HMRC’s Misunderstanding Concession Does Not Require an Underlying Legitimate Expectation

1. Introduction

This decision distinguishes two routes by which taxpayers may seek protection from the retrospective collection of tax: an assurance giving rise to a legitimate expectation, and an extra-statutory concession addressing an honest misunderstanding. The Court of Appeal held that a taxpayer invoking HMRC’s misunderstanding concession need not establish that the underlying guidance independently created an enforceable legitimate expectation. The question is whether the concession’s own requirements are satisfied.

The appeal concerned eight companies in the Thomas and Noble groups operating slot machines in bingo halls and amusement arcades. HMRC assessed them to additional amusement machine licence duty (“AMLD”) after rejecting their understanding that machines using physically separate random number generators attracted a lower rate of duty.

The statutory liability was no longer disputed. The issue was whether HMRC had lawfully refused relief under its misunderstanding and misdirection concessions. Eady J dismissed the judicial review claims, but the Court of Appeal unanimously allowed the appeal concerning the misunderstanding concession. Falk LJ delivered the principal judgment.

The decision also establishes an important boundary in judicial review: although applying a concession may involve evaluative judgments primarily entrusted to HMRC, interpreting HMRC’s published policy is a matter for the court.

2. Background: Machines, Guidance and Tax Liability

The statutory distinction

The regulatory framework under the Gaming Act 1968 and the Lotteries and Amusements Act 1976 distinguished “gaming machines” from other gaming facilities, described in the proceedings as “s16/21 machines”. The critical regulatory wording asked whether the element of chance was provided “by means of the machine”.

The VAT definition used the same wording. Gaming machines were excluded from the exemption for gambling under Group 4 of Schedule 9 to the Value Added Tax Act 1994. By contrast, the Betting and Gaming Duties Act 1981 asked whether the outcome was determined by chances inherent in the machine’s action. The parties accepted that this difference in wording did not materially affect the present dispute.

For AMLD, the financial difference was substantial:

• Category A: £250 annually for a machine that was not a gaming machine.
• Category E: £1,915 annually for the relevant gaming machines.

These were tax licences, distinct from the regulatory permissions governing gambling premises.

Why the location of the random number generator mattered

A random number generator (“RNG”) supplied the chance component used by the machines’ software. Fixed Odds Betting Terminals (“FOBTs”) in bookmakers’ premises generally communicated with off-site RNGs and were then treated as VAT-exempt.

The disputed machines operated differently. Their RNGs were on the licensed premises, usually connected by wire and serving one terminal each. Nevertheless, they were physically outside the terminals—for example, attached to a wall or separator. The claimants understood Customs’ guidance to mean that this separation prevented the terminals from being gaming machines.

HMRC subsequently maintained that an RNG had to be “remote” in the sense of sufficiently distant, not merely outside the terminal. The central interpretative dispute was therefore whether the published guidance communicated a test of physical separation or one involving distance.

The relevant statements

Two letters sent to the British Amusement and Catering Trades Association (“BACTA”) in August and September 2004 stated that terminals could not be classed as gaming machines while relying on an RNG:

“that is not an integral part of the terminal, i.e. a random number generator that is remote from the terminals”.

The letters expressly supported category A treatment and were intended for dissemination to BACTA members.

A published Customs manual statement in January 2005 similarly explained that the relevant terminals were not gaming machines because chance was supplied by an RNG “outside the machine”. Correspondence with each claimant group reinforced the understanding that s16/21 machines required category A licences.

The assessments and the settled statutory position

In February 2008, HMRC assessed the Thomas claimants to £845,355 and the Noble claimants to £2,408,700 for periods ending on 31 July 2006. Legislative changes took effect for VAT on 6 December 2005 and for AMLD on 1 August 2006.

The Supreme Court subsequently established in the Rank litigation that separating the RNG did not prevent the terminal from being a gaming machine. The player’s interaction with the machine generated the winning or losing combination; the RNG was simply part of that process. Its location was legally irrelevant.

