G B Housley Ltd v HM Revenue and Customs

On a statutory appeal against a VAT assessment, the tribunal has an appellate role as to the assessment but a supervisory role when reviewing HMRC’s discretion under regulation 29(2) of the VAT Regulations 1995. The tribunal cannot substitute its own discretion for HMRC’s. If HMRC failed properly to exercise the discretion, the assessment may nevertheless stand only if HMRC show that a proper exercise would inevitably have produced the same result. Otherwise, the assessment must be discharged. HMRC may start again, subject to the statutory time limits, but a later exercise of the discretion cannot retrospectively validate the flawed assessment. The distinction between process defects and merits defects is unhelpful.

The taxpayer appealed against a VAT assessment of £337,381 for input tax claimed on supplies supported by non-compliant self-billing invoices. The First-tier Tribunal allowed the appeal, holding that HMRC had failed to consider their discretion under regulation 29(2) and that the assessment was invalid.

The Upper Tribunal’s first judgment found the July 2009 decision flawed but directed that HMRC should exercise or re-exercise the discretion. In its second judgment, reported at [2015] UKUT 0071 (TCC), it allowed HMRC’s appeal and remitted the matter to the First-tier Tribunal. The central issue was whether the assessment should instead have been discharged once HMRC’s failure properly to exercise the discretion had been established.

1. Disposition. The appeal was allowed unanimously. The Court of Appeal restored the First-tier Tribunal’s order allowing the taxpayer’s appeal and discharged the assessment.
2. Nature of the jurisdiction. Under the statutory appeal provisions in the Value Added Tax Act 1994, the tribunal has an appellate jurisdiction over the assessment itself. Where the issue concerns HMRC’s discretion under regulation 29(2) of the VAT Regulations 1995, the tribunal’s function is supervisory. It may examine legality, relevant and irrelevant considerations, and irrationality, but it may not substitute its own exercise of the discretion.
3. Effect of an improper exercise. Following John Dee Ltd [1995] STC 941, HMRC may preserve the result only by showing that, had the discretion been properly exercised, the decision would inevitably have been the same. HMRC could not make that showing here. It followed that the tribunal could not uphold the assessment merely because HMRC might reach the same conclusion on a fresh consideration.
4. Discharge and fresh assessment. Because the appeal was against the assessment, not against HMRC’s discretionary decision as such, the flawed decision meant that the assessment had to be discharged. HMRC could start again and issue a further assessment only if authorised and within the applicable time limits. A fresh exercise of the discretion could not retrospectively validate the earlier assessment.
5. Further points. The distinction drawn by the Upper Tribunal between process defects and merits defects was difficult to apply and did not alter the result. The Court declined to declare that the only permissible fresh decision would have been to allow the input tax deduction. The First-tier Tribunal’s findings strongly favoured the taxpayer but did not compel that conclusion. Baker J and Patten LJ agreed with Gloster LJ.

1. Court of Appeal (Civil Division). In [2016] EWCA Civ 1299, the appeal was allowed, the Upper Tribunal’s order was set aside, the First-tier Tribunal’s order was restored, and the assessment was discharged.
2. Upper Tribunal (Tax and Chancery Chamber). In [2015] UKUT 0071 (TCC), HMRC’s appeal was allowed and the matter was remitted to the First-tier Tribunal for further consideration after HMRC revisited or re-exercised the discretion.
3. Upper Tribunal, first judgment. In [2014] UKUT 0320 (TCC), the tribunal found HMRC’s July 2009 approach defective but left open the consequence for the assessment and directed a fresh or renewed exercise of the discretion.
4. First-tier Tribunal. In [2013] UKFTT 150 (TC), the taxpayer’s statutory appeal was allowed and the assessment was treated as invalid.