ESCs and rights of appeal

In yet another decision of the FTT on the scope of its jurisdiction to hear appeals based on HMRC's publications, the FTT has held that it had no jurisdiction to consider an appeal against HMRC's decision that a property management company should register and account for VAT on supplies of property services: Chelsea Cloisters Management Ltd v HMRC [2025] UKFTT 205. It had no jurisdiction to consider the taxpayer's arguments based on  HMRC's refusal to apply a statutory concession to exempt such supplies.

However, the FTT suggested that, if they had had jurisdiction, they would have held that the supplies concerned came within the concession and would have founded a case based on legitimate expectation. However, the statutory appeal provisions in VATA 1994 s.83(1)(b) did not give the FTT the ability to consider arguments based on legitimate expectation.

Background

CCML provided services in connection with a large property in Chelsea consisting of 656 apartments. The freeholder was Realreed and Realread in turn granted long leases to occupiers. The leases of these apartments were between Realread, the occupiers and also CCML, under which CCML agreed to provide the services and occupiers agreed to pay for them.

It was accepted that since CCML was not the owner of the property, it was not making exempt supplies of services under the leases. However, it relied on ESC 3.18 to treat its supplies as effectively exempt and avoid any liability to register for VAT. On review, HMRC took the view that the ESC did not apply and compulsorily registered CCML for VAT and issues a liability decision. CCML appealed those decisions to the FTT (whilst also bringing a judicial review decision separately).

HMRC contended that the FTT did not have any jurisdiction to hear CCML's appeal based on the failure of HMRC to apply the ESC and, in any event, the terms of the ESC did not apply to CCML.

FTT decision

On jurisdiction, the FTT has held that it did not have jurisdiction to hear CCML's appeal based on the application of the ESC. VATA 1994 s.83(1) provided a right of appeal to the FTT with respect to (a) the registration of any person and (b) the VAT chargeable on the supply.

Reviewing the conflicting case law on the scope of the FTT to consider administrative law claims in relation to VAT, the FTT noted that the actual wording of the statutory right of appeal is fundamental. In this case, the questions of registration and the VAT chargeable were fundamentally questions of what the VAT legislation required. That was not affected by the ESC. The ESC might operate to indicate that HMRC would not collect VAT otherwise due in certain cases, but it did not affect the amount of "VAT chargeable" (as opposed to the VAT payable). On this point, the FTT effectively held that it was bound by the earlier decision in Caerdav v HMRC [2023] UKUT 179.

The statutory appeals provided for in s.83(1)(a) and (b) did not provide for an appeal against HMRC's exercise of its discretion and the appeals in this case were not (as required by these provisions) against whether the prescribed conditions for the VAT to arise had arisen or the proper amount of that VAT. The taxpayer's claim was effectively that it had a legitimate expectation that HMRC would apply its ESC and not collect the amount of VAT due under the statute. The FTT also rejected the argument that the operation of an ESC was somehow different to other forms of legitimate expectation as regards jurisdiction. The very nature of an ESC is that whilst VAT is chargeable, HMRC will not seek to collect it in certain conditions.

As a result, the FTT held that it did not have jurisdiction to hear the appeal. However, it went on to consider the merits of legitimate expectation arguments around ESC 3.18 had it had jurisdiction.

Did ESC 3.18 apply?

ESC 3.18 was designed to prevent a mismatch between supplies of property services as part of the terms of a lease (exempt) and in certain other situations where mandatory service charges arose. It applied to "mandatory service charges or similar charges paid by the occupants of residential property towards the upkeep of dwellings or blocks of flats in which they reside".

On this issue, HMRC argued that CCML was making its supplies of management services to the freehold owner, Realreed and not to the occupiers. As such, its supplies fell outside the concession. The FTT disagreed. CCML was a party to the long leases and on the face of the invoices provided for the services, they were for the provision of services by CCML pursuant to the leases. The payments by occupiers were to CCML rather than Realreed.

The ESC involved a number of components: mandatory service charges; payment by occupants of residential property; towards the upkeep of dwellings. All these were met in this case. Accordingly, if the FTT had had jurisdiction, it would have held that CCML fell within its scope.

Nevertheless, HMRC argued that CCML had not shown that it had a legitimate expectation that HMRC would apply the concession. It had not shown that it had acted to its detriment in reliance on ESC 3.18. As such, it would not be unfair to allow HMRC to depart from the ESC in the absence of detrimental reliance. The FTT rejected this argument. The FTT considered that the absence of evidence that CCML relied on the ESC did not make it fair for CCML to be denied the benefit of the ESC. The ESC was a clear and unambiguous statement to the public of how HMRC will act where the concession applies and HMRC had not provided any basis for resiling from it.

Finally, the FTT agreed with CCML that, had it had jurisdiction, then it would have been entitled to rely on general principles of EU law (including legitimate expectation) in respect of the disputed supplies in the period from 2018 to 31 December 2020. The FTT noted the restrictions on the application of REULA 2023 such that its amendments did not apply to "anything occurring before the end of 2023". That saving is in broad terms and, in the view of the FTT, applied to supplies, decisions, and appeals in this case all of which occurred prior to 31 December 2023. Moreover, the FTT considered that CCML would have had accrued EU rights arising prior to IP completion day pursuant to EUWA 2018 Sch 8 para 39(5)(a). The FTT rejected HMRC's argument that the determinative feature in this case were the decisions, and these only occurred after IP completion day. Paragraph 39(5)(a) was broadly drafted and applied to a "challenge to anything which occurred before IP completion day".

Comment

It is becoming clearer that the statutory appeal provisions in VATA 1994 section 83 do not generally give the FTT the ability to consider arguments based on administrative law and HMRC's guidance to avoid obligations to register for VAT or make payments of the statutory amount of VAT payable on supplies. Such arguments should be made by way of judicial review. However, there may still be scope within some of the statutory provisions of section 83 to raise administrative law arguments, especially those provisions which relate to the making of decisions by HMRC, where an element of discretion is a necessary part of such a process.

(It is worth noting that Realreed, the freeholder, previously failed in an application that it did not need to account for VAT on certain supplies in relation to this property. It had argued that HMRC's failure to raise issues during inspections gave it a legitimate expectation that VAT was not due: HMRC inspections and legitimate expectation | Simmons & Simmons)