KSM Henryk Zeman - Tribunal can consider 'legitimate expectation' arguments in VAT appeal

In KSM Henryk Zeman SP Zoo v HMRC [2021] UKUT 182 (TCC), the Upper Tribunal (UT) has ruled that the First-tier Tribunal (FTT) does have jurisdiction to consider the question of legitimate expectation in an appeal against an assessment to VAT.

Background

KSM Henryk Zeman SP Zoo (KSM), which belonged in Poland for VAT purposes, entered into a contract with another company, Energoinstal SA (E), which was based in Poland (and not registered for VAT in the UK) to install a boiler in the UK.  KSM sought to register for VAT in the UK, thinking that E would be registered for VAT in the UK, and that KSM would provide services to business customers belonging in the UK for VAT purposes.

HMRC refused KSM's application to register for VAT on the basis that it would be making land-related construction supplies solely to business customers who belong in the UK and who are all registered for VAT in the UK .  Accordingly, it is the customer who is deemed to be making the supply in the UK and who accounts for any VAT due under the 'reverse charge' procedure.

KSM applied again for registration, this time declaring that E did not belong in the UK, and HMRC assessed KSM to VAT in relation to the supplies it made to E.

KSM appealed against the assessment to the FTT on the ground that it had a legitimate expectation that it was not assessable to VAT.  

Legislation

Section 8, Value Added Tax 1994 (VATA), when read together with paragraph 1(2)(e), Schedule 4A, VATA, provides that where services are provided by a person who 'belongs' outside the UK to a recipient that is a relevant business person belonging in and registered for VAT in the UK, and the supply relates to construction works on UK land, then such a supply is treated as a self-supply by the recipient for VAT purposes.

Section 73(1), VATA, provides that in certain circumstances HMRC "may assess the amount of VAT due … to the best of their judgment".

Section 83(1), VATA, sets out the circumstances in which an appeal lies to the FTT under VATA.  In particular, section 83(1)(p) provides that an appeal lies to the FTT in respect of:

"an assessment— 
(i) under section 73(1) or (2) in respect of a period for which the appellant has made a return under this Act; or 
(ii) under [subsections (7), (7A) or (7B)]1 of that section; 
or the amount of such an assessment".

FTT's decision

The appeal was dismissed.

The FTT held that the questions asked by HMRC in determining whether to register KSM for VAT were insufficient to address the question of whether KSM could, or should, be registered for VAT. However, on the basis of the information provided to it, the FTT could understand why HMRC reached the conclusions it did.  HMRC had explained its reasons and had invited KSM to provide further information if it did not agree with HMRC's decision, which KSM had failed to do.  KSM's failure to contest HMRC's decision was not reasonable and as a result KSM could not rely on the principle of legitimate expectation.

KSM appealed to the UT.

UT's decision

The appeal was dismissed.

The UT considered the following two questions raised by the appeal: 

(1)  whether KSM could rely on a legitimate expectation that it was not assessable; and 

(2)  whether that question was within the FTT's jurisdiction.

The UT dealt swiftly with the first question.  HMRC's letter refusing the first application for registration did not, in the view of the UT, give rise to a legitimate expectation that KSM would not be assessable to VAT.  It made supplies that were not covered in HMRC's letter refusing registration, which had been clear on its terms.

The UT had more to say on the second question of whether the FTT had jurisdiction to consider legitimate expectation arguments.  

HMRC argued that since the FTT was a creature of statute, whether it had jurisdiction to consider a challenge to an assessment on public law grounds was a matter of statutory construction.  The UT agreed, but noted that this was the beginning, rather than the end, of the enquiry.  The taxpayer was in substance defending part of an enforcement action by HMRC and the promotion of the rule of law and fairness required that it be able to defend itself by challenging the validity of HMRC's decision on public law grounds, unless that entitlement was excluded by the relevant statutory language.  

The UT considered the relevant case law.  In Oxfam v HMRC [2009] EWHC 3078, the High Court had considered that section 83(1)(c), VATA (which provides that an appeal in respect of the amount of input tax to be credited to a person lies to the FTT), conferred jurisdiction on the FTT to consider relevant issues of public law.  It had held that:

• the words 'with respect to' in the opening of section 83(1) were broad enough to cover any question that related to the determination of input tax; 

• it was the subject-matter of that heading (rather than some categorisation by type of law) that was relevant; 

• there was no general presumption that public law should be reserved to the High Court and other tribunals, with jurisdiction defined by statute, could determine relevant issues of public law; 

• there was no good reason to treat the FTT's jurisdiction as more limited; and 

• there was a public benefit, in terms of the administration of justice, for the FTT to hear relevant public law arguments in determining an appeal.

On the other hand, some courts had taken the opposite view, notably the UT in HMRC v Abdul Noor [2013] UKUT 071 (TC), where the UT, considering itself not to be bound by Oxfam, had considered that because a claim based on legitimate expectation was not a claim 'under the VAT legislation' the FTT did not have jurisdiction to determine the argument.  

The UT noted that the language of section 83(1)(p) (in issue here) was broader than that in section 83(1)(c) (considered in Oxfam and Abdul Noor).  The appeal in the instant case lay not only with respect to the amount of an assessment, but with respect to an assessment under section 73(1).

The UT said that it was clear from the wording of section 83 that the FTT did not have a general supervisory jurisdiction.  But the starting point was still that the taxpayer should have the ability to defend itself by challenging the validity of a decision using public law grounds, unless the statutory scheme excluded this ability.  In the view of the UT, such a defence would fall squarely within the scope of the subject-matter that was within the FTT's jurisdiction.  In addition, there were good policy reasons not to limit the FTT's jurisdiction in the manner sought by HMRC and HMRC's interests were protected by the short appeal deadlines applicable in this context.  

Accordingly, the UT held that, even though KSM had not made out a legitimate expectation on the facts, it was within the FTT's jurisdiction to determine the point.

Comment

Although KSM was unsuccessful in establishing a legitimate expectation on the facts of its case, this is an important decision from the UT and one that will be welcomed by taxpayers.  The requirement to consider whether to commence (and then stay) protective judicial review proceedings (within tight time limits) in order to preserve public law arguments increases professional fees and can be a procedural trap for the unwary. This decision goes some way to alleviating that need.  

However, even though an UT decision is binding on the FTT and must be followed by the FTT, it does not put the FTT's jurisdiction to consider public law points beyond doubt.  Taxpayers and their advisers wishing to raise legitimate expectation arguments will still have to consider carefully whether they should bring protective judicial review proceedings, not least in circumstances where the legislation granting the FTT jurisdiction is less expansive than in the present case. 

The decision can be viewed here.