return would not be correct and complete to the best of its knowledge. The company must take care to apply the law to the facts, including taking professional advice where needed, to resolve its uncertainty before filing the tax return.

Being uncertain how the law should be applied — example 3

A company was unsure if it could deduct some legal expenses from its taxable profits. The company remained unsure after checking HMRC’s guidance. It contacted a trusted tax adviser, who was trained and competent for the task at hand. The company provided all relevant information, a full and accurate set of the facts. The adviser gave their reasons for clearly concluding that the facts meant the company could claim the deduction. The company carefully considered this professional advice and its source, finding no reason to doubt it.

The company considered it had good reason to believe it could claim the deduction. It believed a return containing the deduction would be correct to the best of its knowledge. If the company had not made best efforts to resolve its uncertainty before filing its return, it would not be meeting its obligation to ensure its return was correct and complete.

Finely balanced arguments

After making best efforts to resolve an uncertainty about the correct application of the law, you may find the arguments are finely balanced. HMRC considers the law to be finely balanced when there is more than one reasonable interpretation, with no clear position most likely to be found correct by the courts and tribunals. Where a range of views is possible, a judgment will have to be made. Even then, the declaration can only honestly be made, if the return is filed on the basis that it is believed to be (on balance) correct.

We recommend you include information about finely balanced arguments alongside your filing. The information should be sufficient for HMRC to understand the legal interpretation you have adopted and its impact on your assessment.

Example of a finely balanced argument

A director took legal advice on the tax implications of selling their shares in a close company established to construct and operate a hotel. The director supplied their legal adviser with all the relevant facts and agreements. The advice was that the director was entitled to business asset disposal relief if the company had been trading for at least two years at the time of the share sale. However, on considering competing legal authorities, there was more than one view on when the trade commenced. It was hard to determine whether one argument was more correct than the other in these specific circumstances. The issue was finely balanced.

The director carefully considered the facts, and the advice received in a discussion with their adviser who was trained and competent for the task in hand. On balance, they concluded it was most likely that the relief was due.

The director claimed business asset disposal relief in their Capital Gains Tax computation. They included a note to say that it was to the best of their knowledge that the relief was due, but there was a significant uncertainty whether the company had been trading for two years prior to disposal. They also noted the difference that claiming the relief made to their Capital Gains Tax.

The director has made best efforts to ensure their return is correct, while mitigating the risk of HMRC not being aware of significant information relevant to the figures in their return.

Novel interpretations of the law

We view a novel interpretation of the law to be one that a court or tribunal has not considered. Before adopting a novel view of the law, you should consider each of the following questions:

• if you have good reason to believe it’s correct
• if you need to consult a professional adviser, trained and competent for the task at hand, to satisfy yourself it’s correct
• if, on balance, the courts and tribunals are most likely to find that interpretation to be correct

We recommend you tell HMRC about any novel interpretations you have adopted.

Novel interpretation of the law — example 1

A company was considering writing off a large debt to its parent company. The company’s reading of the law prevented a corporation tax deduction for this specific write off. The company received tax advice that it could choose to structure the debt write off to claim a deduction by applying an untested interpretation of the law. The tax adviser thought the advice may be correct but was not certain. The company took legal advice to resolve this uncertainty. Based on that advice, the company concluded that the courts would most likely find this novel interpretation of the law to be incorrect.

The company did not have good reason to believe its Corporation Tax return would be correct if it included the deduction. It should not file a return that it does not believe is correct.

Novel interpretation of the law — example 2

A company received advice that there was a method for it to reduce its tax liability in connection with the disposal of assets. This general advice was supported by a general opinion from counsel, but there was no attempt to analyse how the advice may apply to the company’s specific transactions and circumstances. There is not good reason to believe the advice applies to this company.

The company should not adopt a legal position based on general advice not tested against the company’s own facts and circumstances. It should test the advice against its particular transactions. Only then, and after taking further professional advice if required, can the company reasonably decide if a Corporation Tax return including the novel interpretation of the law is correct.

Novel interpretation of the law — example 3

A company took professional tax advice when deciding if it could file a VAT return on the basis that a particular supply was zero rated under schedule 8 VAT Act 1994. It was advised that the First Tier Tribunal had ruled against another company treating a superficially similar supply as zero rated. However, the adviser went on to say that the facts in this case were materially different and set out their reasons for believing the courts were most likely to find a novel legal argument to be correct. The adviser had the confidence of the company, being trained and competent for the task at hand having been consistently correct in previous advice. The company carefully considered its position, in discussion with the adviser, making sure it was satisfied it was correct to apply this advice in light of all the facts and circumstances.

