First-tier Tribunal (Tax)

[2011] UKFTT 349 (TC)

TC01209

Appeal number TC/2009/16470

VAT – Whether legitimate expectation to recover pre-registration input tax on supply of services – Whether Tribunal has jurisdiction to consider legitimate expectation – Oxfam v HMRC [2010] STC 686 considered –Appeal allowed

FIRST-TIER TRIBUNAL

TAX

ABDUL NOOR Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JOHN BROOKS (TRIBUNAL JUDGE)

RICHARD CORKE FCA (MEMBER)

Sitting in public at Eastgate House, Newport Road, Cardiff on 3 May 2011

The Appellant in person

Alan Bates, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.       Mr Abdul Noor appeals against the decision of HM Revenue and Customs (“HMRC”) to reduce the amount of input tax on his first VAT return, for the period ending 31 October 2009, by £3,628.39 on the basis that this amount related to services received more than six months before his effective date of registration for VAT.

2.       Until such time as a person is registered, or required to be registered, for VAT there is no entitlement to a credit for input tax on supplies received. However, Regulation 111 of the VAT Regulations 1995 provides for an exception to this general rule and allows for VAT on the supply of goods and services provided to a person within a specified time limit before the date from which he was registered, or required to be registered, for VAT to be treated “as if it were input tax”. In the case of services the time limit is six months. The time limit for goods was increased from three to four years with effect from 1 April 2009.

3.       We heard from Mr Noor who told us that he encountered problems with a builder during the construction of a small commercial property. This resulted in legal action and a reference to adjudication before the building was completed. As a result he received three invoices from the solicitors, dated 24 August 2007, 16 October 2007 and 29 February 2008 and an invoice from the Adjudicator dated 3 December 2007 (the “Invoices”).

4.       At the end of 2007, anticipating the final invoice from the builder, Mr Noor visited the Llanishen office of HMRC, armed with the Invoices then in his possession, to seek advice as to when he should register for VAT so as to be able to claim input tax in respect of the costs incurred on the construction of the property. He was directed to a telephone on a wall of the office on which he could contact HMRC’s telephone National Advice Service (“NAS”).

5.       On telephoning the NAS Mr Noor explained about the construction of the property, he referred to the Invoices as these related to the property and that he was expecting the final invoice from the builder. He was told that he should keep all invoices relating to the new build as he could claim VAT under the option to tax within three years.

6.       On 25 September 2009 HMRC received Mr Noor’s application to register for VAT from 1 July 2009 as a voluntary registration. On 1 November 2009 Mr Noor submitted his first VAT return for the period ending 31 October 2009. This contained a claim for input tax of £28,971.91 and no output tax. An officer of HMRC visited Mr Noor on 6 November 2009 to examine the input tax claim and found that four invoices (the three solicitor’s invoices and the adjudicator’s invoice referred to in paragraph 3, above), on which the total VAT was £3,628.39, related to services that had been provided more than six months prior to Mr Noor’s effective date of registration and could not be treated as input tax. This reduced the VAT claimed on the return by £3,628.39 to £25,243.52. This was paid by HMRC to Mr Noor on 11 November 2009. On 18 November 2009 Mr Noor appealed to the Tribunal.

7.       As the invoices concerned clearly relate to services provided to Mr Noor by the solicitors and adjudicator more than six months before his effective date of registration the VAT shown on them cannot be treated as input tax under Regulation 111 of the VAT Regulations. While this may once have been sufficient grounds to dispose of this appeal, following the decision of Sales J in Oxfam v HMRC [2010] STC 686 (“Oxfam”), it is necessary for us to consider whether, as a result of what he had been told during his telephone conversation with the NAS, Mr Noor had a legitimate expectation that he would be able to claim the input tax shown on the Invoices and, if so, whether it is in our jurisdiction to do so.

