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Jul

VAT: great expectations PUBLISHED IN VAT

In more than 25 years working with VAT, I have seen countless examples of cases where a taxpayer’s dispute with HMRC has gone beyond the narrow legal analysis of the position.

 

The taxpayer might concede that VAT applies where he has not charged it (say), but the next question is whether the taxpayer was to blame or whether HMRC was. Hadn’t the VAT inspector, in a previous visit, implicitly or explicitly approved the incorrect treatment, or hadn’t an officer on the enquiries phone service done so? Weren’t HMRC’s public notices, or the public parts of their manuals, to blame for being misleading? Hadn’t the taxpayer relied on these sources of comfort to his detriment? And hadn’t this set up what the lawyers call a “legitimate expectation” of the correctness of the treatment? And on that basis, shouldn’t past liabilities be forgiven, and VAT applied only into the future?

These arguments are initially put to HMRC, and in some cases succeed. But all too often the best result is a kind of ersatz sympathy but insistence that nothing can be done. To whom then can the disgruntled taxpayer turn? 

The official adjudicator is one possibility, although she only deals with cases of poor behaviour by HMRC, and legitimate expectation issues go far wider than that. You would have thought it would be the Tax Tribunals, which are, in theory at least, a less formal or expensive forum than the main courts for such proceedings. This seems sensible, because, if the tribunal is able to tackle complex points of interpretation of VAT legislation, then it surely must be able also to judge whether the taxpayer can demonstrate a legitimate expectation on his part, which is altogether more “common sense” than VAT legislation. 

But until recently, VAT advisers could only tell their clients that the tribunal could not hear such arguments at all. The remedy for the taxpayer was a full scale judicial review process in the High Court. This, in itself, is much more expensive. It also stops one tribunal deciding on both the VAT law interpretation points and legitimate expectation in one sitting, and this is a major hassle, since taxpayers often have a VAT law case to argue as a preliminary to airing their grievances over HMRC being at fault. The practical outcome has been that medium sized taxpayers have often had to nurse their grievances in private, rather than hazard the cost of judicial review.

Advisers have been pressing for a change in the law of appeal to remove that barrier to justice, to no avail, thus far. 

But then, as seems so typical in VAT, along comes an event which looks set fair to show that all of the above commentary has been wrong all along. A judge, hearing an appeal from a tribunal decision on behalf of Oxfam, said that he thought issues of legitimate expectation could indeed be heard by tribunals. What caused this volte face? Basically it was a point of nuance. Whereas previous courts had pointed to the lack of provision in the legislation for a tribunal appeal against the conduct of HMRC, and had inferred that this meant there was no such power, the Oxfam judge pointed to the lack of anything in the rules restricting the tribunal to consider matters only of legislative interpretation. As simple as that!

This means that there are now two competing interpretations, so the next critical development was whether the tribunals themselves would favour the new view over the old. And, very recently, two tribunal decisions emerged which confirmed that they agreed with this new view. There are some aspects where the legislation governing issues that can be appealed refers to the VAT Act, and in such cases, the old restrictive approach probably applies. But most aspects are not restricted in that way. 

But don’t reach for the Champagne bottle yet, because history shows that success in such a line of argument is rare. This is particularly so where reliance is placed on HMRC published policy. As long as HMRC caveats the limitations of the reliance taxpayers can expect to place on them (and such “health warnings” do apply, and are likely now to be strengthened) then tribunals will probably refuse the appeal. 

What of those past tribunal decisions where the tribunal had only been able to offer sympathy, and a strong indication to HMRC that the taxpayer seemed to have a reasonable complaint against them? Had the tribunal known the extent of their powers, they would plainly have allowed the appeal. On the surface of it, there seems nothing can be done since the tribunal’s decision on that was not appealed to the High Court within the time limitation. It seems that there is no actual procedure for rectifying this injustice. However, if I hear about a device that has been put forward to achieve this objective, I will let you know....

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