Judgment summary
This is a decision of the Upper Tribunal (Tax and Chancery Chamber) concerning Class 1A national insurance contributions (NICs) on cars leased by two related trading companies, MWL International Ltd and Maywal Ltd, to their directors and employees (1).
HMRC decided that certain cars used by the companies' directors and employees were not exempt as pooled cars under section 167 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) (1). The Appellants had appealed to the First-tier Tribunal (FTT), arguing in the alternative that the cars were pooled cars, that HMRC were estopped from arguing otherwise because of a 1993 agreement with an inspector of taxes, and that the Appellants had a legitimate expectation that the cars would be treated as pooled cars (2, 3).
The FTT found that the cars were not pooled cars, that the requirements for estoppel by convention were satisfied but HMRC were not estopped because HMRC cannot be estopped from enforcing a statutory provision and the 1993 Agreement was void as to the future, and that the FTT had no jurisdiction to determine the legitimate expectation issue (4). The Appellants appealed against the FTT's decisions on estoppel and legitimate expectation, and HMRC cross-appealed on the estoppel by convention findings (5).
The Upper Tribunal dismissed the Appellants' appeal on all grounds and did not need to determine HMRC's cross-appeal (50, 53, 81, 92).
Background
MWL International Ltd (MWL) and Maywal Ltd (Maywal) were trading companies established by David Walpole (1). In 1993, following a PAYE audit, a meeting took place between Mr Walpole and Mr Murch for the Maywal group and an Inspector of Taxes and a compliance officer from the Inland Revenue, mainly to discuss use of cars by directors and employees (10, para 38).
At that meeting, Mr Walpole gave unchallenged evidence about the cars' business use, that no journey records had been kept, and that Maywal had historically treated the cars as pool cars without reporting a benefit in kind (10, para 39). The Compliance Officer took the position that the cars could not be pool cars without journey records, but was overruled by the Inspector, who agreed that the cars were and would continue to be pool cars provided four conditions were met: availability for business use, availability to and use by more than one employee, being kept overnight at the company's registered office, and each employee having another car available for private use (the "1993 Agreement") (10, paras 40-42).
From 1993 to 2018, cars in the fleet changed, and from some point before 2015 all new cars were purchased by ABM, a leasing company within the Maywal group, and leased to Maywal or MWL (10, para 43). The Appellants relied on the 1993 Agreement throughout, did not report the cars on P11Ds, and were not questioned about the cars during numerous subsequent HMRC enquiries (10, para 44).
The decisions under appeal related to twelve cars (seven Mercedes, two Teslas, one Land Rover Discovery, one BMW and one Porsche Cayenne) leased and used by Mr Walpole, Mr Mark Walpole, Mrs Walpole and a chauffeur, for tax years 2015-2020 (10, paras 49-51; 90). There was no dispute as to the quantum of the decisions if NICs were properly chargeable (10, para 49). It was common ground that the terms of the 1993 Agreement were not satisfied solely in relation to the Porsche Cayenne (11).
Core dispute
The Appellants did not appeal the FTT's finding that the cars were not pooled cars under the statutory conditions in section 167 ITEPA (5). The issues before the Upper Tribunal were therefore: (1) whether HMRC could be estopped from applying NICs retrospectively in light of the 1993 Agreement; (2) whether the requirements for estoppel by convention were in fact satisfied (HMRC's cross-appeal); and (3) whether the FTT had jurisdiction to decide whether the Appellants had a legitimate expectation, based on the 1993 Agreement, that HMRC would not apply NICs to the cars retrospectively (14).
HMRC also sought permission to cross-appeal on the ground that the conditions of the 1993 Agreement were not satisfied in practice, but the Tribunal refused permission for this argument to be raised, applying principles on new points on appeal from Notting Hill Finance Limited v Sheikh and Singh v Dass, because HMRC had not raised the point before the FTT and the Appellants would likely have adduced evidence to rebut it (11-13).