8.       We first consider the issue of legitimate expectation. The relevant principles to be applied can be derived from the following passage of the judgment of which Bingham LJ (as he then was) in R v Inland Revenue Commissioners ex p MFK Underwriting Agencies Ltd [1990] 1 WLR 1545 at 1569 – 1570 (“MFK”):

“… in assessing the meaning, weight and effect reasonably to be given to statements of the revenue the factual context, including the position of the revenue itself, is all-important. Every ordinarily sophisticated taxpayer knows that the revenue is a tax-collecting agency, not a tax-imposing authority. The taxpayer's only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law: Reg. v. Attorney-General, Ex parte Imperial Chemical Industries Plc. (1986) 60 T.C.1, 64g, per Lord Oliver of Aylmerton. Such taxpayers would appreciate, if they could not so pithily express, the truth of the aphorism of “One should be taxed by law, and not be untaxed by concession:” Vestey v. Inland Revenue Commissioners [1979] EWHC Ch 177, 197 per Walton J. No doubt a statement formally published by the Inland Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them. But where the approach to the revenue is of a less formal nature a more detailed inquiry is in my view necessary. If it is to be successfully said that as a result of such an approach the revenue has agreed to forgo, or has represented that it will forgo, tax which might arguably be payable on a proper construction of the relevant legislation it would in my judgment be ordinarily necessary for the taxpayer to show that certain conditions had been fulfilled. I say “ordinarily” to allow for the exceptional case where different rules might be appropriate, but the necessity in my view exists here. First, it is necessary that the taxpayer should have put all his cards face upwards on the table. This means that he must give full details of the specific transaction on which he seeks the revenue's ruling, unless it is the same as an earlier transaction on which a ruling has already been given. It means that he must indicate to the revenue the ruling sought. It is one thing to ask an official of the revenue whether he shares the taxpayer's view of a legislative provision, quite another to ask whether the revenue will forgo any claim to tax on any other basis. It means that the taxpayer must make plain that a fully considered ruling is sought. It means, I think, that the taxpayer should indicate the use he intends to make of any ruling given. This is not because the revenue would wish to favour one class of taxpayers at the expense of another but because knowledge that a ruling is to be publicised in a large and important market could affect the person by whom and the level at which a problem is considered and, indeed, whether it is appropriate to give a ruling at all. Secondly, it is necessary that the ruling or statement relied upon should be clear, unambiguous and devoid of relevant qualification.

In so stating these requirements I do not, I hope, diminish or emasculate the valuable, developing doctrine of legitimate expectation. If a public authority so conducts itself as to create a legitimate expectation that a certain course will be followed it would often be unfair if the authority were permitted to follow a different course to the detriment of one who entertained the expectation, particularly if he acted on it. If in private law a body would be in breach of contract in so acting or estopped from so acting a public authority should generally be in no better position. The doctrine of legitimate expectation is rooted in fairness. But fairness is not a one-way street. It imports the notion of equitableness, of fair and open dealing, to which the authority is as much entitled as the citizen. The revenue's discretion, while it exists, is limited. Fairness requires that its exercise should be on a basis of full disclosure. Counsel for the applicants accepted that it would not be reasonable for a representee to rely on an unclear or equivocal representation. Nor, I think, on facts such as the present, would it be fair to hold the revenue bound by anything less than a clear, unambiguous and unqualified representation."

9.       Mr Bates, for HMRC, explained that there had been unsuccessful attempts to ascertain when Mr Noor had made his call to the NAS so that a record of what was said could have been obtained. He accepted that Mr Noor was an honest witness who had told the Tribunal the truth, but that as the telephone call was several years ago it was not be possible for him to be precise about the content of the conversation, eg whether there had been any mention of a supply of services, whether the NAS tax official had just read out guidelines, or whether there had been a misunderstanding of what had been said. In the circumstances he submitted that it was not possible for Mr Noor to satisfy the conditions set out by Bingham LJ in MFK and there could not be a legitimate expectation that Mr Noor would to be able to recover the input tax shown on the Invoices.

