VAT assessment ‘conspicuously unfair’ and set aside on the basis of taxpayer’s legitimate expectation

In Treasures of Brazil Limited v HMRC [2024] UKFTT 929, the First-Tier Tribunal set aside a ‘conspicuously unfair’ assessment made by HMRC against a taxpayer for output VAT, deciding that the taxpayer had a legitimate expectation that it was not required to collect VAT whilst it VAT registration was pending.

Summary

The tribunal held that it did have jurisdiction to consider the public law defence of legitimate expectation in the context of appeals against VAT assessments and that, in this context, taxpayers did not have to make an application for judicial review if they wished to challenge the validity of a decision on public law grounds.

Background

On 21 September 2022, the taxpayer, anticipating that the increasing turnover of its business would soon meet the threshold for mandatory VAT registration, instructed its accountant to apply for voluntary VAT registration with an effective start date of 1 October 2022.
 
In response to the application, HMRC’s VAT team emailed the taxpayer advising: 

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

• get any software 
• charge customers for VAT”

HMRC’s systems indicated that, on 17 December 2022, a letter was issued to the taxpayer confirming VAT registration with an (erroneous) effective date of 10 October 2022 (although the taxpayer submitted, and the tribunal accepted, that this letter was not received until 28 December 2022). As soon as the taxpayer received its VAT registration number, it began charging customers VAT on sales. 

When the taxpayer submitted its VAT return for the period 12/22, it did not account for any output VAT on sales but sought credit for input tax attributable to this period. HMRC queried why the taxpayer sought to recover input tax for this period having not charged output VAT, and the taxpayer pointed to the previous correspondence from HMRC advising that the taxpayer should not be charging VAT in this period. Following further correspondence, HMRC assessed the output tax, and the taxpayer appealed.

 

Tribunal decision

It was not disputed that the VAT legislation required the taxpayer to account for output VAT from the date on which VAT registration took place. However, the taxpayer asserted that it had relied on a clear statement from HMRC to the contrary. 

HMRC identified this argument as being one of legitimate expectation and submitted that the tribunal did not have jurisdiction to consider this. HMRC argued that that legitimate expectation is matter of remedy for judicial review in the Administrative Court – and not the First-Tier Tribunal. 

However, the tribunal rejected this argument, noting that the law had “evolved” in this area in recent years and that, in reliance on the Zeman case (KSM Henryk Zeman SP Z.o.o. v HMRC [2021] UKUT 182 (TCC)), the starting point was that a taxpayer ought to be able to defend itself by challenging the validity of a decision on public law grounds (i.e., by raising an argument based on legitimate expectation). The question that arose in this context was whether, either expressly or by implication, the relevant statutory language excluded the taxpayer’s ability to raise a public law defence. 

In reliance of the Zeman case, the tribunal was satisfied that the VAT legislation did not exclude the taxpayer’s claim to raise a public law argument and that it therefore had jurisdiction to determine the point. The tribunal agreed with the reasoning of the Upper Tier Tribunal in Zeman, that adopting a restrictive approach could result in “duplication, delay and potentially injustice”, and that it would be “artificial and unworkable” to exclude public law arguments in the context of the relevant VAT legislation. 

Having reached the view that it had jurisdiction to consider the taxpayer’s legitimate expectation argument in the case, the tribunal concluded that the taxpayer had a legitimate expectation that it was not required to collect VAT pending registration, and that in the circumstances, HMRC’s assessment was conspicuously unfair and should not stand. The appeal was therefore allowed, and the assessment was set aside. 

 

Why does this matter? 

Taxpayers looking to appeal an assessment or closure notice may have various grounds of appeal open to them – some of these may be based on public law grounds (e.g., arguments of legitimate expectation) and others may be procedural or substantive, arising from tax legislative provisions. 

HMRC have long maintained (and in some instances case law has seemingly supported) that public law arguments are a remedy for judicial review only in the Administrative Court and that such arguments cannot be raised in the tax tribunals. This has frequently resulted in taxpayers facing a ‘fork in the road’ at an early stage of tax litigation as to whether they should pursue public law arguments through the Administrative Court or substantive / procedural arguments through the tax tribunals (or both – likely at some considerable cost). 

However, this decision clarifies that the starting point as to whether a public law argument can be raised before the tax tribunal is whether the relevant legislation excludes public law arguments, not whether such arguments are expressly permitted. This is therefore an extremely important decision for taxpayers considering how they should approach tax litigation, and which grounds should be included in any appeal to the tribunal.