In HMRC v GB6 Housely the UT has remitted to the FTT the question of whether HMRC would have been acting within the proper exercise of its powers to decide not to exercise its discretion under regulation 29(2) of the Value Added Tax Regulations 1995 (VATR) in favour of GB Housely (GBH) in making its assessment on a taxpayer’s right to input VAT recovery.


GBH 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 GBH would pay the VAT element of the consideration for goods by separate cheque, for the supplier to pay HMRC. GBH would also obtain a copy of the supplier’s VAT registration certificate and would confirm with HMRC by telephone that the certificate was valid. GBH would then make the relevant input tax deductions in its returns.

In 2008, HMRC informed GBH 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 GBH would be disallowed and assessments made.

HMRC accepted that the deregistration of these suppliers may have been back-dated and may not have been completed when GBH checked the suppliers’ VAT certificates with HMRC at various points. It also accepted that it was possible that HMRC may have confirmed to GBH during this time that the certificates were in order. However, it transpired that GBH 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 suppliers to inform taxpayers if they were deregistered for VAT purposes. 

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 the present 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.

The FTT concluded that HMRC had misunderstood the law by refusing to consider the exercise of its discretion for the reasons given. Nothing in the legislation prevented it from considering the use of its discretion in these circumstances. 

The UT agreed with the FTT in this respect, but in a decision critical of both the FTT’s analysis and findings, Mr Justice Warren declined to discharge the assessments levied against GBH. 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.

UT’s decision

The UT remitted to the FTT the question of whether HMRC would have been acting within the proper exercise of its powers to decide not to exercise its discretion in favour of GBH. 

In clarifying the role of the FTT in cases where HMRC’s exercise/non-exercise of its discretion is challenged, it said that the FTT’s function in determining whether HMRC had properly exercised its discretion was purely supervisory. When carrying out its supervisory function, the FTT was to distinguish between:

  • “process defect” cases, where HMRC had failed to satisfy a pre-condition to exercise its discretion and to take into account relevant matters and to discount irrelevant matters
  • “merits defect” cases, where on the basis of material before it, HMRC could not properly have reached the decision that it did.

The starting point was that an assessment was valid unless the taxpayer could show that it was entitled to have the discretion exercised in its favour by establishing a merits defect. If a merits defect is found then the FTT ought to allow an appeal and discharge HMRC’s assessment. However, if HMRC’s exercise / non-exercise of discretion was due to a process defect, then the taxpayer’s appeal would not automatically be allowed nor the relevant assessment discharged. The FTT would have to consider the merits.

That said, the UT then clarified that in circumstances where HMRC did not consider something that it ought to have taken into account in making its assessment, but the decision would inevitably have been the same, then the appeal might still be dismissed.

The FTT had based its decision on a process defect. The UT therefore found that the FTT should not have upheld GBH’s appeal; such a decision would only have been permissible in the event of a finding of a merits defect. In essence, the FTT should only have upheld GBH’s appeal if it had found that no reasonable body in HMRC’s position could reasonably have refused, on the merits, to exercise its discretion in favour of GBH.


This case provides helpful guidance on the UT’s view on how to approach decisions as to HMRC’s exercise of discretion under regulation 29(2). It seems that a taxpayer will only succeed in having an assessment discharged on this basis if it can show that no reasonable body, in HMRC’s position, could have refused, on the merits, to exercise its discretion in the taxpayer’s favour.

To read the decision click here.