HMRC's failure to exercise its discretion unreasonable

In G B Housley Limited v HMRC [2016] EWCA Civ 1299, the Court of Appeal allowed the Appellant's appeal and restored the decision of the First-tier Tribunal (FTT) which had discharged HMRC's VAT assessment on the basis HMRC had failed to correctly exercise its discretion.

Background

G B Housley Limited (the Appellant) was a scrap metal dealer.  The Appellant operated informal self-billing arrangements in relation to supplies of scrap metal received and claimed an input tax deduction. 

HMRC considered the self-billing arrangements to be invalid as some of the Appellant's suppliers were not registered for VAT and were not at the address of the self-billing invoice.  HMRC was also of the view that the Appellant had failed to correctly notify HMRC that it would be operating a self-billing arrangement. 

The Appellant requested HMRC to exercise its discretion under Regulation 29(2) of the VAT Regulations 1995 (the Regulations) to accept, in the absence of proper self-billing invoices, alternative evidence in support of the input tax deductions.  This request was refused.

HMRC denied the deduction and issued an assessment to the Appellant under section 73 of the Value Added Tax Act 1994 in the sum of £337,381, which was appealed. 

The FTT held that HMRC had not exercised its discretion properly and the assessment was discharged. HMRC appealed to the Upper Tribunal (UT). 

The UT found that HMRC had failed to properly exercise its discretion under the Regulations.  However, in the course of its decision, the UT raised the issue as to what were the consequences of HMRC's failure to exercise its discretion, in particular, whether the assessment should be discharged or should stand.  A further hearing was held to consider this issue.  In the UT's second decision it held that the FTT should not have discharged the assessment.  The UT considered that the FTT could only discharge the assessment if one of the following applied:

• HMRC revisited its decision and decided to exercise its discretion in the taxpayer's favour; or
  
  
• the FTT (or UT) determined that, on the basis of the evidence before it, HMRC could not reasonably have reached the decision it did.

The UT therefore decided to remit the matter to HMRC to remake its decision and if HMRC decided not to exercise its discretion in the Appellant's favour, remit the matter to the FTT to determine whether HMRC had properly exercised its discretion. 

The UT reached this decision on the basis that its role in determining whether HMRC had properly exercised its discretion was supervisory. 

The Appellant appealed the UT's decision to the Court of Appeal on the basis that once it was established that HMRC had acted unreasonably in exercising its discretion the appeal should have been allowed.    

Court of Appeal's decision

The Court allowed the Appellant's appeal applying the approach adopted by the Court of Appeal in John Dee Limited v HMRC [1995] STC 941.

In John Dee, the Court concluded that the powers of the FTT in cases dealing with the exercise by HMRC of its discretion under the Regulations are appellate and not supervisory.  Therefore, once it is found that HMRC has misdirected itself, the appeal should be allowed.  HMRC would then be free to issue a new assessment on the basis of a proper exercise of its discretion. 

In this case, HMRC had misdirected itself in applying its discretion under the Regulations because of a misapprehension as to the necessity of a billing agreement.  It was not a case where HMRC could demonstrate that if it had properly exercised its discretion it would have inevitably come to the same conclusion and denied the input tax.  Once HMRC's  decision to raise the assessment had been found to be flawed, the appeal against the assessment should have been allowed and the assessment discharged. 

Comment

This case provides further confirmation that the powers of the FTT in cases dealing with the exercise by HMRC of its discretion under the Regulations are appellate and not supervisory.

This is also an important decision in relation to the evidence required to support input tax reclaims where there is no valid VAT invoice.  The Court of Appeal put significant emphasis on alternative evidence to justify the claim of input tax.  HMRC is required to consider any such alternative evidence pursuant to the Regulations before issuing an assessment.   

A copy of the judgment can be found here