The company concluded that it was satisfied this novel interpretation of the law was most likely correct without needing further advice. It prepared its VAT return on that basis.

The company recognised it was applying a novel interpretation of the law when filing its return. It told its HMRC Customer Compliance Manager (CCM) about the position it had adopted, supplying all information relevant to its decision.

Improbable interpretations of the law

In Langham (HM Inspector of Taxes) v Veltema [2004] EWCA Civ 193; [2004] BTC 156, Lord Justice Auld said, “As to both of those questions, it may be helpful to consider first the underlying purpose of the new self-assessment scheme. It seems to me that its purpose is to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer…”

In the case, HM Revenue & Customs v Tower MCashback LLP 1 & Anor [2010] EWCA Civ 32, Lord Justice Moses said, “The taxpayer’s self-assessment is the final determination of his taxable income and chargeable gains for a particular year of assessment, subject to three exceptions…”

In HMRC’s view, you should not file a return based on an improbable interpretation of the law. We view an interpretation of the law as improbable if the best of your knowledge is that it’s not likely the courts would agree with it. We do not see an interpretation of the law as improbable when the law is finely balanced between reasonable interpretations, with no clear position most likely to be found correct by the courts and tribunals.

Improbable interpretation of the law — example 1

A company developed a new product. It thought the characteristics of the product made it standard rated for VAT. The company saw a low possibility that some changes to the characteristics may allow it to treat the product as being zero rated. The company received professional advice that the proposed changes were unlikely to have any impact on the VAT rating, that it was most likely the product should be standard rated. The company sought no further advice.

Whether or not it changes the product, the company does not have a good reason to belief that a tax return treating the product as zero rated is correct. That is contrary to both its own view and professional advice later received.

The company should not file a return they do not believe to be correct.

Improbable interpretation of the law — example 2

A company received professional advice that it was possible to adjust the way it carries out certain transactions to reduce its tax liability. The company took further advice on how this may apply to its specific circumstances. The advice concluded that there was a chance that a tribunal or higher court may agree the adjustments reduced the company’s tax liability, but this conclusion was unlikely. The outcome was not thought to be finely balanced. It was most likely that the courts would find the adjustments did not lawfully reduce the company’s tax liability.

The best of the company’s knowledge is that the return would be incorrect if it included a reduced tax liability based on the adjustments. The company should not file on that basis.

Extracts from legal proceedings

This section includes details from some illustrative cases HMRC has considered in arriving at the views expressed in these guidelines. The extracts are from cases heard by the Court of Appeals, the Upper Tribunal, the First Tier Tribunal, and a Special Commissioner.

Revenue and Customs v John Hicks: [2020] UKUT 12 (TCC). 

“The context in the present case is the delivery of a self-assessment tax return pursuant to sections 8 and 9 TMA. Under section 8(2), the person making the return is required to declare that to the best of his knowledge, the return is correct and complete. As explained by Moses LJ in Tower MCashback LLP 1 v HMRC [2010] STC 809 at [17]-[18], the taxpayer’s self-assessment constitutes the final determination of his liability subject to three circumstances (namely, an amendment to the return, an enquiry by HMRC or a discovery assessment). Thus, a taxpayer making a self-assessment must take care to get the assessment right. He must take care to get it right both as to matters of fact and matters of law”

CF Booth Limited v Revenue and Customs [2022] UKUT 217 (TCC). 

“…In particular, Regulation 25(1) provides that the VAT return must show the amount of VAT payable by or to the relevant taxpayer and containing “full information in respect of the other matters specified in the form”, and must also contain a declaration, signed by the taxpayer (or by a person authorised to sign on their behalf) certifying that the return is “correct and complete”. Accordingly, when the Appellant made that declaration in the present case it must have envisaged and intended that HMRC would rely on the contents of the return being correct and complete. We see no sensible argument to the contrary.”

Colin Moore vs HMRC [2011] UKUT 239 (TCC). 

