Volkswagen Financial Services (UK) Ltd v Commissioners for Her Majesty’s Revenue and Customs

A tribunal dealing with substantial litigants represented by experienced counsel may assume that the parties have carefully identified the issues requiring decision. Tribunal procedure remains flexible, and a more inquisitorial approach may be appropriate in other cases, particularly those involving litigants in person.

An appellate court should ordinarily accept a tribunal’s clear account of the scope of the dispute where the available submissions and evidence support that account. A party alleging that the tribunal misunderstood or omitted a significant issue should raise the matter promptly while events remain fresh.

Volkswagen Financial Services supplied vehicles under hire-purchase arrangements involving taxable vehicle supplies and exempt finance supplies. The dispute concerned the attribution of residual input tax on general overheads under an agreed partial exemption special method.

The First-tier Tribunal accepted that some input tax could be attributed to the taxable supplies. The Upper Tribunal supported HMRC’s approach, but the Court of Appeal restored the First-tier Tribunal’s decision in [2015] EWCA Civ 832.

The Supreme Court considered that the principal tax issue required a reference to the Court of Justice of the European Union. This judgment determined only HMRC’s secondary ground: whether the First-tier Tribunal had failed to consider an alternative contention that less than 50% of the relevant input tax should be attributed to taxable vehicle supplies.

1. HMRC’s secondary ground of appeal was dismissed unanimously. Lord Carnwath delivered the judgment, with which Lord Neuberger, Lord Kerr, Lord Reed and Lord Gill agreed. The principal tax issue was left for determination following a reference to the Court of Justice of the European Union.

2. The issue did not require the court to determine general questions about whether tax tribunal proceedings are adversarial or inquisitorial. The new tribunal system has flexible procedures capable of adaptation to different cases and litigants. A more inquisitorial role may be suitable where litigants appear in person. Where substantial litigants are represented by experienced counsel, however, the tribunal may assume that the parties have identified with care the issues they consider relevant for decision.

3. The observations in Pegasus Birds Ltd v Revenue and Customs and Excise Comrs [2004] EWCA Civ 1015 were not of general application. They were directed at discouraging undue attention to the tax authority’s original exercise of best judgment, as distinct from determining the correctness of the resulting assessment.

4. The First-tier Tribunal had expressly stated that the 50/50 weighting was not disputed and that the sole dispute was whether any residual input tax could be attributed to the taxable vehicle supply. That understanding was consistent with HMRC’s written submissions and witness evidence, neither of which advanced a specific alternative apportionment. A passing reference recorded in the hearing notes did not establish that a separate alternative case had been presented.

5. The Supreme Court agreed with the Court of Appeal that there was no material justifying departure from the First-tier Tribunal’s clear description of the issues before it. If HMRC believed that the tribunal had misunderstood its position or omitted a significant issue, it should have raised the matter when the decision was received, while the proceedings remained fresh in the participants’ minds.

1. United Kingdom Supreme Court: In [2017] UKSC 26, unanimously dismissed HMRC’s secondary ground of appeal. The principal tax issue required a reference to the Court of Justice of the European Union.

2. Court of Appeal: In [2015] EWCA Civ 832, decided the attribution issue in favour of Volkswagen Financial Services and rejected HMRC’s contention that the First-tier Tribunal had failed to consider an alternative apportionment below 50%.

3. Upper Tribunal: Supported HMRC’s approach and regarded the hearing notes as showing that HMRC had advanced an alternative contention that less than 50% should be attributed to taxable supplies.

4. First-tier Tribunal: Decided the attribution issue in favour of Volkswagen Financial Services. It recorded that the 50/50 weighting was accepted and that the dispute concerned whether any residual input tax could be attributed to the taxable vehicle supply.