Legitimate expectation and industry Memorandum of Understanding

The High Court has held that a business that operated a retail business allowing clients to buy and sell gold was not entitled to rely on the terms of the Memorandum of Understanding between the London Bullion Market Association (LBMA), London Platinum and Palladium Market and HMRC (MOU): R (on the application of Glint Pay Services) v HMRC [2023] EWHC 1621. The MOU had not been directed at taxpayers such as Glint and as such it did not have a legitimate expectation that it could rely on its terms as opposed to the strict VAT provisions.

The Court also indicated that, at least in this case, the fact that the taxpayer had not sought to check the application of the MOU to its particular transactions with HMRC was a further reason why it would not be unfair for HMRC to apply the strict VAT provisions rather than the position set out in the MOU.

Background

Glint set up a business to enable its clients to buy, hold and sell gold via an App which was also linked to a Mastercard account. Ownership of the gold and other transactions on the account were recorded on the App. Underlying these arrangements, Glint had a contract with StoneX (a member of the LBMA). StoneX had custody of the gold which it provided to Glint under contractual arrangements. The gold itself was physically held in vaults operated by Brink’s in Zurich. Brink’s was also a member of the LBMA.

VATA 1994 Sch 9 Group 15 exempts the supply of investment gold, but Note 4 excludes supplies involving members of the LBMA. Article 4 of the TMO provides for the zero rating of supplies of investment gold excluded from Group 15 by Note 4.

Glint treated its supplies of gold to retail customers as zero-rated pursuant to the VAT (Terminal Markets) Order 1973 (TMO). HMRC rejected this, taking the view that the supplies of gold were exempt from VAT under VATA 1994 Sch 9 Group 15, and as a result Glint was not able to deduct input VAT incurred by it. Glint initially appealed to the FTT, but later withdrew its appeal and instead commenced judicial review proceedings. Its arguments were that its supplies (even if they did not strictly fall within the terms of the TMO) were clearly covered by the MOU such that it had a legitimate expectation that HMRC would tax it in accordance with the MOU.

The MOU was entered into in 2013 and there was evidence from 2021 that HMRC agreed that the MOU was an agreed interpretation of the operation of the TMO. Glint relied in particular on a number of sections of the MOU that indicated it applied not only to transactions involving members of the LBMA but also to transactions between non-members provided that

For example, section 3.4 states that where a LBMA member retains physical control over gold (such as being stored in a member’s vault), “any transactions undertaken have historically been treated as benefiting from reliefs under the Terminal Markets Order. This has applied specifically to transactions between non-members. At paragraph 4.3, we have set out that Members are within the supply chain in these transactions and therefore the relief continues to apply.”

Paragraph 4.3, titled Non-member transactions, states that: “The TMO applies the zero rate to supplies between Members, or a Member and a non-member, of the LBMA. A transaction between two non-members in which the metal concerned is under the physical control of a Member will invariably include a Member, specifically a clearing member, to transfer the interest in the metal. Although the sale is agreed between two non-members that sale is assigned to enable clearing and settlement to take place. Therefore, the transactions are entered into between non-members and Members, and thus conditions set out in the TMO are met.”

High Court decision

The High Court considered that the law of legitimate expectation applicable to a case such as this were not in dispute, referring in particular to the recent judgment in R (on the application of Hely-Hutchison) v HMRC [2017] EWCA 1075. In particular, a taxpayer must have an expectation of being treated in a particular way caused by HMRC’s words or conduct which must be clear, unambiguous and devoid of relevant qualification.

The High Court considered that Glint’s case “falls at the first hurdle”. “On its face the MOU does not state in terms which are clear, unambiguous, and devoid of any relevant qualification that Glint’s supplies of gold would benefit from any additional carve out in addition to what is provided by law. The terms of the MOU simply do not cover what counsel for HMRC accepted was a clever system enabling retail customers to buy gold while it remains protected in Brink’s vaults.”

At a general level, the Court considered that the MOU dealt with dealing of LBMA members on the wholesale bullion market. In contrast, Glint was not a member and LBMA members were not part of the transactions that it engaged in with its retail customers.

As regards the specific provisions of the MOU dealing with supplies between non-members, section 4.3 contained the qualification that a member would be part of the supply chain such that the conditions in the TMO would be met. In reality, there was no involvement of either StoneX or Brink’s in the contractual arrangements between Glint and its retail customers, and certainly no involvement as a clearing member for the transfer of an interest in gold between Glint and its customers.

The Court went on to suggest that, in any event, it would not be conspicuously unfair or an abuse of power for HMRC to collect VAT in accordance with the law, especially since neither Glint nor its advisers KPMG had ever approached HMRC to seek clarification that the MOU would apply to Glint’s business model. The Court stated that, “I accept HMRC’s submission that the fact that Glint did not approach HMRC is a compelling reason why it would not be an unjust exercise of power for HMRC to frustrate any expectation Glint might have”.

Comment

Whilst the decision that the MOU did not apply on its terms to Glint may be relatively straightforward, the decision does also suggest that it is incumbent on taxpayers to check the application of the MOU with HMRC in relation to individual situations before a legitimate expectation claim can be made. Perhaps this should be seen in the particular light of this case, involving a novel business model, rather than suggesting there should be a general requirement to check with HMRC the application of guidance to individual situations before it can found a claim in legitimate expectation.