Top Ten Tax Cases of 2024

Direct taxes have formal enquiries that can take several years to wrap up, giving HMRC plenty of time to decide before making any tax assessments or changes to returns. But indirect taxes don't have that luxury, and HMRC has to act quickly to catch any underpaid taxes before the clock runs out. This often leads to HMRC purporting to raise " protective assessments", just to keep their options open. However, Go City serves as a friendly reminder that this "assess now, ask questions later" tactic isn't allowed. HMRC needs to believe there's actually an error, not just a possibility of one, before hitting taxpayers with assessments.

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Estoppel is an unexpected ‘ace’ card, allowing you to say "you can't do that" where it would be unfair to let someone insist on their rights. In the Telent case, both HMRC and the taxpayer were caught in something of a merry-go-round, each trying to outdo the other with their estoppel arguments. In this case, Telent first claimed a refund for input VAT on investment management services, then withdrew the claim, and later (with new advisers) made another claim for the same period. HMRC said Telent couldn't make the second claim because they had withdrawn the first one. This might have been a reasonable argument, but HMRC didn't follow through with this argument properly in its pleadings, and then tried to bring it up again later in the proceedings. So Telent, perhaps having learned from HMRC’s tactics, then argued that HMRC couldn't (being estopped) say Telent was estopped from making the second claim, because HMRC had already missed their chance to argue that point. The lesson? Being really clear about your arguments matters from an early stage.

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In this case, the taxpayer sought judicial review of HMRC’s refusal to exercise a discretionary power that would, in effect, disapply some of their PAYE obligations. The Upper Tribunal’s decision on this core issue is instructive: UBS succeeded in showing that HMRC’s decision not to exercise the power was unlawful, on the basis that HMRC had misdirected itself, but did not succeed in persuading the Tribunal that the only lawful decision would have been to exercise the power, and therefore did not secure an order mandating HMRC’s exercise of the power. The lesson here? Judicial review remedies come in different shapes and sizes.

This case also came with procedural complexities, as HMRC attempted, shortly before the hearing, to withdraw from the proceedings by saying that another officer would think again about whether to exercise the power – thus (in their submission) rendering the matter moot and leaving nothing for the taxpayer to challenge in the judicial review. They were, however, unsuccessful in doing so, with the Upper Tribunal finding that UBS’s claim would only have become academic if by ‘withdrawing’ the challenged decision HMRC had given the taxpayer what it wanted - i.e. they had exercised the power in UBS’s favour – which was not the case.

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In Treasures of Brazil, the FTT decided that the taxpayer had a legitimate expectation it could rely on and enforce against HMRC. (Perhaps this should sound a klaxon, TV-quiz-style?) This expectation stemmed from a clearly worded and specific email from HMRC, which told the taxpayer there was no need to worry about VAT on its supplies until the VAT registration was confirmed. But then, HMRC turned the tables and assessed the taxpayer for unpaid output VAT for the period before the registration confirmation.

Drawing from the Upper Tribunal’s decision in Henrik Zeman, the FTT concluded it could hear the taxpayer’s legitimate expectation arguments as part of the appeal against the assessment. The FTT found that the instruction in HMRC's email was meant to be directly followed by the taxpayer. By following the email's guidance, the taxpayer didn't add VAT to its prices and would now have to pay the tax out of its own pocket.

Considering the significant VAT amount at stake for a small business, the FTT decided it was fair to depart from the general rule that HMRC can collect the tax legally due. Essentially, the FTT ruled that HMRC couldn't go back on its word given the clear guidance it had provided.

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In this third round match (previously HMRC 1, taxpayer 1) HMRC came out on top, successfully convincing 2 of the 3 Court of Appeal judges that the time of supply provisions should apply in priority to the VAT grouping rules. The question before the Court was whether a supply of investment management services performed at a time when the supplier and recipient entities were members of the same VAT Group, but for which part of the consideration (a deferred performance fee) was paid after the supplier entity had left the VAT Group, should be subject to UK VAT or disregarded in accordance with s.43 VATA. The Court ultimately found in favour of HMRC, who had argued that there was a continuous supply of services under Regulation 90 of the VAT Regulations – the tax point for which was the issue of an invoice, or receipt of consideration. As the invoice for the performance fee in question was only issued when the supplier and recipient entities were no longer members of the same VAT group, VAT was due on that supply.

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Various VAT grouping-related issues were the focus of this FTT decision. Although Barclays was unsuccessful on the facts of its case in persuading the Tribunal that the UK branch of a US group company constituted a ‘fixed establishment’ such that it could join the UK VAT group, two points of wider significance were decided in Barclays’ favour, albeit that they did not change the result. Firstly, the Tribunal confirmed that the CJEU decision in Danske Bank did not import a territorial restriction into the UK VAT grouping rules. Secondly, the Tribunal decided found that HMRC could not have properly rejected Barclays’ application to VAT group the US group company on the grounds of protection of the revenue - the VAT savings that would have arisen if the US company had joined the UK VAT group would have fallen within the ordinary consequences of VAT grouping.

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In JTI Acquisition Company and Kwik-Fit, the Court of Appeal released successive judgments considering the scope of the rule for disallowing interest expenses where a loan is entered into for an ‘unallowable purpose’. The judgments confirm that the statutory test requires a focus on the company’s purpose for being a party to the loan. The wider context (such as the reasons for the company existing or a wider scheme) may inform the company’s purposes, but may not simply be elided with them, save in cases where a company has no other function than to take on borrowings for UK tax purposes.

In October 2024, the Supreme Court denied the taxpayers permission to appeal, meaning these seminal cases have now reached the end of the road.

