Vacation Rentals – taxpayer had legitimate expectation that HMRC guidance could be relied on

In R (on the application of Vacation Rentals (UK) Ltd) (formerly The Hoseasons Group Ltd) v HMRC [2018] UKUT 383 (TCC), the Upper Tribunal (UT), has held that HMRC was bound by its published guidance in Business Brief 18/06 (BB18/06) concerning the treatment of payments for card handling services.

Background

Vacation Rentals (UK) Ltd (the claimant), acted as a booking agent between holidaymakers and property owners. This role included collecting payment from holidaymakers on behalf of its property-owning clients. When collecting payments made by either credit or debit card, the claimant charged an additional fee and treated it as being exempt from VAT.

Under item 1, Group 5, Schedule 9, VATA 1994, certain financial services are exempt from VAT. This includes the "issue, transfer or receipt of, or any dealing with money, security for money, or any note or order for the payment of money".

In Bookit v HMRC [2006] STC 1367, the Court of Appeal held that a supply by the taxpayer of card handling services was exempt from VAT where it contained the following four specific components:  

1. obtaining card information and security information from the customer;

2. transmitting this information to the card issuer;

3. receiving authorisation codes from the card issuer; and

4. transmitting all of the above information to the intermediary bank which liaises between the card issuer and the taxpayer (the fourth stage).

Following Bookit and the decision of the Court of Session in Scottish Exhibition Centre v HMRC [2008] STC 967, HMRC issued BB18/06,  which confirmed that if an agent, acting for the supplier of goods or services, makes a charge to a customer over and above the price of the goods or services, for a separately identifiable service of handling payment by a credit or debit card, and that service includes the fourth stage, then the additional charge will be exempt under item 1 Group 5,  Schedule 9, VATA 1994.

I the present case, HMRC refused to apply BB18/06 to the claimant's treatment of card handling services and issued VAT assessments to it in the sum of £329,929. 

HMRC's view was that the claimant's card handling services did not satisfy the requirements of Bookit and BB18/06 because it received the authorisation code from its merchant acquirer not the card issuer, as was the case in Bookit.

The claimant applied to the UT for judicial review of HMRC's decision not to apply its guidance in BB18/06, arguing that it had a legitimate expectation that HMRC would comply with its own published policy. 

UT decision

The UT agreed with the claimant and quashed HMRC's decision not to apply the terms of BB18/06 to the claimant's card handling services. 

The UT was satisfied that the claimant had a legitimate expectation that HMRC would not resile from its own published guidance. In the view of the UT, HMRC's interpretation of BB18/06 was overly literal and technical. HMRC's published policies should not to be construed in the same way as a statute, rather, they should be construed on a "fair reading by an ordinarily sophisticated taxpayer". 

The UT noted that the guidance contained within BB18/06 was "clear, unambiguous and unqualified" and focused on the fourth stage as being the core factor of whether the exemption was applicable. It is noteworthy that the UT also commented that the change in HMRC's view was as a result of a change in personnel rather than any change in the law.

Comment

This decision confirms that published HMRC guidance can create a legitimate expectation which the taxpayer can rely on to challenge a decision of HMRC which is inconsistent with that guidance.  HMRC is of course able to abandon its guidance, but only where it is able to demonstrate sufficient public interest in doing so. In this case the UT was of the view that "HMRC had not even begun to discharge that heavy burden". 

A copy of the decision can be viewed here.