GSTS Pathology LLP & Ors, R (On the Application Of) v Revenue & Customs

Where a public authority gives clear tax rulings on fully disclosed arrangements, and the taxpayer reasonably relies on them, a substantive legitimate expectation may arise that the stated treatment will continue. The expectation is not unlimited: legislation or an authoritative judicial decision changing the legal position may justify prospective change, subject to fair implementation time. Where the law remains reasonably arguable and the authority has merely changed its view, fairness may prevent immediate departure from the ruling. The court may examine the merits more closely on an interim application where the relief would substantially determine the final claim and the evidence and argument are sufficient. In deciding whether to frustrate a legitimate expectation, the court must weigh fairness against the public interest and assess proportionality.

The claimants sought urgent interim relief in judicial review proceedings concerning HMRC’s decision to treat pathology services supplied by GSTS Pathology LLP as exempt from VAT. HMRC had previously ruled in 2008, and confirmed in 2010, that the supplies were taxable at the standard rate. The claimants relied on those rulings when establishing, investing in and expanding the joint venture.

HMRC’s January 2013 decision adopted the opposite treatment from 1 May 2013. GSTS had appealed that decision to the First-tier Tribunal, with the earliest hearing listed for July 2013. The parties agreed that the substantive judicial review should await the tribunal appeal. The central issue on the interim application was whether HMRC should be restrained from implementing the new treatment until the tribunal decision and a reasonable period thereafter.

1. Relief granted. The court granted an interim injunction restraining HMRC from implementing the decision to treat GSTS’s pathology supplies as VAT-exempt until the First-tier Tribunal had determined GSTS’s appeal and, if necessary, for three months thereafter. Either party could adduce further evidence and apply to vary the period.
2. The application was assessed under American Cyanamid v Ethicon Ltd [1975] AC 396. Because the relief would have substantially the effect of final relief, and the court had extensive evidence and argument with few material factual disputes, it was just and convenient to examine whether the judicial review claim was likely to succeed. The court’s view was provisional and created no issue estoppel.
3. A substantive legitimate expectation arose from HMRC’s clear and categorical 2008 and 2010 rulings. The claimants had made full disclosure, identified the ruling sought and explained the reliance to be placed on it. Detrimental reliance was not an essential element, although reliance was relevant to fairness.
4. The expectation was not absolute. A change in legislation or an authoritative court or tribunal decision changing the interpretation of the law could justify a new tax treatment, provided it was managed fairly and sufficient time was allowed for reorganisation. Here there had been no such objective change. HMRC had merely changed its view on an uncertain question of law, and the earlier rulings remained consistent with its published VAT guidance.
5. Considering the extent and clarity of reliance, the serious and potentially irreversible consequences of immediate change, the arguability of the earlier interpretation and the absence of effective compensation, it would be unfair to implement the new treatment before the tribunal had determined the legal issue. The public interests in collecting tax and treating taxpayers equally did not outweigh that unfairness. The appropriate response was proportionate interim protection.
6. The balance of convenience led to the same result. Immediate implementation risked insolvency, costly restructuring and damage to NHS pathology provision, whereas delay exposed the revenue principally to a temporary loss of tax which could not properly be pursued retrospectively on the material before the court.