In Syngenta, the Tax Tribunal then applied the Court of Appeal authorities, disallowing interest expenses on an intra-group loan referred to in company documentation as a “tax optimisation project” to push debt down into the UK sub-group. The Tribunal concluded that the loan had an ‘unallowable purpose’. The group’s plan was to achieve a tax saving for the entire group, and this was well-understood and accepted by the borrowing company’s directors, who were content to play their part. The Tribunal was not persuaded by some of the witness evidence, pointing out inconsistencies with the contemporary documents. They found several instances where the tax saving purpose was downplayed, perhaps a little too much.

The decision is a reminder that when it comes to transactions, the rationale, including the role of tax, should be clearly and accurately spelled out in contemporary documents.

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• JTI
• KwikFit
• Syngenta

In the Boston Consulting case, the Tax Tribunal considered how payments to individual partners were treated for tax purposes when they sold certain capital interests in a management consulting firm operating through a UK LLP. The main issue was whether these payments should be taxed as income rather than capital gains. The Tribunal decided that these capital interests were not part of the LLP’s profit-sharing arrangements, so they didn’t fall under the mixed member partnership tax rules. However, the payments were still considered income and taxable as 'miscellaneous income.'

The individuals’ appeals were dismissed, although the Tribunal found that HMRC’s discovery assessments for certain periods were out of time and that HMRC had not proved that the errors were due to carelessness or that the ‘hypothetical officer’ test was met.

This case is one of many working through the UK courts about the tax charge for 'miscellaneous income.' The procedural aspects, especially those about partnership and LLP tax administration rules and HMRC’s discovery assessment powers, are noteworthy.

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JTI and Kwik-Fit are examples of cases involving specific anti-avoidance rules. However, the decision in Altrad Services is a good reminder that the much older Ramsay principle (that transactions should be viewed realistically, against legislation interpreted purposively, and circular arrangements without a commercial purpose can be ‘looked through’ by the tribunals) is very much alive. In Altrad, the Court of Appeal emphasised two points. First, there is nothing novel in saying that tax law often disregards transactions solely aimed at tax avoidance. Second, courts will generally assume that Parliament did not write tax legislation containing a convoluted and technical means of escaping the tax that that piece of legislation is imposing. Altrad is therefore a further warning against basing tax planning on overly-simplistic readings of tax legislation, without asking at a broader level what the legislation is trying to achieve.

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In Lowe v HMRC, the FTT decided that a discovery assessment was invalid, emphasising that HMRC must show that a valid discovery had been made. The case involved a taxpayer claiming tax relief on subsistence expenses incurred while traveling for work, with the assistance of an accountancy firm, Apostle. HMRC had opened an enquiry into the taxpayer's return, suspecting that Apostle had submitted inaccurate claims in other cases. However, the only direct evidence related to the taxpayer's claims was a confusing note from a call between HMRC and the taxpayer, which led to HMRC issuing a discovery assessment without waiting for evidence of the expenses to be provided.

The FTT found that HMRC had not made a valid discovery under section 29 of the Taxes Management Act 1970, as there was no requirement to submit evidence of deductions with a self-assessment return, and there was no proof that HMRC had discovered any relevant fact. The HMRC officer's witness statement was not supported by oral evidence, and did not indicate that a discovery had been made. The FTT concluded that a reasonable officer would have sought further information about the expenses claims before making a decision. The decision underscores the importance of HMRC providing clear and admissible evidence of a discovery when issuing an assessment, rather than relying on assumptions or incomplete information; it’s therefore also an important protection for taxpayers.

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2024 hasn’t been short of ‘VAT on food’ cases, but we’ve picked perhaps the most absurd. Spare a thought for the VAT treatment of essential winter warmers. Do they fall under "confectionery", and are therefore excluded from zero rating for food? In HMRC v Innovative Bites Ltd [2024] UKUT 95, the Upper Tribunal concluded that the First-Tier Tribunal was justified in its determination that packets of large Mega Marshmallows did not qualify as confectionery since they were intended to be roasted rather than eaten directly from the packet. The notion that large packets of marshmallows should receive different VAT treatment compared to small, yet otherwise identical marshmallows may seem illogical. However, it is precisely this element of inconsistency that makes VAT on food the gift that keeps on giving, all year round.

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In HMRC v A Taxpayer, the Upper Tribunal (UT) clarified the principles surrounding taxpayer anonymity in legal proceedings. The UT emphasised open justice as a cornerstone of the judicial system, granting anonymity only when necessary and justified. Initially, the taxpayer managed to secure a private case management decision from the FTT. However, HMRC appealed, and the UT ultimately decided that the proceedings should be published without anonymity.

The taxpayer proposed that if an anonymity application were denied, they should have the option to withdraw from the proceedings while maintaining anonymity. The UT rejected this, highlighting that publicity arises from initiating a tax appeal, not from the privacy application itself. The taxpayer's comparison to previous cases, which involved compelling, evidence-supported privacy claims, was also dismissed by the UT.

The concern that denying anonymity might deter legitimate applications was addressed with the assurance that only tactical or meritless applications should be deterred. The UT found no breach of the taxpayer's Article 8 rights under the European Convention on Human Rights, as the taxpayer did not sufficiently demonstrate how these rights would be affected. The decision underlines the importance of openness and transparency, ensuring that justice is not only done but seen to be done, while maintaining a fair and balanced approach to privacy requests. (The identity of the taxpayer has since become public, but it isn’t relevant to the issue in the case, and we’re therefore choosing not to name him here.)

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