The Upper Tribunal (UT) has decided, in Noor v HMRC [2011] UKFTT 349 (TC), that the First-tier Tribunal (FTT) has no jurisdiction to determine legitimate expectation issues in VAT appeals, reversing the FTT’s decision.

The UT decided that Sales J’s conclusion in Oxfam v HMRC [2009] EWHC 3078 (Ch), that the FTT had jurisdiction to consider legitimate expectation claims under section 83 of the Value Added Tax 1994 (VATA), was not obiter dicta but did not bind the UT. Further, the right of appeal in section 83(1)(c) of VATA concerns a person’s right to credit for input tax under the VAT legislation. The term “VAT legislation” may include any provision that affects the amount of credit due. Therefore, if HMRC has power to enter into an agreement with a taxpayer and that agreement results in an entitlement to a different amount of input tax credit than would have resulted without the agreement, the amount ascertained under the agreement may be one arising “under the VAT legislation”. In contrast, a person may claim a right based on legitimate expectation that goes behind his entitlement ascertained under the VAT legislation. In that case, the legitimate expectation is a matter for judicial review, the FTT having no jurisdiction to determine the issue by appeal under section 83 of VATA.

The facts

The taxpayer engaged a builder to build a small commercial property. He wished to claim input tax relating to the building costs (and legal costs arising from a dispute with the builder). Therefore, he visited his local HMRC office to seek advice on when to register for VAT purposes. There, the taxpayer was directed to a telephone on the wall, by means of which he could contact HMRC’s telephone national advice service (NAS). The taxpayer explained the situation to the NAS adviser, who told him that he could claim VAT under the option to tax within three years. On the basis of this advice, the taxpayer registered for VAT less than three years, but more than six months, after the relevant services were provided. HMRC rejected the taxpayer’s claim for input tax and he appealed to the FTT.

The FTT allowed the appeal, holding that the input tax clearly fell outside regulation 111 but that the appellant had a legitimate expectation that he would be able to reclaim the input tax. The FTT commented that the views of the High Court on this issue in the Oxfam case were a necessary part of the Judge’s reasoning (not obiter dicta) and were, therefore, binding on the FTT. HMRC appealed to the UT.

The UT’s decision

The UT (Mr Justice Warren and Judge Colin Bishopp) allowed HMRC’s appeal, reversing the FTT’s decision.

The UT considered the Oxfam case in detail. In that case, Sales J had to grapple with the complex state of the law in the area of tribunals and legitimate expectation. In the House of Lords’ decision in Customs and Excise Commissioners v J H Corbitt (Numismatists) Ltd [1981] AC 22, Lord Lane commented that the VAT and Duties Tribunal (VATDT) (as it then was) did not have a supervisory jurisdiction because, if it had been intended to give it a supervisory jurisdiction, there would have been clear words to that effect in its establishing Act.

In Commissioners for Customs & Excise v National Westminster Bank plc [2003] EWCA 1822 (Ch), the High Court concluded that the VATDT did not have a supervisory, public law, jurisdiction (citing Corbitt). However, in Oxfam, Sales J held that the FTT had jurisdiction to apply general public law if it was necessary to determine an issue which fell within section 83 of VATA.

In Hanover Company Services Ltd v HMRC [2010] UKFTT 256 (TC), the FTT held that it has jurisdiction to apply public law principles where it is necessary to determine a VAT issue that falls within the scope of its statutory authority contained in section 83. The FTT in that case preferred Oxfam to the National Westminster Bank case.

In HOK Limited v HMRC [2012] UKUT 363 (TCC), the UT (Mr Justice Warren and Judge Colin Bishopp), overturning the FTT, ruled that the FTT has no judicial review or other common law jurisdiction to set aside PAYE penalties on fairness grounds. The judges in HOK considered that Sales J’s conclusion in the Oxfam case was not necessary for resolving the appeal and that, therefore, his comments were obiter dicta. Lloyd LJ in the earlier Court of Appeal decision in Thorpe v HMRC [2010] EWCA Civ 339 also expressed a similar view.

