Reliance on HMRC public guidance

The Upper Tribunal has held that HMRC were bound by its guidance in Business Brief 18/06 concerning the treatment of payments for card handling services. A taxpayer had a legitimate expectation that the guidance could be relied on and tax accounted for on the basis of that guidance, which was clear and unambiguous: R (Vacation Rentals (UK) Ltd) v HMRC [2018] UKUT 383.

The fact that the taxpayer was a “very sophisticated taxpayer” with access to professional advice on the issue did not detract from its right to rely on the guidance and account for VAT on the basis set out in Business Brief.

Background

The case involved supplies made between 2007 and 2009 by Vacation Rentals (UK) Ltd (then Hoseasons Group) of credit card handling services for which it charged a fee. At that time it treated those supplies as exempt from VAT based on the guidance issued by HMRC in Business Brief 18/06 following the Court of Appeal decision in Bookit. In 2010, HMRC disagreed and contended that the supplies were subject to VAT. The taxpayer resisted HMRC’s assessment to recover the output VAT and sought judicial review of HMRC’s failure to apply its guidance. HMRC contended that the taxpayer either failed to fall within the terms of the guidance or did not have a legitimate expectation sufficient to defeat HMRC’s obligation to collect VAT on the correct basis.

It has since been held, of course, that such supplies do not fall within the exemption for VAT, see “VAT and payment processing services”.

Decision of the Upper Tribunal

The Upper Tribunal noted that the principles applicable to a judicial review based on an infringement of a legitimate expectation were largely common ground and HMRC did not dispute that a Business Brief was capable of giving rise to a legitimate expectation. The question was whether the guidance was sufficiently clear and unambiguous so as to be relied upon by the “ordinarily sophisticated taxpayer” irrespective of whether they receive professional advice.

In this particular case, the Upper Tribunal held that the guidance in Business Brief 18/06 was clear, unambiguous and unqualified. The key part of the guidance was contained in the identification of the four components necessary to fall within the exemption and (in the context of this case) “transmitting the card information with the necessary security information and the card issuers’ authorisation codes”.

HMRC had contended that when read in the context of the Bookit case and the background section of the Business Brief, it was a requirement that the taxpayer communicated directly with the card issuer. The Upper Tribunal rejected this distinction. It involved an inappropriately rigorous and technical construction of the Brief and, in any event, relied on treating the Background section of the Brief as being a key part of the guidance when it was merely an introduction and explanation of the circumstances in which the issue arose. It was not appropriate to suggest that the Business Brief must be read by reference to the full judgment in Bookit. A fair reading of the four components set out in the guidance was sufficient to determine that the taxpayer’s circumstances fell within the terms of the guidance.

HMRC argued, nevertheless, that it would not in all the circumstances of this case be unfair or an abuse of power for HMRC to resile from the position expressed in the Brief. HMRC contended that Vacation Rentals was a “very sophisticated taxpayer, with access to high quality advice”. HMRC submitted that as the taxpayer had a substantial business involving services of the kind that were addressed in the Business Brief, it had the ability, and would reasonably be expected, to access external professional advice about its position.

The Upper Tribunal rejected this argument. It is only open to HMRC to override the legitimate expectation that it has encouraged in circumstances where there is a sufficient public interest to override it. Where, as here, legitimate expectation has been established, it is for HMRC to identify any overriding public interest. In this case, “HMRC had not even begun to discharge that heavy burden”.

Comment

The case is of interest in relation to a taxpayer’s right to rely on published guidance issued by HMRC. It is notable that there was no discussion of whether or the extent to which the taxpayer may have relied on the guidance to its detriment. However, the Upper Tribunal quoted from R (GSTS Pathology LLP & Ors) v HMRC that, “Although it has sometimes been said to be a requirement also that the claimant has relied to its detriment on what the public authority has said, the law now seems to be clear that such detrimental reliance is not essential but is relevant to the question of whether it would be an unjust exercise of power for the authority to frustrate the claimant's expectation”. As such, it appears that there is no necessary burden on the taxpayer to show detrimental reliance as part of its initial case.

It is also worth noting that there was no question of prospective or future reliance on the guidance in this case. The challenge was purely to the historical position in 2007 to 2009.