Judicial review granted after HMRC wrongly rejects company’s tax claim

Hotelbeds won the right to judicial review of HMRC’s decision-making process following a dispute with the tax body over the VAT it incurred on the supply of hotel accommodation. Hotelbeds is a wholesale supplier of hotel rooms, meaning it purchases hotel accommodation from UK VAT-registered hotels and then sells them on to other suppliers of hotel accommodation.

The company bought and resold hotel accommodation directly on a business-to-business basis. Under basic VAT principles, the VAT it paid on the purchase of hotel rooms would therefore be recoverable input tax on supplies incurred for the purposes of making onward VATable supplies. However, Hotelbeds had issues with obtaining appropriate VAT invoices from the hotels.

HMRC had previously approved two input tax deduction claims based on alternative evidence for Hotelbeds’ supply of hotel rooms. Its subsequent rejection of a further two claims, worth more than £10 million, was improper, the court ruled.

Tax dispute expert Jake Landman, of Pinsent Masons, said the ruling showed the challenging nature of the case before the High Court.

“It is not a common occurrence for a taxpayer to succeed in a judicial review of a HMRC decision,” he said.

“The judge’s comments regarding sympathy for the HMRC decision maker in having to navigate inconsistent and inapplicable guidance in reaching their decision are quite telling. However, it is also a good example of how bringing judicial review proceedings can, in certain circumstances, be the right approach for challenging decisions.”

Hotelbeds had submitted error correction notices (ECNs) to deduct input tax on a series of rooms where there had been no invoice issued. This became more common following an industry shift to the tour operators’ margin scheme (TOMS), a system where hotel suppliers were paid when guests checked in - which removed the incentive for hotels to supply VAT invoices to get paid and meant many hotels no longer complied with their legal obligation to issue them.

HMRC paid the initial two ECNs but warned of “serious concerns” and denied subsequent ECNs. It had argued that Hotelbeds had changed its payment process voluntarily and could have done more to chase suppliers for invoices.

But Hotelbeds argued that the decisions taken by HMRC, in particular refusing to consider alternative evidence when there was no invoice, were contrary to the body’s own guidance.

The company claimed it had chased 900 separate VAT registered suppliers for 300,000 individual invoices and argued that there had been no risk to the public purse as HMRC had received the associated output tax but had not repaid input tax that it said was due.

The judge ruled that HMRC should have allowed payment, concluding that although the tax body’s guidance did not specifically cover situations where no invoices were available - focusing instead on situations where the invoice is invalid - its decision maker should have considered how the law and that guidance would guide the exercise of the available discretion. However, the decision maker had failed to properly consider the relevant legal principles.

The court also noted that, as the events in question took place before the UK left the EU, the decisions contravened the EU principle of effectiveness. Other factors that the court considered relevant were that there was no risk of fraud; the taxpayer had moved its operations to the TOMS since the events of this case; and that the payment of the earlier ECNs gave rise to an expectation later ones would also be paid.

Bryn Reynolds, a tax expert at Pinsent Masons, warned: “It is striking that, due to the inconsistent treatment it received and the difficulties of dealing with HMRC over an extended period, this taxpayer decided to move to using the TOMS from 2023 onwards, apparently at significant cost to themselves.”

“However, it also shows that submitting ECNs when there is a substantial sum at stake, particularly where backed up with good evidence, is still worthwhile for taxpayers, and that judicial review of VAT decision making should be considered as a possible avenue for challenge on both the basis of legitimate expectation and irrationality. Historically the courts have given legitimate expectation claims short shrift but with HMRC frequently departing from published policy, irrationality may be the more successful ground.”