10.    Alternatively, Mr Bates submitted that the NAS was only a source of general advice rather than binding rulings and as Mr Noor had not sought written confirmation of what he had been told during the telephone conversation a legitimate expectation could not have arisen. In R (on the application of Corkteck Ltd) v HMRC [2009] STC 1681 (“Corkteck”) Sales J, after referring to the need for full disclosure by the taxpayer, said at [30]:

“… In my view, this aspect of the test in ex p. MFK Underwriting Agencies Ltd will be especially difficult to satisfy where the taxpayer claims that an enforceable legitimate expectation has arisen on the basis of a purely oral exchange with a tax official. In particular, where there is no written request for a tax ruling, then in anything other than very exceptional circumstances a tax official will not have been put on proper notice of the desire of the taxpayer to have a fully considered ruling on the point at issue and will not have been put on proper notice of the importance and significance of the ruling which he is being asked to provide.”

11.     We agree with Mr Bates that Mr Noor was a truthful and honest witness and we accept his evidence. Although a record of his telephone conversation with the NAS would, no doubt, have been of assistance we do not consider that it necessarily follows that, in the absence of such a record, Mr Noor cannot satisfy the conditions of Bingham LJ in MFK.

12.    The first condition requires the taxpayer to “put all his cards face upwards on the table” which as Bingham LJ explains means that he must give full details of the specific transaction on which he seeks the HMRC’s ruling and indicate the ruling sought. The taxpayer must also make it plain that a fully considered ruling is sought and the use he intends to make of any ruling given. We find that Mr Noor did this when he called the NAS during his visit to HMRC’s Llanishen office. The purpose of the call to the NAS was to enquire (seek a ruling) as to when he should register for VAT in order to be able to claim input tax arising from the construction of the property. He had taken the Invoices which he then possessed with him and had referred to these during his conversation with the NAS about reclaiming the input tax. In answer to a question from the Tribunal, Mr Noor confirmed that he did tell the NAS what the Invoices were for and that they all related to one property. Also, in the circumstances, it must have been clear that Mr Noor was to use the answer given to him by the NAS to register for VAT and claim input tax incurred in relation to the construction of the property. We therefore find that Mr Noor has satisfied the first condition of Bingham LJ.

13.    The second condition of Bingham LJ is that the ruling or statement relied upon should be “clear, unambiguous and devoid of any relevant qualification”. It would seem that this condition was also satisfied when Mr Noor was told unequivocally by the NAS that he could recover input tax if it was incurred within three years of the date of his registration for VAT. Although, without any record of the telephone conversation we cannot be certain, we consider that it is more likely than not that this was the advice given by the NAS especially as Mr Noor only applied to be registered for VAT from 1 July 2009 whereas, as he said, he would have made an earlier application had he been told that he would only be able to recover input tax on services supplied within six months of his registration.

14.    This brings us to the alternative argument of Mr Bates. While we accept that the NAS is a source of general advice, given the nature of the information sought, we consider that the NAS tax official would have realised that Mr Noor required an answer to his question, the importance and significance of that answer and that it would be relied on notwithstanding that the request was not in writing. Also, in view of the clear answer he had received from the NAS, we do not consider that Mr Noor’s failure to seek written confirmation of the advice precludes him from having a legitimate expectation that he could rely on what he had been told and find that the present case falls within the “very exceptional circumstances” contemplated by Sales J. in Corkteck.

15.    We therefore have to consider whether we have the jurisdiction to find that Mr Noor had a legitimate expectation that he would be entitled to recover the input tax shown on the invoices.

16.    The jurisdiction of the Tribunal is defined by s. 83 of the Value Added Tax Act 1994 (“VATA”) which provides, so far as material, as follows:

17.    However this was considered by Sales J in Oxfam where he said at [63 – 72]:

[63] “On the ordinary meaning of the language of that provision, it appears that it covers all the issues between Oxfam and HMRC regarding the question whether HMRC should have allowed Oxfam credit for a higher amount of input tax under the Approved Method Formula, including both the contract issue and the legitimate expectation issue. The words, "with respect to", in section 83(1) appear clearly to be wide enough to cover any legal question capable of being determinative of the issue of the amount of input tax which should be credited to a taxpayer. The Tribunal's jurisdiction is defined by reference to the subject matter specified in the section, not by reference to the particular legal regime or type of law to be applied in resolving issues arising in respect of that subject matter.

