Realreed Limited, R (on the application of) v Commissioners for HMRC

Simple or substantive unfairness is not a free-standing ground of judicial review. A challenge must be analysed through recognised principles, such as irrationality or legitimate expectation.

A legitimate expectation may arise from an express or implied representation or an established practice, but the representation must be clear, unambiguous and free from relevant qualification. In tax cases, the taxpayer normally remains responsible for determining and returning the correct liability. HMRC’s failure to challenge a treatment on earlier occasions does not generally transfer that responsibility to HMRC.

Detrimental reliance is not an universal prerequisite to a substantive legitimate expectation, but it remains relevant to fairness and may be required in the circumstances of a particular case.

The claimant owned and operated serviced accommodation in a block of flats. It treated supplies of accommodation as exempt from VAT. HMRC later decided that the supplies were taxable and issued assessments exceeding £4.8 million for the four-year period permitted by Value Added Tax Act 1994.

The claimant sought judicial review of the decision to uphold the assessments. It alleged substantive unfairness, frustration of a legitimate expectation, breach of general principles of EU law, and disproportionate interference with its rights under Article 1 of Protocol 1 to the ECHR.

The court was asked to proceed on the hypothetical basis that HMRC’s liability decision was correct, although the First-tier Tribunal had not yet determined the claimant’s tax appeal.

1. The application for judicial review was dismissed. The court accepted that the assessments were discretionary and therefore reviewable, but held that substantive unfairness was not an independent ground of review. It was bound by Gallaher, which treated such language as adding nothing to ordinary principles including irrationality and legitimate expectation.

2. A legitimate expectation may arise from an express or implied representation or a practice, provided the representation is clear, unambiguous and devoid of relevant qualification. The inspections of the interested party did not give rise to any representation to the claimant. HMRC’s inspections of the claimant repeatedly described the supplies as exempt and used that assumption in partial exemption calculations, but HMRC never stated that it had critically examined the legal basis of the exemption or that the claimant could rely on its treatment.

3. In the circumstances, HMRC had not created a legitimate expectation binding on it. Alternatively, any expectation would have required detrimental reliance. Detrimental reliance is not an absolute legal prerequisite in every case, but it is a relevant consideration in determining fairness. The claimant had independently decided how to treat the supplies, would have continued that treatment without the inspections, and had not shown financial detriment from charging VAT or from the assessments.

4. The legitimate expectation doctrine could not reverse the statutory allocation of responsibility. The claimant was responsible for determining the correct VAT treatment and filing correct returns. HMRC’s failure to challenge a supply on previous occasions did not shift that burden.

5. The arguments based on proportionality, legal certainty, non-retrospectivity, legitimate expectations, fiscal neutrality and effectiveness under EU law added nothing and did not invalidate the assessments. Nor did Article 1 of Protocol 1. Although taxation interfered with possessions, the assessments were proportionate in the circumstances.

This was a first-instance judicial review in the Administrative Court. The related appeal against HMRC’s VAT liability decision remained pending before the First-tier Tribunal (Tax Chamber).