In the recent decision of HMRC v GB Housely10 the Upper Tribunal held that HMRC was wrong not to exercise its discretion under regulation 29(2) of the Value Added Tax Regulations 1995 (VATR) regarding input tax recovery, simply because the taxpayer had failed to put in place self-billing agreements.
The taxpayer was VAT registered and received scrap metal from various suppliers. It had operated self-billing arrangements in relation to those supplies from about 1996/7. Under these arrangements the taxpayer would pay the VAT element of the consideration for goods by separate cheque, for the supplier to pay HMRC. The taxpayer would also obtain a copy of the supplier’s VAT registration certificate and would confirm with HMRC by telephone that the certificate was valid. The taxpayer would then make the relevant input tax deductions in its returns.
In 2008 HMRC informed the taxpayer that four of its suppliers had been deregistered for VAT purposes and that invoices relating to those suppliers were invalid. Consequently various input tax deductions made by the taxpayer would be disallowed and assessments raised.
HMRC accepted that the deregistration of these suppliers may have been back-dated and may not have been completed when the taxpayer checked the suppliers’ VAT certificates with HMRC at various points. It also accepted that it was possible that HMRC may have confirmed to the taxpayer during this time that the certificates were in order. However, it transpired that the taxpayer had failed to arrange “self-billing agreements” with its suppliers in contravention of the requirements of regulation 13 of VATR. HMRC argued that such agreements were designed (inter alia) to place a requirement on the supplier to inform the taxpayer if they were deregistered for VAT purposes.
HMRC had been in regular communication with the taxpayer (including site visits and correspondence) since 1996 onwards without raising any issues regarding the taxpayer’s self- billing arrangements. The UT found, however, that HMRC could not be criticised for this as none of the previous visits could be considered a full “audit” of the taxpayer’s VAT affairs. The fact that relevant documents may have been shown to officers of HMRC at different times was immaterial since it may have been the case that the officer concerned was engaged on a different matter.
There are circumstances in which HMRC may exercise a discretion to permit a credit for input tax even if a valid VAT invoice is not present. In this case however the officer came to the view that absent the relevant self-billing agreements it would be inappropriate for HMRC to consider using its discretion.
At first instance, the FTT concluded that HMRC had misunderstood the law by refusing to consider the exercise of its discretion for the reason given. Nothing in the legislation prevented it from considering the use of its discretion in these circumstances.
The Upper Tribunal agreed with the FTT in this respect, but in a judgment critical of both the FTT’s analysis and findings, Warren J declined to discharge the assessments levied against the taxpayer. Rather, he ordered that HMRC (re-)exercise its regulation 29(2) discretion taking account of all of the information available to it (including information revealed during the FTT and UT proceedings). If agreement was still not possible, a further hearing would then be required to determine whether the assessment should be discharged.
This case demonstrates the importance of considering not only the outcome of the use of a discretion but also whether or not the exercise (or not) of that discretion was based upon irrelevant and therefore impermissible reasons.
Click here to read the judgment.