Legitimate expectation and VAT appeals

The question whether a taxpayer may rely on a public law defence (such as legitimate expectation) in the context of a statutory VAT appeal has a long and troubled history. Most notably, the High Court and later Upper Tribunal reached opposite conclusions in relation to this question in the cases of Oxfam [2009] EWHC 3078 and HMRC v Abdul Noor [2013] UKUT 71 both concerning appeals under VATA 1994 s.83(1)(c) in relation to the amount of input VAT available for credit. The Upper Tribunal has now revisited this question in KSM Henryk Zeman v HMRC [2021] UKUT 182 in the context of an appeal under s.83(1)(p) against an assessment for output VAT made under s.73.

The Upper Tribunal has considered the previous case law and held that the starting point is that a taxpayer should be able to challenge the validity of a decision made by HMRC on public law grounds and it is only if the statutory scheme for the appeal expressly or by implication excludes this possibility that a public law defence will not be possible.

In the context of s.83(1)(p) the Tribunal noted that the statutory language allowed for a right of appeal “with respect to… an assessment” and the Tribunal considered that this did not exclude consideration of public law defences based on legitimate expectation.

Case facts

The case itself concerned supplies of the installation of a boiler by a Polish company in the UK for another Polish company (which was not registered for VAT in the UK). It applied to register for VAT in the UK, but since it indicated that its customers would be UK VAT registered, HMRC rejected its application to register based on the premise that it would be making land related supplies to UK business customers which would be required to reverse charge VAT. Later, when seeking to reclaim input VAT, the taxpayer indicated that its customer did not belong in the UK and was allowed to register and HMRC assessed it to VAT in relation to the supplies it had made. The taxpayer sought to defend itself against the assessment on the basis that HMRC’s decision not to register it provided it with a legitimate expectation that no assessment would be made. On the facts, that defence was rejected by the FTT and this aspect was upheld by the UT. However, the Upper Tribunal went on, nevertheless, to consider whether the FTT had, in principle, the jurisdiction to consider the legitimate expectation defence.

Public law defense

The Upper Tribunal has considered the case law in relation to the “vexed question” of whether the FTT has jurisdiction to consider the legitimate expectation argument.

As a starting point, the UT confirmed that the FTT does not have any general supervisory jurisdiction in relation to VAT. However, within the context of the appeals allowed for by s.83(1), the Tribunal considered that a taxpayer should be able to defend him or herself by challenging the validity of a decision on public law grounds (based on the recent decision in Beadle v HMRC [2020] EWCA 562) unless the statutory language excludes that possibility. As such, it was important to consider the statutory language in point in each case (rather than considering s.83(1) as a whole).

In this case, section 73(1) provides that the Commissioners “may assess the amount of VAT due … to the best of their judgment” and if they do then an appeal shall lie to the tribunal “with respect to” the assessment or its amount. In line with the Oxfam decision, the Tribunal considered that the wording “with respect to” defines the scope of the tribunal’s appellate jurisdiction broadly by reference to the subject matter (as assessment) and, accordingly, held that it was “difficult to see that this statutory language excludes the availability of a general public law defence based on legitimate expectation”.

In addition, the Tribunal considered that there were good policy decisions for not adopting a construction of s.83(1)(p) which strictly limits the tribunal’s appellate jurisdiction. Such an approach would give rise to an obvious risk of duplication, delay and potential injustice given the potential difficulty and costs involved in a separate judicial review procedure.

Comment

The decision of the Upper Tribunal that public law defences can be raised and heard by the FTT in appropriate cases is very welcome. It should make it much easier and less costly to raise such arguments. However, as a word of caution, this may not be the last word on this “vexed question”. HMRC may appeal the matter and, indeed, different courts and tribunals have previously expressed different views on this question. In addition, based on the analysis of the Tribunal, each case should be considered on its own merits and based on the particular statutory provision that the appeal is made under. This is not necessarily a carte blanche for legitimate expectation argument before the FTT, therefore.