Judgment summary
The First-tier Tribunal (Tax Chamber) heard an appeal by Abbey Group Ltd against a VAT assessment raised by HMRC under section 73(2) VATA 1994, concerning input VAT reclaimed on carpets provided free to house buyers as an incentive (paras 1, 7).
The Tribunal held that Abbey's appeal failed for two independent reasons: first, the Tribunal concluded it did not have jurisdiction to determine Abbey's legitimate expectation argument, and second, even if it did have jurisdiction, it would have rejected that argument on its merits (para 2).
The appeal was dismissed, and the assessment amount was corrected by agreement to £332,948.12 to reflect a typographical error (paras 7, 157).
Background
Abbey is a residential property developer whose supplies of newly constructed dwellings are zero-rated for VAT. It can generally reclaim input VAT on building materials ordinarily installed in a building, but is blocked from reclaiming input VAT on certain items such as carpets (paras 3, 5).
Abbey offers free carpets to some purchasers as an incentive, supplied together with new-build properties. It does not sell carpets separately (paras 4, 17-18). Both parties agreed that, as a matter of correct legal position, Abbey was blocked from recovering input VAT on these carpets, but Abbey had in fact reclaimed such VAT (paras 5-6).
HMRC raised an assessment dated 21 July 2023 under section 73(2) VATA 1994 for VAT periods 07/19 and 02/23, initially stated as £322,948.12 but corrected during the hearing, by agreement, to £332,948.12 due to a typographical error (para 7).
Abbey appealed under section 83(1)(p) VATA, contending it had a legitimate expectation, arising from a conversation with HMRC Officer John Martin around 2 December 2016 (the 'December conversation'), that it could reclaim input VAT on the carpets (paras 8, 27-29). HMRC had initially applied to strike out the appeal on jurisdiction and prospects grounds but withdrew that application before the hearing (paras 9-10).
Core dispute
The Tribunal had to determine two issues: first, whether it had jurisdiction to determine the legitimate expectation issue in the context of an appeal against a VAT assessment under section 83(1)(p) VATA 1994; and second, if it had jurisdiction, whether Abbey had in fact established a legitimate expectation that it could recover input VAT on the carpets (para 13).
Abbey argued that Officer Martin's statement during the December conversation, 'OK, I am satisfied with the treatment,' constituted a clear, unambiguous assurance covering input VAT recovery, made after full disclosure, such that it would be conspicuously unfair for HMRC to resile from it (paras 29, 63). HMRC argued the statement was ambiguous, related only to output VAT, and that Abbey had not put all its cards on the table, and in any event it would not be conspicuously unfair for HMRC to collect the correct amount of tax (para 64).
On jurisdiction, Abbey relied on the Court of Appeal decision in Beadle and the Upper Tribunal decision in Zeman to argue that the Tribunal had jurisdiction to hear a public law legitimate expectation defence in a VAT assessment appeal, given HMRC's discretionary power to assess under section 73(2) (para 61). HMRC relied on the Upper Tribunal decisions in Queenscourt and MWL, and on Caerdav and Noor, to argue that a VAT assessment appeal is not enforcement action analogous to that in Beadle, and that the relevant statutory provisions, construed purposively, did not confer jurisdiction on the Tribunal to decide public law legitimate expectation claims (para 62).
Court findings
The Tribunal found that the jurisdictional analysis in Zeman was obiter and not binding, preferring the reasoning in WM Morrison Supermarkets Limited v HMRC over that in Treasures of Brazil and United Carpets (paras 68-78).
Applying the exclusivity principle from O'Reilly v Mackman and the enforcement-proceedings exception recognised in Beadle, the Tribunal held that an appeal against a VAT assessment under section 83(1)(p) is not equivalent to the enforcement proceedings considered in Winder, Pawlowski and Beadle, because the assessment itself is the decision under challenge rather than a collateral issue arising in separate enforcement or recovery proceedings (paras 109-111).
On a conventional purposive construction of sections 73(2) and 83(1)(p) VATA, the Tribunal found that section 73(2) confers a discretion on HMRC whether to assess (the 'may assess' wording), consistent with Aria Technology v HMRC, but concluded that the existence of that discretion did not mean Parliament intended the Tribunal to have jurisdiction to determine legitimate expectation challenges to the exercise of that discretion (paras 116-121, 124, 137). The Tribunal concluded, with some hesitation, that it lacked jurisdiction to decide the legitimate expectation issue (paras 137-138).
On the merits, had it had jurisdiction, the Tribunal found that Officer Martin's statement during the December conversation did relate to input VAT and amounted to a clear, unambiguous assurance, and that Abbey had put its cards on the table (paras 54, 142-143). However, the Tribunal found that the representation was an informal verbal assurance rather than a published policy or formal ruling, that Abbey had not altered its underlying commercial arrangements in reliance on it (continuing to offer carpets as incentives regardless of the VAT position), and that permitting Abbey to retain the input tax permanently would give it an unwarranted fiscal advantage (paras 149-154). On balance, the Tribunal found it would not be conspicuously unfair, or an abuse of power, for HMRC to depart from the representation, and so no legitimate expectation claim would have succeeded (paras 153-155).
Outcome
The Tribunal dismissed Abbey's appeal, holding both that it lacked jurisdiction to determine the legitimate expectation argument and that, even if it had jurisdiction, Abbey had not established a legitimate expectation preventing HMRC from recovering the assessed VAT (paras 156-157).
The Tribunal also increased the amount of the assessment, as agreed between the parties during the hearing, to £332,948.12 to correct a typographical error (para 157).
Major issues / areas of contention
- Whether the First-tier Tribunal has jurisdiction to determine a legitimate expectation argument raised in an appeal against a VAT assessment under section 83(1)(p) VATA 1994.
- Whether the Upper Tribunal's jurisdictional analysis in KSM Henryk Zeman v HMRC was binding ratio or obiter dicta.
- Whether an appeal against a VAT assessment under section 73(2) VATA is analogous to 'enforcement proceedings' within the exception to the exclusivity principle recognised in Beadle.
- Whether section 73(2) VATA confers a discretion on HMRC to assess, and if so, whether that discretion brings public law legitimate expectation challenges within the Tribunal's jurisdiction under section 83(1)(p).
- Whether, on the facts, Officer Martin's statement during the December 2016 conversation constituted a clear, unambiguous assurance as to input VAT recovery on carpets.
- Whether it would be conspicuously unfair, or an abuse of power, for HMRC to depart retrospectively from any such assurance.
- The correct amount of the VAT assessment, following an agreed correction of a typographical error.