VAT registration, output VAT and legitimate expectation

The FTT has held that a trader had a legitimate expectation that HMRC would not seek output VAT on transactions undertaken by it until HMRC had confirmed its VAT registration, based on the text of the standard email sent to the trader by HMRC: Treasures of Brazil Ltd v HMRC [2024] UKFTT 929. In this context, the FTT was entitled to consider the public law defence raised by the trader and give effect to it. It was not necessary for the point to be raised by way of judicial review. Furthermore, the FTT rejected HMRC's argument that the FTT should provide a broader equitable result by denying the trader input VAT credit for the same period.

Background

The trader in this case considered that the mandatory VAT registration threshold would be met in the near future and so instructed her accountant to apply for voluntary VAT registration. The accountant applied on 21 September 2022, requesting an effective date of 1 October 2022. HMRC replied with an instruction email which included the statement:

"You should wait until your VAT registration is confirmed before you:

• get any software

• charge customers for VAT".

The VAT registration request in this case took until December 2022 to be processed by HMRC. On 17 December 2022, HMRC issued a letter (dated 10 October 2022) confirming the VAT registration from 1 October 2022. The letter was not received until 28 December 2022. At this point, the trader started to charge VAT on its sales.

When the trader put in its first VAT return for the period from October to December 2022, it did not account for any output VAT. However, it sought recovery of input VAT of some £4,500. HMRC queried the return and, on the basis of the sales figures provided, assessed the trader to £14,000 output VAT. The trader appealed that assessment.

FTT decision

The taxpayer did not dispute that the legislation required output VAT to be charged from the date from which the VAT registration took effect (1 October 2022). However, it argued that it was unfair of HMRC to seek output VAT for the period from 1 October in the light of its specific instruction in the email to not charge customers for VAT until the VAT registration was confirmed.

HMRC pointed out that the taxpayer's argument was essentially one based on legitimate expectation and contended that the FTT did not have jurisdiction to consider such an argument. And even if it did, HMRC argued that the taxpayer did not have an actionable legitimate expectation in this case.

On the first point, the FTT held that it did have jurisdiction to hear the legitimate expectation argument. The appeal in this case was under VATA 1994 s.83(1)(p). In particular, this provision allowed an appeal against an assessment. HMRC "may assess the amount of VAT due... to the best of their judgment" and, if they do, the taxpayer has a right of appeal "with respect to" that assessment under s.83(1)(p). The FTT noted that the Upper Tribunal in Henrik Zeman had held that an appeal under s.83(1)(p) could consider public law arguments such as legitimate expectation, since the statutory provision did not expressly or by implication exclude the ability to raise such arguments. The fact that the assessment right was not mandatory ("may") and that the appeal was "with respect to" an assessment did not exclude wider public law arguments.

Did the taxpayer have a legitimate expectation? The FTT was clear that the email directly sent from HMRC to the taxpayer on receipt of its application provided a clear instruction to wait until the registration was confirmed by charging VAT. HMRC, however, pointed to guidance in the VAT Notices and notes accompanying the application for VAT registration which it said made it clear that the correct approach was to account for VAT from the registration date and to increase prices in anticipation of the need to account for VAT. HMRC argued that, taking the other guidance into account, the statements made to the taxpayer were not "clear, unambiguous and devoid of qualification" as required by a public law claim for legitimate expectation.

The FTT held that the specific guidance in the email would supersede any statements made in more general guidance. A taxpayer cannot be expected to compare instructions received directly from HMRC with guidance on gov.uk and HMRC notices in order to discern of there is ambiguity or an alternative interpretation. In any event, the FTT considered that the instruction in the email was clearly intended to be directly acted on by the taxpayer and drew attention to a number of features. Firstly, it used the unusual phrase that that the taxpayer should not "charge customers for VAT". This phrase might be interpreted as covering not only not charging VAT but equally not charging any additional amounts in anticipation of VAT. Secondly, the instruction did not cross-refer to any other guidance or provide any qualification. Thirdly, the FTT noted that the email also instructed the taxpayer not to get any software before the VAT registration was confirmed. This "strange" instruction bolstered the impression that the email was instructing the taxpayer not to take any steps in advance to prepare for charging VAT until HMRC confirmed the VAT registration.

Based on the existence of a legitimate expectation, was it conspicuously unfair for HMRC to seek to levy output VAT in the circumstances? The FTT noted that it must carry out a balancing act between the requirements of fairness and the public interest in HMRC being able to collect tax due by law.

The FTT noted that the nature of VAT was a significant factor in this regard. Unlike other taxes, a trader generally operates as a collector of tax to be economically borne by others. However, since the trader in this case had not added amounts to its prices to account for VAT due to HMRC's instructions, the VAT on its transactions would effectively be borne for the relevant period by it and not its customers. This would require it to fund the VAT from its own resources, contrary to the normal role VAT plays. In those circumstances, and given the significant amount of VAT at stake for a small business with a turnover of around £100,000) the FTT considered that it was right to overturn the general presumption that HMRC are entitled to collect the tax legally due.

The FTT also considered whether it would be appropriate to amend the assessment to unwind the input VAT recovered by the taxpayer in the relevant period. However, the FTT considered that the taxpayer was legally entitled to the input VAT and there was no basis on which it could take steps to bring about a generally equitable outcome by denying legitimate input VAT credit. Moreover, the FTT considered that they were far from convinced that it would be inequitable or improper to allow the taxpayer to keep the windfall, since HMRC had entirely caused the issue by its own poor communications.

Comment

The circumstances in which a taxpayer can raise a public law argument, such as legitimate expectation, in the FTT remains a matter of much contention. However, at least in relation to a VAT assessment, it now appears relatively settled (perhaps until considered by a higher court) that the statutory appeal under VATA 1984 s.83(1)(p) does allow the FTT to consider such wider arguments. And in this context, the FTT's comments about the nature of VAT as a tax which a trader collects on behalf of HMRC carries a lot of weight when considering whether it would be conspicuously unfair for HMRC to insist on collecting VAT due where the effect of that would be to put the burden of the VAT onto the trader itself.