17 September 2019 - Article
It was only a few days ago, at a Withers reception, that I was talking to what one might describe as a 'small taxpayer', who had been embroiled in an appeal to the Tribunal over a trifling sum of £40,000 of VAT. As it turned out, she won her appeal, without the assistance of a professional advocate, because HMRC had misinterpreted the VAT legislation. The professional fee insurers were not prepared to back her, so she could not afford representation. Her ending was happy, since she won on a point of law. What about the 'small taxpayer' who has an argument which might be settled purely on the tax legislation, but could alternatively be settled by reference to HMRC's conduct? It may be that the tax is due by law, but that HMRC causes difficulties to the hapless taxpayer notwithstanding this. Perhaps their general literature gives the wrong impression of the treatment of an activity, or private correspondence between the taxpayer and HMRC does the same. In certain cases this can give rise to what is called 'legitimate expectation'. If HMRC's conduct causes a person not to charge VAT when they ought to have done, or to claim VAT when they ought not to have (thus giving them the impression they are running at a profit which might be false), a taxpayer may have good reason to say that, despite the legislation saying the tax is due from them, they ought not to have to pay it. In such a case, where does the taxpayer go in order to enforce any rights of 'legitimate expectation'? Up until 2010, the firm answer was that the First-tier Tax tribunal was not the place to go for this. Such issues could only be dealt with under formal judicial review at the High Court. Then, in a limited situation relating to input tax deduction, the High Court suggested that this was not necessarily true. Judge Sales, in Oxfam v HMRC, said that the regulations relating to the jurisdiction of the First-tier Tribunal should be interpreted more broadly. He reckoned that the criteria whereby a Tribunal might hear a case relating to whether input tax could be reclaimed could in certain circumstances be interpreted widely enough to determine whether input tax should be allowed to be reclaimed on the basis of misadvice by HMRC. This simple revelation was seized upon by taxpayers. Some First-tier Tribunals decided that they now had that power, and exercised it. Other First-tier Tribunals decided that Judge Sales was wrong and doggedly stuck to the old view. A major problem with Judge Sales' decision was that this was not a point that either side had put to him. He did not have the benefit of legal argument on it. During the course of the hearing, when his own thoughts were merely embryonic, he asked both advocates as to whether they agreed. Both did, which is a surprise as regards the advocate for HMRC, although of course not a surprise as regards the advocate for the taxpayer. This lack of legal argument in the hearing created a lack of moral authority around Judge Sales' decision. From the standpoint of HMRC it was important to obtain clarification, and particularly a reversal of the decision. For them, there was no benefit in the First-tier Tribunal having this extra power. It would allow taxpayers of modest means, with relatively modest sums of tax at issue, to launch combined proceedings on both the legal and 'legitimate expectation' points in the same hearing. HMRC's defence of their own poor quality decision-making would be severely weakened. In due course a case came forward in which the First-tier Tribunal decided that it had quasi judicial review authority, and would decide in favour of the Appellant. HMRC appealed to the Upper Tribunal on the point. The Upper Tribunal is not bound by a decision of the High Court. This, therefore, was a straight re-litigation of the Judge Sales decision. The case in question is likely to become a famous name in VAT litigation – Abdul Noor (UKUT 071). But in the course of the appeal a further unhappy paradox occurred. The problem was that the amount of tax at issue was very small. The taxpayer did not wish to incur cost defending it. The court asked HMRC to fund the cost of an advocate so that the court could have the benefit of argument from both sides. HMRC refused. The court tried to align this case with another on a similar point, but HMRC managed to reach a settlement with the other appellant before the date of the hearing. The court, clearly desperate to be afforded the privilege of advocacy on both sides of the argument, asked for a postponement. Understandably the appellant refused on the basis that it was not worth his while to delay, and HMRC also had no reason to delay the hearing. Accordingly, the Upper Tribunal heard the case with advocacy on only one side of the argument, namely HMRC's. Thus, in hearing an appeal against a decision made by a High Court judge who had lacked any representation for or against his proposition, the Upper Tribunal considered the same point with one-sided advocacy. This caused the Upper Tribunal to say that, whilst its decision was binding on future First-tier Tribunals, it lost some authority by reference to this one sided advocacy. Nonetheless in a painstaking decision, the Upper Tribunal mapped out a variety of reasons why it disagreed with the decision of Judge Sales. To pick just two points, it says that Judge Sales had misinterpreted a House of Lords decision which is binding, and had inferred wrongly that it was not binding, and had also given insufficient credit to other High Court decisions which did not square with his point of view. Second, on a point of construction of the power of the Tribunal, the relevant powers refer to a decision in respect of 'input tax'. The Upper Tribunal did not think that the language of the provision went any wider, and did not include sums which should be paid by way of compensation for HMRC misleading a taxpayer in respect of input tax. Input tax is one thing, and compensation is another. Whilst this decision may very well be right, there is no doubt that it would have been given a sterner test had an advocate opposed these points of view. Conclusion It is disturbing, to say the least, that a test case of this importance, overturning a decision of a High Court judge, could come to Tribunal with one-sided advocacy in circumstances where a perfectly sensible solution, the funding of the taxpayer's advocate by HMRC, had been refused by the agents of the government. What should happen now? Clearly there is a strong case for introducing limited judicial review powers to the First-tier Tribunal so that they can hear cases of combined tax law and HMRC conduct in order to deliver natural justice to the smaller taxpayer who cannot afford the judicial review process, and who would in all probability be too late to adhere to judicial review's demanding timescales. Many commentators suggested this when the Tribunals were being reformed a few years ago. It is difficult to resist the view that its omission was intended to protect HMRC against its own frailties. This creates an unlevel playing field, and appears to be difficult to justify on the basis of natural justice. Or, to put it in the current government's favourite language, it simply does not appear to be 'fair'.