The Serpentine Trust Ltd – HMRC entitled to raise VAT assessments despite binding contractual agreement

In The Serpentine Trust Ltd v HMRC [2018] UKFTT 535, the First-tier Tribunal (FTT) has held that although HMRC had agreed with the taxpayer one basis for calculating VAT, under its alternative dispute resolution (ADR) procedure, it was not precluded from raising VAT assessments on a different basis because the agreement reached was ultra vires and therefore void.

Background

The Serpentine Trust Ltd (the taxpayer), is a registered charity which operates various 'supporter schemes' (the schemes) whereby supporters make payments to it and in return receive a range of benefits.

In July 2013, HMRC and the taxpayer held an ADR meeting in relation to the VAT treatment of the schemes. An agreement was reached in relation to some of the schemes only. In relation to those schemes where agreement had not been reached, HMRC considered the schemes to be standard rated VAT supplies and it issued two decisions and an assessment to that effect.

The taxpayer appealed to the FTT and additionally sought judicial review of HMRC’s decision.

FTT decision

The appeal was dismissed.

The issues before the FTT were whether HMRC and the taxpayer had reached an agreement and if so, whether HMRC had made a unilateral mistake, or whether the agreement was void because it was ultra vires as it did not reflect the correct legal position.

The FTT concluded that the parties had reached an agreement at the ADR meeting and that there was no unilateral mistake by HMRC as an HMRC officer had made extensive changes to the ADR document, including clarificatory amendments, yet no changes had been made to the disputed paragraph.

The income received by the taxpayer from the schemes was standard rated for VAT purposes as the taxpayer had made a “single supply of the opportunity … to partake of exclusive events at, and offers by, the trust”. The VAT treatment agreed under the ADR process was therefore wrong in law and inconsistent with HMRC’s published position. Following Preston v IRC [1985] AC 835, agreements between taxpayers and HMRC which prevent HMRC from applying a taxing provision in accordance with the law are ultra vires and void.

Comment

It was accepted by the taxpayer that what HMRC had agreed as part of the ADR process was wrong as a matter of law and the FTT concluded that this meant the agreement was ultra vires and void. The judicial review proceedings were stayed until the outcome of this appeal and the taxpayer can now seek to challenge in those proceedings HMRC’s decision to change its position on the grounds of legitimate expectation.

This decision could have serious implications for HMRC’s ADR process in general, if agreements reached during the ADR process can be simply disregarded by HMRC on the ground that the agreed basis for calculating tax is wrong in law.