The UT, after analysing the case law in this area, decided that the FTT was right to conclude that Sales J’s conclusion in the Oxfam case, that the FTT had jurisdiction to consider legitimate expectation claims under section 83 of VATA, was a necessary part of the High Court’s reasoning, not obiter and, therefore, binding on the FTT. However, the UT decided that Sales J’s conclusion in Oxfam, that the FTT had jurisdiction to consider legitimate expectation claims under section 83, did not bind the UT. This was because:

  •  Sales J recognised that the matter had not been the subject of detailed argument.
  • He relied on the position in relation to the contract issue without distinguishing (for the purposes of the argument) between a contract that HMRC had power to enter into and one which they had no power to enter into.
  • He was wrong to find it difficult to reconcile the exclusion of jurisdiction from the VATDT

(and, by extension, the FTT) with the dictum in Corbitt.

According to the UT, his difficulty lay in some of the cases in which inferior courts had made decisions in relation to public law. However, the UT noted that the cases to which he referred were examples of a court needing to decide a point of public law to be able to exercise the jurisdiction which it did have or to decide whether it in fact had jurisdiction in the first place. In contrast, the issue in Oxfam and in the present case was one of statutory construction, namely the extent of the jurisdiction of the VATDT and the FTT under section 83(1)(c) of VATA. Without that perceived difficulty, one could not say that Sales J would have reached the conclusion that he should not follow the earlier cases (even if he was correct in saying that he was not bound to do so).

Scope of section 83(1)(c) of VATA

With regard to the construction of section 83(1)(c), the UT decided that the FTT does not have jurisdiction to give effect to any legitimate expectation that the taxpayer may be able to establish for any credit for input tax. The UT agreed with counsel for HMRC that the right of appeal in section 83(1)(c) is an appeal concerning a person’s right to credit for input tax under the VAT legislation. The term “VAT legislation” may include any provision that affects the amount of credit due but the UT did not need to decide the point. Therefore, if HMRC have power (whether as part of their care and management powers or some other statutory power) to enter into an agreement with a taxpayer and that agreement, according to its terms, results in an entitlement to a different amount of credit for input tax than would have resulted in the absence of the agreement, the amount ascertained in accordance with the agreement may be one arising “under the VAT legislation”.

The UT added that, in contrast, a person may claim a right based on legitimate expectation that goes behind his entitlement ascertained in accordance with the VAT legislation (in that sense). In that case, the legitimate expectation is a matter for judicial review and the FTT has no jurisdiction to determine the disputed issue in the context of an appeal under section 83.

Further, although the FTT has no general supervisory jurisdiction over the decisions of HMRC, that does not mean that, under section 83(1)(c), the FTT cannot examine the exercise of an HMRC discretion relating to the entitlement to input tax credit, and decide whether HMRC has exercised the discretion reasonably. The UT cited the example of Best Buys Supplies Ltd v HMRC [2011] UKUT 497 (TCC), concerning a discretion under regulation 29(2) of the Value Added Tax Regulations 1995 (SI 1995/2518). Although that jurisdiction can be described as supervisory, it relates to the exercise of a discretion that the legislation clearly confers on HMRC, which contrasts with the case of an ultra vires contract or a claim based on legitimate expectation in which HMRC acts outside their powers.

Comment

Taxpayers will be disappointed that the UT has reversed the FTT’s decision. The UT’s decision means that taxpayers cannot run administrative law or legitimate expectation arguments as part of regular appeals to the FTT and must start judicial review proceedings in order to do so. The UT was clearly keen to distinguish Oxfam as convincingly as possible and, by sitting in the same formation as in HOK, has attempted to lay to rest the debate about the extent to which Sales J’s comments were obiter. Given the conflicting authorities in this area, it may, therefore, require further litigation to settle definitively the scope of the FTT’s jurisdiction to hear legitimate expectation arguments on section 83 claims.