Court findings
On estoppel, the Tribunal held that estoppel by convention can in principle operate against HMRC, but the circumstances in which it will do so are limited (25-26). Drawing on Maritime Electric Company Limited v General Dairies Limited, Southend-on-Sea Corporation v Hodgson, Keen v Holland and Tinkler v HMRC, the Tribunal set out principles for when estoppel cannot operate against a statutory provision, including where a positive statutory duty enacted for the benefit of a section of the public would be overridden or undermined, and where a body could not have avoided the statutory provision by contract (40).
Applying those principles, the Tribunal found that the 1993 Agreement's requirement that an employee merely own another car was a poor proxy for, and did not adequately reflect, the statutory requirement in section 167(3)(d) that private use be "merely incidental", since an employee could own another car but never use it, or use the leased car exclusively for private purposes (44-46). HMRC could not have bound themselves by contract to disapply section 167(3)(d) in this way, so they could not be estopped by the 1993 Agreement from applying the statute (47-48). The FTT's conclusion that estoppel by convention could not apply was upheld (50).
Because the estoppel appeal failed on this ground, the Tribunal did not need to decide the Appellants' challenge to the FTT's alternative finding that the 1993 Agreement was void as to the future, and expressed no view on it (51-52). For the same reason, the Tribunal did not need to determine HMRC's cross-appeal on whether the requirements for estoppel by convention were otherwise satisfied, though it noted it would have exercised caution in disturbing the FTT's factual findings (53).
On jurisdiction over legitimate expectation, the Tribunal reviewed a body of case law including Aspin v Estill, Oxfam v Revenue and Customs Commissioners, Trustees of the BT Pensions Scheme v HMRC, Metropolitan International Schools Ltd v HMRC, Beadle v HMRC, KSM Henryk Zeman SP Zoo v HMRC and Caerdav v HMRC, noting tension between the authorities (66-74). It endorsed a purposive construction approach focusing on the specific statutory jurisdiction being exercised, per R & J Birkett v HMRC (76-77). Applying this, the Tribunal found that section 167 ITEPA and section 8 of the Social Security Contributions (Transfer of Functions etc) Act 1999 were mandatory provisions involving no exercise of discretion, and the appeal rights under section 11 ToFA did not confer a supervisory jurisdiction on the FTT, so the FTT had no jurisdiction to determine the legitimate expectation argument (78-81).
Although not necessary to its decision, the Tribunal indicated that, even if jurisdiction existed, the legitimate expectation claim would have failed, because the 1993 Agreement did not adequately reflect the statutory private use requirement, and applying the conspicuous unfairness test from R (Hely Hutchinson) v HMRC and R (Aozora GMAC Ltd) v HMRC, the high level of unfairness needed to override the public interest in collecting tax due had not been shown, particularly as the Appellants had benefited from the exemption for over 10 years before the decisions, which related only to tax years 2015-2020 (82-90).
Outcome
The Upper Tribunal dismissed the Appellants' appeal on the estoppel ground and on the legitimate expectation jurisdiction ground (50, 81, 92). It refused HMRC permission to cross-appeal on whether the terms of the 1993 Agreement were satisfied in practice (13), and it did not need to determine HMRC's cross-appeal on whether the requirements for estoppel by convention were otherwise satisfied (53). The appeal was dismissed (92).
Major issues / areas of contention
- Whether the cars leased by the Appellants qualified as "pooled cars" exempt from Class 1A NICs under section 167 ITEPA (not itself under appeal to the Upper Tribunal).
- Whether HMRC could be estopped by convention, on the basis of a 1993 agreement with an Inspector of Taxes, from retrospectively charging NICs.
- Whether estoppel by convention requirements were in fact satisfied on the facts (subject of HMRC's cross-appeal).
- Whether the 1993 Agreement was void insofar as it purported to bind HMRC for future tax years (not determined by the Upper Tribunal).
- Whether the First-tier Tribunal had jurisdiction to consider an argument based on legitimate expectation arising from the 1993 Agreement.
- Whether, if jurisdiction existed, the Appellants' legitimate expectation claim would have succeeded on the facts.
- Whether HMRC should be granted permission to cross-appeal on a new point regarding compliance with the terms of the 1993 Agreement in practice.