[64] In this case, issues of contract law (under rules of general private law), legitimate expectation (under rules of general public law) and application of general rules of VAT law all arose. The first two issues were the primary issues governing the question whether Oxfam should be credited with more input tax, since Oxfam did not maintain any serious argument against its assessment apart from by reference to those issues.

[65] The parties and the Tribunal agreed that the Tribunal had jurisdiction to deal with the contract law argument. I think this is correct – the question of contract was an issue potentially determinative of Oxfam's rights to be credited with input tax, so the Tribunal had jurisdiction to deal with it.

[66] However, the parties thought that the Tribunal did not have jurisdiction to consider Oxfam's alternative legitimate expectation argument. In my view, this is not correct. By the same construction of section 83(1)(c) and the same reasoning which led to the conclusion that Oxfam's contract claim was within the jurisdiction of the Tribunal, Oxfam's legitimate expectation argument also fell within the jurisdiction of the Tribunal. I can see no sensible basis in the language of that provision for differentiating between Oxfam's contract claim and its legitimate expectation claim. In both cases, if Oxfam's claim had been made out, an error of law on the part of HMRC in arriving at its decision on the amount of input tax to be credited to Oxfam would have been established (either a failure to respect Oxfam's contractual rights or a failure to treat Oxfam fairly, in breach of Oxfam's legitimate expectation) which would, on the face of it, be a proper basis for an appeal to the Tribunal against HMRC's decision within the terms of section 83(1)(c).

[67] Usually, of course, an appeal under one of the sub-paragraphs of section 83(1) will be on the merits of decision taken by HMRC, and questions of private law or public law (such as whether HMRC took into account irrelevant considerations or failed to take account of relevant considerations) will simply not be relevant to the Tribunal's task on the appeal. But in my view it does not follow from this that the Tribunal will never have jurisdiction to consider issues of general private law and general public law where that is necessary for it to determine the outcome of an appeal against a decision of HMRC whose subject matter falls within one of the sub-paragraphs of section 83(1).

[68] I do not think that it is a valid objection to this straightforward interpretation of section 83(1)(c) according to its natural meaning that it has the effect that sometimes the Tribunal will have to apply public law concepts in order to determine cases before it. It happens regularly elsewhere in the legal system that courts or tribunals with jurisdiction defined in statute by general words have jurisdiction to decide issues of public law which may be relevant to determination of questions falling within their statutorily defined jurisdiction. No special language is required to achieve that effect. Where they are themselves independent and impartial courts or tribunals (as the Tribunal is) there is no presumption that public law issues are reserved to the High Court in the exercise of its judicial review jurisdiction. So, for example, a county court may have to consider whether possession proceedings issued by a local authority have been issued in breach of its public law obligations (Wandsworth LBC v Winder [1985] AC 461; Doherty v Birmingham City Council [2008] UKHL 57); magistrates courts and the Crown Court may have to decide issues of public law in so far as they arise in relation to criminal proceedings (e.g. to determine if a by-law is a valid and proper foundation for a criminal charge: Boddington v British Transport Police [1999] 2 AC 143 or to determine the validity of a formal instrument which is in some way a necessary foundation for the criminal charge: DPP v Head [1959] AC 83); and employment tribunals may have to decide issues of public law in employment proceedings (e.g. to determine whether a contract of employment with a public authority is vitiated as having been made ultra vires).

[69] I cannot see any good reason for adopting a different approach to the interpretation of the jurisdiction of the Tribunal in section 83 of VATA. The Tribunal is used to dealing with complex issues of tax law. There is no reason to think that it would not be competent to deal with issues of public law, in so far as they might be relevant to determine the outcome of any appeal. That view is reinforced by the fact that the Tribunal may have to deal with complex public law arguments in relation to Convention rights when construing legislation under section 3 of the Human Rights Act 1998, and is recognised by Parliament as being competent to do so.

[70] Moreover, there is a clear public benefit in construing section 83 by reference to its ordinary and natural meaning which strongly supports that construction. It is desirable for the Tribunal to hear all matters relevant to determination of a question under section 83 (here, the amount of input tax to be credited to a taxpayer) because (a) it is a specialist tribunal which is particularly well positioned to make judgments about the fair treatment of taxpayers by HMRC and (b) it avoids the cost, delay and potential injustice and confusion associated with proliferation of proceedings and ensures that all issues relevant to determine the one thing the HMRC and taxpayer are interested in (in this case, the amount of input tax to be recovered) are resolved on one occasion in one place. It seems plausible to suppose that Parliament would have had these public benefits in mind when legislating in the wide terms of section 83.

