'Sophisticated taxpayer' could rely on HMRC published guidance

The tribunal said that there was "no ambiguity" in the guidance and that it would be "unfair or an abuse of power" if HMRC did not apply the guidance to the company. It was irrelevant that the company was a "very sophisticated" taxpayer with access to high quality advice, the judges said.

"It is good to see the tribunal deciding for once that a taxpayer can rely on HMRC guidance. Over recent years a number of decisions have made it difficult for taxpayers to rely on HMRC guidance with any certainty," said Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com.

Vacation Rentals acted as a booking agent between holidaymakers and property owners. Where payments were made by debit or credit card the company charged an extra fee for 'card handling services'.

In a 2006 case concerning Odeon cinema seat booking company Bookit the Court of Appeal decided that the supply of card handling services was exempt from VAT. The court said that the supply comprised four components. The first three components were obtaining the card information with the necessary security information from the customer; transmitting that information to the card issuers and receiving the authorisation codes from the card issuers. The fourth component was transmitting the card information with the necessary security information and the card issuers' authorisation codes to the intermediary bank (the 'merchant acquirer') which liaises between the card issuer and the taxpayer.

Following the case, HMRC issued guidance in the form of Business Brief 18/06 (BB 18/06) which stated that if an agent, acting for the supplier of the goods or services, makes a charge to the customer over and above the price of the actual goods or services, for a separately identifiable service of handling payment by credit or debit card, and that service includes the fourth component then the additional charge would be exempt from VAT.

The company applied the terms of BB 18/06 to its card handling supplies and treated them as exempt. However, HMRC disputed that the supplies were exempt. It said that the company did not satisfy the terms of BB 18/06 as the company transmitted the card information and security information to its merchant acquirer, and received the authorisation code from its merchant acquirer, rather than obtaining the authorisation code itself from the card issuer.

The judges said that there was "no ambiguity" in the wording of BB 18/06 and the distinction that HMRC sought to make between direct and indirect communications between the agent and the card issuer was of no material significance to the guidance. They said: "The reader would not be uncertain to any degree whether the exemption would apply if the authorisation code was acquired from the card issuer via the systems of the merchant acquirer".

HMRC argued that even if the company had a legitimate expectation that its supplies should be treated as exempt, it was not unfair or an abuse of power from HMRC to resile from the guidance in this case because the company was a "very sophisticated taxpayer" with access to high quality advice.

"In our view, it is only open to HMRC to override the legitimate expectation that it has encouraged in circumstances where there is a sufficient public interest to override it," the tribunal said.

The judges said that the onus was on HMRC to justify the frustration of legitimate expectation and HMRC had "not even began to discharge that heavy burden". They said the ability of the taxpayer to obtain legal advice on the guidance was irrelevant to the issue and that the legal advice would "almost inevitably" have been that the terms of BB 18/06 were clear and that the company's case fell squarely within the guidance".

Last year a company called Aozora failed in judicial review of a decision by HMRC to refuse to allow it to rely on a statement in HMRC's manual in relation to double tax relief. The judge said the taxpayer was entitled to rely on HMRC's manual, but there was no evidence that the taxpayer or its advisers had actually relied on it. The taxpayer did not show it would have adopted a business structure with more favourable tax consequences if it had not been for HMRC's representation, he said.

In 2017, Samarkand, a film partnership failed in claim that it had a legitimate expectation to be taxed in accordance with the representations contained in an HMRC manual where the Court of Appeal said that tax avoidance was reasonably suspected by HMRC.