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KEY POINTS
- Changing the rules: HMRC rewrite their instructions.
- What are the grounds for judicial review?
- The circumstances of Oxfam’s VAT calculations.
- The decision in Church of England Children’s Society.
- Limited ability to advance public law arguments before the Tax Tribunal.
Large numbers of taxpayers rely on HMRC guidance such as leaflet IR20 (relating to residence, and now replaced by HMRC6). It helps both taxpayers and their advisers pick their way through the morass of UK tax law, and it provides some much-needed certainty.
At least, that is the way things are supposed to work. What happens, however, when HMRC change their mind? The position can become complicated.
The muddle of residence
Once upon a time, taxpayers thought they knew where they stood with IR20 and residence rules.
Readers will remember that the basic rule (paragraph 2.8) was that a UK taxpayer who had left the UK ‘permanently or for at least three years’ would be treated as not resident and not ordinarily resident.
This was provided the taxpayer’s absence from the UK covered at least a whole year and any subsequent visits totalled either fewer than 183 days in the tax year or averaged fewer than 91 days a tax year.
In other words, these taxpayers had a convenient rule of thumb that if they had left the UK, as long as they watched the clock and made sure they averaged fewer than 91 days in the UK over a three-year period, they would maintain their non-resident status.
Unfortunately, HMRC changed the ground rules in their Business Brief 1/2007:
‘The text of IR20 makes it clear… that the “91 day test” applies only to the individuals who have… left the UK and live elsewhere… Where an individual has lived in the UK, the question of whether he has left the UK has to be decided first [our emphasis]. Individuals who have left the UK will continue to be regarded as UK resident if their visits to the UK average 91 days or more a tax year, taken over a maximum of up to four years…’
Changing the rules
What happens when HMRC change their mind and effectively change the rules? IR20 had been relied upon for many years and by a great many taxpayers. The traditional way of protecting a taxpayer’s position in such cases is to commence an application for judicial review based on legitimate expectation.
Essentially, judicial review is a procedure by which the courts examine the decision of public bodies to ensure that they act lawfully and fairly. The court will conduct a review of the process by which a public body has reached a decision and assess whether it was validly made.
Judicial review is always a remedy of last resort; it can be time consuming and a court may refuse permission to bring an application if alternative remedies have not been exhausted.
Grounds for judicial review are constantly evolving but, broadly, can be categorised under four main heads: illegality, irrationality, procedural unfairness, and legitimate expectation.
The last concerns the fact that a public body such as HMRC may, by its own statements or conduct, be required to act in a certain way, even if it subsequently changes its mind, where there is a legitimate expectation on the part of those affected as to the way in which it will act.
This was the basis of the latest Gaines Cooper case in the Court of Appeal.
A party wishing to proceed with a judicial review claim must file promptly and, in any event, within three months of the date on which the grounds to the claim first arose. These time limits are strictly enforced by the courts.
What about the tribunal?
Traditionally, the tax tribunals have refused to consider points such as legitimate expectation in the context of a tax appeal.
See, for example, Marks & Spencer Plc v CCE [1999] STC 205 and CCE v National Westminster Bank Plc [2003] STC 1072.
Most recently in Jones & Anor v HMRC [2009] UKFTT 312 (TC), released on 18 November 2009, the First-tier Tribunal decided that a property letting business, which had been taxed as a trade, was not a trade for the purposes of taper relief.
As part of its decision, the tribunal ruled that it did not have jurisdiction to consider certain arguments raised by the appellants concerning judicial review.
These decisions have left taxpayers in the unsatisfactory position of taking general tax law points to the tribunal, but, at least before the introduction of the Upper-tier Tribunal, having to go to an entirely separate jurisdiction, the High Court, on the tightest of timescales, to enforce public law rights such as legitimate expectation.
The Oxfam decision
Oxfam raises money for its charitable activities by a number of means, mainly carrying on business through shops selling second-hand clothes and goods purchased from commercial suppliers and sold at a profit, and attracting donations from members of the public (referred to in the decision as unrestricted fund-raising expenditure).
For VAT purposes, Oxfam was deemed to engage in both business and non-business activities; input tax is deductable only in respect of the former.
Oxfam came to an agreement (‘the approved method’) with HMRC as to how input tax should be attributed to supplies made to the charity that could not be directly attributed to one or other types of supply made by the charity in a simple manner.
The agreement was set out in letters dated 25 January 2000 to Oxfam from HMRC and subsequent letters between the parties dated 3 March 2000 and 17 October 2000.
