Judicial review success in a VAT case reveals HMRC’s surprising willingness to resile from its guidance.
One can almost hear the sound of rejoicing at the news that a judicial review action concerning VAT, and effective misdirection by HMRC, has met with success. It takes a brave litigant to embark on such a project, in which the prognosis is almost never good. But Vacation Rentals (UK) Ltd went to the Upper Tribunal ([2018] UKUT 383), in which Judges Fancourt and Herrington supported their case. Their bravery may yet prove unrewarded if HMRC appeals successfully, but we are up and running with a good result that will stiffen taxpayers’ resolve in similar cases.
The supply had been treated as exempt by the taxpayer, whereas we now know (and nobody disputes this) that it ought to have been taxable after a decision by the Court of Justice. You can read about the technical causes of that issue elsewhere (see the case report at page 5), but it is not relevant to the issue about misdirection. HMRC published a detailed Business Brief on the subject, confirming that, subject to certain conditions (which the Brief carefully described), the exemption would apply, according to the court decisions of the day (which were only later contradicted by the CJEU).
But HMRC decided not to stand behind its policy and sought to collect tax on such supplies. It spotted what it thought was a chink in the wall, as far as the taxpayer was concerned, namely a minor difference in facts compared with the precedent cases that led to the policy announcement. This minor difference was reflected in the descriptions given in the Business Brief. The only difference was about a piece of information that is relevant to the operational nature of the supply being sourced from a different party than the one mentioned in the precedent cases. There was no indication that this difference had been relevant to the outcome of these cases. The Upper Tribunal dissected the precedents and the later CJEU decisions, and found that this difference was not relevant. It was a distinction that did not make any difference. Should HMRC be able to resile from the policy on such a small difference? The tribunal thought not.
But, having failed with the jab, HMRC resorted to the upper cut. It also argued that the taxpayer was ‘a very sophisticated taxpayer, with access to high quality advice’. This, HMRC contended, meant that it ought to have checked whether an expert agreed with the contents of the Business Brief, and should have concluded that they did not, and so should have paid VAT despite the Brief’s meaning clearly being to exempt the supply. This, HMRC said, meant that it was not an ‘abuse of power’ to resile from the guidance it had issued. This is a breath-taking assertion, even in the cut and thrust world of JR. Can anyone seriously believe that advisers would tell their client to pay tax that an HMRC Brief conceded should not be paid? The judges seem to view it the same way: ‘We have to say that we are surprised that HMRC should seek to advance such a contention in circumstances of a finding that the claimant had a legitimate expectation that it would be dealt with in the manner described in HMRC’s own guidance.’ That is gentlemanly language for a finding that HMRC was trying it on. It is unfortunate (to adopt similar euphemistic terminology) that HMRC thinks it is acceptable to advance almost any legal theory to collect tax.
Whilst I fully appreciate the principle that the correct tax ought to be paid, it is equally important for there to be certainty in tax affairs, and a level playing field. The use of Revenue & Customs Briefs, and similar announcements is a force for good in commercial affairs, but this force is seriously weakened by HMRC’s own attempts to undermine such good works. One hopes HMRC will reflect on this before appealing, or applying the same nostrums to other similar cases.
Home >Articles > Judicial review challenge in Vacation Rentals
Judicial review challenge in Vacation Rentals
Judicial review success in a VAT case reveals HMRC’s surprising willingness to resile from its guidance.
One can almost hear the sound of rejoicing at the news that a judicial review action concerning VAT, and effective misdirection by HMRC, has met with success. It takes a brave litigant to embark on such a project, in which the prognosis is almost never good. But Vacation Rentals (UK) Ltd went to the Upper Tribunal ([2018] UKUT 383), in which Judges Fancourt and Herrington supported their case. Their bravery may yet prove unrewarded if HMRC appeals successfully, but we are up and running with a good result that will stiffen taxpayers’ resolve in similar cases.
The supply had been treated as exempt by the taxpayer, whereas we now know (and nobody disputes this) that it ought to have been taxable after a decision by the Court of Justice. You can read about the technical causes of that issue elsewhere (see the case report at page 5), but it is not relevant to the issue about misdirection. HMRC published a detailed Business Brief on the subject, confirming that, subject to certain conditions (which the Brief carefully described), the exemption would apply, according to the court decisions of the day (which were only later contradicted by the CJEU).
But HMRC decided not to stand behind its policy and sought to collect tax on such supplies. It spotted what it thought was a chink in the wall, as far as the taxpayer was concerned, namely a minor difference in facts compared with the precedent cases that led to the policy announcement. This minor difference was reflected in the descriptions given in the Business Brief. The only difference was about a piece of information that is relevant to the operational nature of the supply being sourced from a different party than the one mentioned in the precedent cases. There was no indication that this difference had been relevant to the outcome of these cases. The Upper Tribunal dissected the precedents and the later CJEU decisions, and found that this difference was not relevant. It was a distinction that did not make any difference. Should HMRC be able to resile from the policy on such a small difference? The tribunal thought not.
But, having failed with the jab, HMRC resorted to the upper cut. It also argued that the taxpayer was ‘a very sophisticated taxpayer, with access to high quality advice’. This, HMRC contended, meant that it ought to have checked whether an expert agreed with the contents of the Business Brief, and should have concluded that they did not, and so should have paid VAT despite the Brief’s meaning clearly being to exempt the supply. This, HMRC said, meant that it was not an ‘abuse of power’ to resile from the guidance it had issued. This is a breath-taking assertion, even in the cut and thrust world of JR. Can anyone seriously believe that advisers would tell their client to pay tax that an HMRC Brief conceded should not be paid? The judges seem to view it the same way: ‘We have to say that we are surprised that HMRC should seek to advance such a contention in circumstances of a finding that the claimant had a legitimate expectation that it would be dealt with in the manner described in HMRC’s own guidance.’ That is gentlemanly language for a finding that HMRC was trying it on. It is unfortunate (to adopt similar euphemistic terminology) that HMRC thinks it is acceptable to advance almost any legal theory to collect tax.
Whilst I fully appreciate the principle that the correct tax ought to be paid, it is equally important for there to be certainty in tax affairs, and a level playing field. The use of Revenue & Customs Briefs, and similar announcements is a force for good in commercial affairs, but this force is seriously weakened by HMRC’s own attempts to undermine such good works. One hopes HMRC will reflect on this before appealing, or applying the same nostrums to other similar cases.
