In this case, HMRC drew criticism from the First-tier Tribunal (Tax Chamber) (Tribunal) over its refusal to treat two taxpayers, in similar circumstances, in the same way.  

Spectrum Legal Services Limited (Spectrum), a legal search business focussing on conveyancing searches, was started in 2000, when Spectrum became a franchisee of The Property Search Group (PSG), under whose name it traded.

When Spectrum started trading, the provision of an LCC1 form (a type of official search results form) to its customers (who tended to be conveyancing lawyers) was treated for VAT purposes as a disbursement and thus no VAT was charged on the provision of the form. Another franchisee of PSG (unconnected with Spectrum in terms of ownership or control) called Esse Investments Limited (Esse) traded in the same way as Spectrum, under the PSG name.  

In 2002, HMRC advised Esse that this VAT treatment was incorrect and that VAT should be accounted for on the basis that the LCC1 forms were the subject of a standard rated supply by Esse.  

Esse accepted this advice and began to charge VAT accordingly, and as PSG is a franchise organisation, the advice was circulated to all of its franchisees who were obliged to adopt similar procedures. Accordingly, Spectrum began to charge VAT on its provision of LCC1 forms to its customers.

Esse later became aware that HMRC’s advice might be incorrect. Eventually, HMRC accepted that the advice they had issued was incorrect. Esse therefore put in a claim for repayment of the VAT wrongly accounted for on the basis of HMRC’s advice. HMRC accepted that as their initial advice had been incorrect there were grounds for a claim that Esse had suffered financial loss in connection with the implementation of that incorrect advice. HMRC advised that they would make an ex gratia payment to Esse and that the payment could relate back as far as 2002, ie beyond the period for which repayments are permitted under the “capping provisions” contained in section 80(4) and 4ZA of the VAT Act 1994 (these provisions prevent repayment claims which go back more than three years).

Spectrum became aware, in the normal course of the franchise operations, that HMRC’s advice to Esse might have been incorrect and made a voluntary disclosure to HMRC in December 2008.  

In response to Spectrum’s claim, HMRC eventually agreed to accept its voluntary disclosure but only in relation to the period not prohibited by the “capping provisions”.

Spectrum contended that they should be entitled to full repayment, going back beyond the period for which repayments are permitted by the “capping provisions” on the basis that Esse had obtained a commitment to the payment of a full ex gratia payment.

The Tribunal held that it had no jurisdiction to consider the basis on which an ex gratia payment might be made to Spectrum. The Tribunal was of the view that it:

“can only consider the relevant VAT law, and section 80(4) VATA is clear that HMRC are not liable as a matter of VAT law on a claim in respect of periods for which a credit or repayment is prohibited by the ‘capping provisions’. On that basis Spectrum’s appeal must be struck out…”

The Tribunal did, however, question HMRC’s contention that, while they had misdirected Esse, they had not misdirected Spectrum. The Tribunal considered that HMRC may well have effectively misdirected Spectrum also by advising Esse that it should follow an incorrect VAT procedure, if they knew or should have known:

  • that Esse was a franchisee of PSG; and
  • that the PSG franchise operated on the basis that all franchisees were obliged to follow the same procedures in relation to VAT; and
  • that there were other companies who were also franchisees of PSG to whom HMRC’s direction would normally be communicated; and
  • that such other companies would normally apply the direction.  

The Tribunal held that it seemed likely that the relevant HMRC officer knew, or ought to have known, all these things if she had (as was suggested) conducted a VAT assurance visit at Esse. The Tribunal, therefore, despite striking out the appeal, expressed its hope and expectation that HMRC would reconsider its position on the question of making an ex gratia payment to Spectrum on the same basis as that offered to Esse.

Comment

The Tribunal was clearly concerned at the unequal treatment which HMRC had afforded to two taxpayers in essentially identical positions. Whilst HMRC is of course not obliged to make ex gratia payments, given the circumstances in which the need for the payments arose (ie HMRC’s own incorrect advice) it is somewhat unconscionable that HMRC agreed to make the payment to one taxpayer but not the other and is yet another example of HMRC failing to treat all taxpayers in similar circumstances the same. It is to be hoped that HMRC does the correct thing and makes an ex gratia payment to Spectrum.

See http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=6298 for the Tribunal’s decision