[71] Therefore, apart from any authority on this question, I would hold that section 83(1)(c) bears its ordinary and natural meaning, so that resolution of the issue of legitimate expectation which arose between Oxfam and HMRC fell within the Tribunal's jurisdiction.

 [72] Am I constrained by authority to come to a different view? There are a number of cases at the level of the Tribunal (e.g. Marks and Spencer plc v Customs and Excise Comrs [1998] V&DR 93, Greenwich Property Ltd v Customs and Excise Comrs, decision 16746 of 9 June 2000, referred to in R (Greenwich Property Ltd) v Customs and Excise Comrs [2001] EWHC Admin 230; [2001] STC 618, at [1]) and in the High Court (Customs and Excise Comrs v Arnold [1996] STC 1271; Marks and Spencer plc v Customs and Excise Comrs [1999] STC 205, 246; Customs and Excise Comrs v National Westminster Bank plc [2003] EWHC 1822 (Ch); [2003] STC 1072) which have adopted a narrower interpretation of section 83(1), and have held that it excludes a general supervisory jurisdiction on public law grounds in relation to HMRC. Some of the authorities are reviewed by Jacob J in National Westminster Bank at [46]-[56] (though the point in relation to domestic public law was conceded before him: see [53]). There is also a Scottish decision of the Second Division of the Inner House of the Court of Session (Customs and Excise Commissioners v United Biscuits (UK) Ltd [1992] STC 325) which held at 326-327, by reference to a decision of the Tribunal in Cando 70 v Customs and Excise Comrs [1978] VATTR 211 and without extensive reasoning of its own, that "The whole area of value added tax guide concessions was beyond the jurisdiction of the tribunal". None of these authorities are directly binding on me, if I am clearly of the view that their reasoning on this point should not be followed.”

He continued at [76]:

“… It is clear that section 83 – like section 40 of the 1972 Act - does not confer any general supervisory jurisdiction on the Tribunal, but it seems to me to be a non sequitur to say that the Tribunal has no power to apply public law principles if they are relevant to an appeal against (i.e. a decision either to uphold or overturn) a decision of HMRC which falls within the terms of one of the headings of jurisdiction set out in section 83 (here, HMRC's decision regarding the amount of any input tax which may be credited to Oxfam). In J.H. Corbitt (Numismatists) Ltd Lord Lane considered that the commissioners' decision not to accept the taxpayers' records as sufficient under Article 3(5) was too remote from the immediate decision of the commissioners under section 31 (in relation to which an appeal lay to the tribunal); but in the present case Oxfam's complaints based on breach of contract and breach of legitimate expectation sought directly to impugn HMRC's decision in relation to the input tax to be credited to Oxfam. Therefore, whereas the taxpayer's complaints in that case did not fall within the scope of section 40(1)(b) of the 1972 Act, Oxfam's complaints in this case do fall within the scope of section 83(1)(c) of VATA. …”

18.    The present appeal, like that in Oxfam, falls within the scope of s 83(1)(c) VATA and, as such, it would appear that the consideration of the public law principle of legitimate expectation is within our jurisdiction.

19.    A further argument advanced by HMRC in previous cases in which Oxfam has been considered, eg CGI Group (Europe) Limited v HMRC [2010] SFTD 1001 and Hanover Company Services Ltd v HMRC [2010] SFTD 1047 (“Hanover”), is that the views expressed by Sales J on the jurisdiction of the Tribunal were obiter.  Although Sales J had decided to reject Oxfam’s technical tax argument and legitimate expectation argument before commenting in detail on the Tribunal’s jurisdiction, it is clear that his decision on the legitimate expectation argument was reached on the basis that the Tribunal did have the jurisdiction to hear it saying at [5]:

“I think that the correct approach for me is to treat that argument as a new argument raised on the appeal under VATA with the leave of the court and to rule upon it in the context of that appeal, applying principles of public law. Having given leave for the argument to be raised in the appeal, it is unnecessary for me to grant permission for the same argument to be brought by way of judicial review. (If I had reached a different conclusion about the jurisdiction of the Tribunal and of this court on a VAT appeal, I would have granted Oxfam permission to bring its judicial review claim and would have dealt with it on the substance of the legitimate expectation argument in the same way as I have done below in the context of this appeal).” 