“There can, I think, be no doubt that any taxpayer completing a self-assessment return has a duty to take care when doing so: the obligation upon him is plainly to submit an accurate return.” … 

‘The assessments in this case—Mr Moore’s self-assessments—were based not upon what he wrote on the additional sheets, but on what he entered in the boxes. In my judgment it follows, despite the initial attraction of Mr Moore’s argument to which I have referred, that the tribunal’s evident conclusion about what the duty of care entailed was right.’ 

AEI Group Ltd & Anor v Revenue & Customs [2015] UKFTT 290 (TC).  

A company said they could not file Corporation Tax returns because their uncertainty of the correct view of the law risked making a false declaration. The judge said, “…The declaration that the person signing the company tax return is required to give is that the return is correct and complete “to the best of [his]/[her] knowledge and belief”. That statement does not require the signatory to certify that the return is absolutely correct. It simply requires that person to complete the return with the best information that is available. If the position is uncertain, the person who completes the return can identify that uncertainty to HMRC and will not be regarded as making a false statement by doing so (see Goulding J in Dunk v General Commissioners for Havant and others).”

James S Moffat v Revenue & Customs [2006] UKSPC SPC00538. 

“As a matter of common sense, it is obvious that, in completing a self-assessment tax return, a taxpayer must be at liberty to state circumstances which may or may not have given rise to a liability to tax and, at the same time or in the next breath, deny that tax is or was due. The whole point of self-assessment is that one discloses the circumstances in which one is, or might be, liable for tax, and specifies one’s view of the resultant liability, which may be non-existent or nil. The return is, or may be, incomplete when one fails to do this, not when one does. This approach was recognised by Mr Justice Goulding in his judgment in Dunk v General Commissioners for Havant (1976) 51 TC 519. That case concerned the extent to which a taxpayer was obligated to provide full information in his tax return.”

Alexander v Wallington General Commissioners and Inland Revenue Commissioners - [1993] STC 588. 

Lord Justice Lloyd quoted the following passage from the case Dunk v General Commissioners for Havant and others (1976) 51 TC 519 as a correct statement of law and practice on this subject. 

“What the taxpayer has to declare is ‘that the return is to the best of his knowledge correct and complete’. If… a taxpayer finds particular circumstances that make the best of his knowledge more than usually unreliable, it is open to him to put against his figure for a particular item of income some such words as ‘Estimated’, ‘See accompanying memorandum’, or something of that kind, and explain the circumstances. If he has done his best - and, of course, he is under a duty to use all proper sources of knowledge - he will not, in my view, be guilty of making a false statement providing, as I say, he puts in a genuine estimate and, if necessary, explains that it is not very reliable.”

Langham (HM Inspector of Taxes) v Veltema [2004] EWCA Civ 193; [2004] BTC 156. 

Lord Justice Auld,  

“[31] As to both of those questions, it may be helpful to consider first the underlying purpose of the new self-assessment scheme. It seems to me that its purpose is to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer. This is subject to the exercise by the Inland Revenue of: (1) whatever routine or random checks that it sees fit to make as a form of ‘light monitoring’ of self-assessment returns; (2) its statutory power of enquiry under s. 9A where it considers it appropriate; and (3) in the absence of fraud or negligent conduct, subject to further scrutiny thereafter only in the event of newly discovered information and/or reasonably drawn inferences therefrom that the self-assessment was insufficient resulting in loss of tax. 

[32] If, as here, the taxpayer has made an inaccurate self-assessment, but without any fraud or negligence on his part, it seems to me that it would frustrate the scheme’s aims of simplicity and early finality of assessment to tax, to interpret s. 29(5) so as to introduce an obligation on tax inspectors to conduct an intermediate and possibly time consuming scrutiny, whether or not in the form of an enquiry under s. 9A, of self-assessment returns when they do not disclose insufficiency, but only circumstances further investigation of which might or might not show it. I should emphasise that I say that, not in reliance on Miss Simler’s information to the court that the Inland Revenue do not customarily make much of an initial check of self-assessment returns and accompanying documents. Such practice, if it is general, cannot affect the proper interpretation of the statutory provisions, though it would appear to me to be consistent with the aims of simplicity and speed of the new statutory scheme as I read it, namely that there is nothing in the Act that obliges an Inland Revenue officer to enquire into a return, for example in a case such as this, to obtain expert valuation evidence for the purpose of checking the accuracy of a valuation indicated in a return.”