Out-Law Analysis | 05 Oct 2021 | 3:23 pm | 5 min. read
The UK’s First-tier tax Tribunal (FTT) has no general jurisdiction to judicially review decisions made by HM Revenue & Customs (HMRC), but it can consider public law arguments in some VAT appeals within its jurisdiction, the Upper Tribunal (UT) has said.
In the tax context a public law argument is one that even though tax may strictly be due, it should not be payable because HMRC has exceeded its powers or breached its duty of fairness, such as where statements made by HMRC have given the taxpayer a legitimate expectation that they will not be taxed in a particular way.
Public law arguments must usually be raised by way of judicial review. At present, on an appeal to the FTT, if there is a public law argument as well as an argument that the tax is not due, separate proceedings must be brought in the High Court to apply for judicial review in respect of the public law argument. This increases costs.
In a recent case involving a Polish company, KSM Henrk Zeman (KSM), the company argued in the FTT that it had a legitimate expectation that it would not be subject to VAT because of statements made by HMRC when the company tried to register for VAT. KSM incorrectly answered a questionnaire from HMRC, leading the tax authority to believe that it would be supplying services only to UK VAT registered business customers, whereas its boiler installation supplies in the UK were actually to a Polish company that was not registered for UK VAT. On the basis of this questionnaire, HMRC wrote to KSM saying it did not need to register for VAT.
It seems to be accepted from the case law that there are some circumstances when the FTT can consider public law arguments. Unfortunately, doubt still surrounds when these may be
When KSM subsequently applied again to be registered HMRC assessed KSM for VAT on the previous supplies. The UT dismissed KSM’s claim that it had a legitimate expectation in respect of statements made in HMRC’s original letter refusing registration. However, the UT also found that the FTT did have jurisdiction to adjudicate on a legitimate expectation argument in KSM’s circumstances.
As the UT had already dismissed KSM’s appeal against the VAT assessment on the basis that KSM did not have a legitimate expectation, the comments about the FTT’s public law jurisdiction are only persuasive rather than a binding authority on the FTT.
The UT relied on comments made in the Court of Appeal by Lady Justice Simler in a 2020 case where she said: “Where a public body brings enforcement action against a person in a court or tribunal … the promotion of the rule of law and fairness means, in general, that person may defend themselves by challenging the validity of the enforcement decision or some antecedent decision on public law grounds, save where the scope for challenging alleged unlawful conduct has been circumscribed by the relevant statutory scheme, which excludes such a challenge”.
The judges in the KSM case considered that the ability to raise a public law challenge alongside an appeal within the FTT’s jurisdiction was not excluded in relation to the particular statutory provision under which the VAT assessment was made.
In 2013 the UT had decided in another VAT case concerning a different provision that the FTT had no jurisdiction to consider a legitimate expectation argument. That case concerned a right to appeal in respect of a right to credit for input tax “under the VAT legislation”. The judges in that case said that a legitimate expectation claim was not a claim under the VAT legislation and so the FTT had no jurisdiction to consider it. This was contrary to the decision reached by Mr Justice Sales in the High Court in 2009 on the same statutory provision in a case concerning the charity Oxfam.
The judges in the KSM case considered that the UT’s previous decision could be distinguished because the statutory provision concerned in the KSM case was broader in scope than the one considered in the earlier case, as an appeal lay not only with respect to the amount of an assessment but, more generally, with respect the assessment.
In addition, the statutory provisions relevant in the KSM case said that that HMRC “may” assess the amount of VAT due to the best of its judgment. For there to be an assessment HMRC needed to have made a decision that there should be one, and the judges said the legislation did not exclude the availability of a general public law defence based on legitimate expectation. They said in these circumstances there were “strong reasons for thinking that it would be artificial and unworkable” to exclude a defence based on the public law principle of legitimate expectation from the FTT’s jurisdiction.
It is clearly established that the FTT has no general supervisory judicial review jurisdiction so that where there is no statutory right of appeal you cannot bring a public law argument in the FTT. However, it seems to be accepted from the case law that there are some circumstances when the FTT can consider public law arguments. Unfortunately, doubt still surrounds when these may be.
The KSM case does little, if anything, to clarify the issue as the UT’s views on the FTT’s jurisdiction were only persuasive rather than a binding authority on the FTT. Further, how broadly statutory provisions can be read so as to allow public law arguments to be invoked will no doubt be the subject of further debate in the tribunals and courts, as can be seen already from the differing decisions taken relating to even the same statutory provisions.
This means that where taxpayers have a public law argument in addition to an appeal which is clearly within the jurisdiction of the FTT, they will still need to apply to the High Court for permission to bring a judicial review in respect of the public law challenge, in addition to pursuing their appeal in the FTT. This process can lead to increased costs, delay, potential injustice and confusion.
It is unlikely to be possible to try to raise both arguments in the FTT and then apply for judicial review in the High Court if that fails, because an application for judicial review must be filed "promptly" and in any event not later than three months after the grounds to make the claim first arose.
We really need a higher court to rule once and for all on the issue having heard full argument from both sides or for the government to clarify by legislation the ambit of the FTT’s jurisdiction. Getting such a case before a higher court where the taxpayer is represented so that the case can be fully argued may be difficult, as a properly advised taxpayer would likely have applied to the High Court in respect of the public law argument and so would not be relying on the FTT having jurisdiction and it is unlikely a taxpayer in this position will want to fund an appeal to the Court of Appeal unless the tax at stake is very significant.
The KSM decision does offer some glimmers of hope to those who think the FTT should have jurisdiction to consider incidental public law issues, but the issue is far from resolved.