Therefore the conclusion by Sales J in respect of the Tribunal’s jurisdiction is a necessary part of his reasoning in determining the appeal which accordingly has a binding effect on the Tribunal.

20.    However, we also have to take account of the decision of Jacob J in Customs and Excise Comrs v National Westminster Bank plc [2003] STC 1072 (“Natwest”). As Sales J noted in Oxfam (at [72]), a narrower interpretation of section 83(1) VATA was adopted in Natwest holding that it excludes a general supervisory jurisdiction in relation to HMRC on public law grounds. Sales J, as a judge of the High Court, was not bound by Natwest but, as a decision of the High Court, it is binding on the Tribunal. This puts us in the same situation as the Tribunal in Hanover where it was said at [37 – 41]:

[37] This leaves us with two decisions of the High Court, Natwest and Oxfam. In such a situation Mr Singh submitted that we should prefer Natwest as it is part of a long line of authority where the scope of the Tribunal’s jurisdiction has been squarely in issue and subject to full argument unlike in Oxfam where Sales J had made his observations “without the benefit of detailed arguments to the contrary” before him (see at [80] of Oxfam). However, as Sales J noted at [72] in Oxfam, the point in relation to domestic public law was conceded in Natwest (see at [53] of Natwest).

[38] As a further reason for preferring Natwest over Oxfam Mr Singh referred us the Tribunals Courts and Enforcements Act 2007 (“TCEA”). This gives the Upper Tribunal the jurisdiction to hear judicial review claims in designated circumstances. Mr Singh pointed out that this was not considered by Sales J and the effect of his decision was to render the statutory framework redundant as both the First-tier and Upper Tribunal could consider public law arguments in the course of hearing an appeal.

[39] He also contended that unlike the Administrative Court, which could, for example grant a quashing order, the Tribunal does not have the power to grant an appropriate remedy in response to a public law argument and that this was not considered by Sales J. Similarly, Mr Singh contended, Sales J had not taken account of the procedural safeguards for defendants in judicial review proceedings contained in the Civil Procedure Rules 1998 (“CPR”) such as the application of strict time limits and the requirement for claimants to disclose an arguable case.

[40] However, as Sales J observed at [68] (see paragraph 31 above), public law issues can, and do, arise in cases other than those concerned with judicial review and therefore, insofar as they apply to judicial review the provisions of TCEA are not rendered otiose by the Tribunal being able to consider public law issues. …

[41] Insofar as the procedural safeguards of the CPR are concerned it should be noted that Part 54 of the CPR which requires a claim for judicial review to be made “(a) promptly and (b) in any event not later than 3 months after the grounds to make the claim first arose” and to be accompanied with a detailed statement of the grounds for bringing the claim. However, s. 83G(1) VATA provides that an appeal is to be made to the Tribunal at “the end of a period of 30 days” from the date of HMRC’s decision, a shorter period than required for a judicial review claim. Also the Tribunal Rules require the “grounds for making the appeal” to be included on the Notice of Appeal (rule 20(1)(f)).

21.    We agree with, and adopt these reasons for preferring the decision in Oxfam to that in Natwest and find that the Tribunal does have the jurisdiction to consider the issue of legitimate expectation in the present case.

22.    Having found that Mr Noor has satisfied the conditions of Bingham LJ in MFK and that the present case falls within the “very exceptional circumstances” contemplated by Sales J. in Corkteck, we come to the conclusion that, despite his failure to seek written confirmation of the advice received from the NAS, Mr Noor did have a legitimate expectation that he could recover the input tax shown on the Invoices.

23.    We therefore allow his appeal.

24.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.