The position changed, however, with a decision of the High Court in Church of England Children’s Society v CIR [2005] STC1644. The effect of this decision was that VAT incurred on unrestricted fund-raising expenditure was in fact recoverable in part.
On 17 March 2006, Oxfam made a claim under the VAT Regulations SI 1995 No 2518, Reg 29 to reclaim, retrospectively, VAT incurred from the fees of professional fundraisers in generating voluntary charitable donations.
For the purposes of this claim, Oxfam used the approved method previously agreed with HMRC, interpreted in light of the decision in Church of England Children’s Society. On this basis, using the formula in the agreement, a greater amount of input tax was deemed to be recoverable by Oxfam.
HMRC replied by withdrawing their agreement to the approved method on 30 May 2006 and advising Oxfam that a revised method needed to be put in place.
One of the arguments raised by Oxfam was that HMRC were bound to accept the claim on the basis of the approved method on the grounds that the charity had an enforceable legitimate expectation that an agreement previously entered into would be adhered to by HMRC.
In the High Court
Having lost before the tribunal (20752), Oxfam appealed to the High Court, where the appeal was heard by Sales J (Oxfam v CRC [2009] EWHC 3078 (Ch)). The judge dealt in detail with whether the tribunal had jurisdiction to entertain a public law issue such as legitimate expectation.
Sales J set out the jurisdiction of the tribunal, as defined in VATA 1994, s 83, which provides that an appeal shall lie to a tribunal with respect to the amount of any input tax that may be credited to a person.
Sales J held that, on the ordinary meaning of the language of this provision, it would cover all the issues between Oxfam and HMRC regarding the question of whether the department should have allowed Oxfam credit for a higher amount of input tax, including any arguments on legitimate expectation.
The judge concluded:
‘The tribunal is used to dealing with complex issues of tax law. There is no reason to think that it would not be competent to deal with issues of public law, insofar as it might be relevant to determine the outcome of any appeal. That view is reinforced by the fact that the tribunal may have to deal with complex public law arguments in relation to convention rights when construing legislation under the Human Rights Act 1998, s 3 and is recognised by Parliament as being competent to do so.
‘Moreover, there is a clear public benefit in construing s 83 by reference to its ordinary and natural meaning … it is desirable for the tribunal to hear all matters relevant to determination of a question under s 83 … because (a) it is a specialist tribunal which is particularly well positioned to make judgments about the fair treatment of taxpayers by HMRC and (b) it avoids the cost, delay and potential injustice and confusion associated with proliferation of proceedings and ensures that all issues relevant to determine the one thing the HMRC and taxpayer are interested in (in this case, the amount of input tax to be recovered) are resolved on one occasion in one place.’
Sales J also noted that when the court raised this issue, counsel for HMRC had indicated that the department did not seek to argue against this view and, in fact, presented argument in support of it.
Where are we now?
This judgment, supported by HMRC, enables taxpayers to take public law arguments in VAT cases in a much more convenient setting, and thus widens the remit of the First-tier Tribunal.
Readers will be aware that under the new tribunal rules and supporting legislation, the Upper Tribunal has jurisdiction to hear judicial review proceedings brought by taxpayers (see, for example, the Tribunal Procedure (Upper Tribunal) Rules SI 2008, No 2698, Rule 28). However, tight time limits still apply.
The effect of the decision in Oxfam is that such public law points may now be raised in the First-tier Tribunal. Moreover, unlike in the Upper Tribunal, it would appear that only the usual VAT time limits will apply.
Notwithstanding that much of Mr Justice Sales’s reasoning is as equally applicable to direct taxes as indirect taxes – as Oxfam was a VAT case and concerned the interpretation of VATA 1994, s 83 – the decision has no application to those cases concerning direct tax.
It would appear that taxpayers who wish to enforce their public law rights in the context of a VAT appeal may now do so before the First-tier Tribunal, whereas taxpayers wishing to enforce similar rights in the context of direct tax appeals will have to make a written application to the Upper Tribunal under Rule 28 in the usual way.
Given that one of the main drivers of the new tribunal system was to harmonise the appeal procedures applying to indirect and direct taxes, such a dichotomy of jurisdiction is both anomalous and unwelcome.
Jonathan Levy is a partner and head of the tax disputes resolution team at Reynolds Porter Chamberlain LLP. He can be contacted on 020 3060 6472 or by email. Adam Craggs is a senior associate in the team. He can be contacted on 020 3060 6421 or by email.