Accordingly, category E AMLD had been payable under the legislation. The present appeal concerned relief from that liability, not whether the assessments correctly reflected the statutory charge.

3. The Concessions and the Court’s Decision

The misunderstanding concession

Concession 3.4 permitted remission of VAT undercharged through a bona fide misunderstanding where four further conditions were met:

1. There was no reason to believe tax had knowingly been evaded.
2. There was no evidence of negligence.
3. The misunderstanding did not concern an aspect of tax clearly covered by published guidance or specific instructions.
4. The tax had not been charged to customers, could not reasonably now be charged, and would not be charged.

The misdirection concession

Concession 3.5 addressed a written, clear and unequivocal ruling given with the full facts available, or an officer misleading a taxpayer to its detriment while knowing the full facts. It generally protected the taxpayer until the error was brought to its attention.

Although both concessions were expressed to concern VAT, HMRC accepted their application to AMLD in these proceedings. Both have since been withdrawn.

Outcome

The Court of Appeal quashed the decisions insofar as they refused the misunderstanding concession. HMRC must make fresh decisions. The court did not itself remit the assessments or invalidate the statutory liability.

The court found that HMRC’s refusals rested on erroneous interpretations of its statements. It also examined possible alternative objections and identified no rational basis, on the evidence considered, for rejecting the claimants’ genuine misunderstanding or treating their failure to obtain individual confirmation as negligence.

Success on this ground made it unnecessary to determine the misdirection claims.

4. Analysis of the Legal Reasoning

A. Interpretation belongs to the court; evaluation may belong to HMRC

The court separated two questions that HMRC’s submissions had treated too broadly as matters for administrative judgment:

• What does a concession or policy statement mean? This is an objective legal question for the court.
• Does a particular case satisfy its requirements? This may involve evaluative judgments primarily for HMRC, subject to judicial review.

HMRC’s general submission that factual application was reviewable only for irrationality had considerable force. However, it could not extend to determining the meaning of the very guidance through which HMRC communicated its policy.

The BACTA letters were effectively published policy statements: they were addressed to an industry association for circulation to its members. The manual statement was likewise relevant published guidance. Their interpretation could not be left to HMRC merely because that interpretation arose within an application for concessionary relief.

The court did not comprehensively determine the appropriate intensity of review for every component of both concessions. It acknowledged that negligence may involve an evaluation primarily for HMRC, whereas deciding whether guidance clearly covers an issue more obviously requires the court’s own interpretation. It also recognised the close analogy between misdirection and ordinary legitimate-expectation claims.

B. An honest misunderstanding is a separate threshold requirement

The High Court had treated the existence of a bona fide misunderstanding as something to be answered through the four conditions. The Court of Appeal rejected that approach.

On a fair and normal reading, the concession requires a sequential inquiry:

1. Was there a genuine misunderstanding?
2. If so, were the four additional conditions satisfied?

This matters because honesty and reasonable care are different questions. A taxpayer may genuinely misunderstand a position but nevertheless fail the concession because there is evidence of negligence. Conversely, administrative uncertainty cannot simply be relabelled a “difference of opinion” without addressing what the taxpayer genuinely understood.

C. The underlying guidance need not create a legitimate expectation

The most significant clarification concerns the relationship between the concession and legitimate expectation. A claim to enforce an extra-statutory concession is itself analogous to enforcing a substantive legitimate expectation. But the relevant expectation is that HMRC will apply the concession according to its terms.

It does not follow that the material producing the misunderstanding must separately satisfy the demanding test for an enforceable assurance: a statement that is clear, unambiguous and devoid of relevant qualification.

Indeed, concession 3.4 does not require the misunderstanding to have been caused by Customs at all. Official communications were critical here, but the concession’s language was broader. Importing the requirements of the misdirection concession into the misunderstanding concession would improperly narrow its protection.

Thus, uncertainty in underlying guidance does not automatically defeat an honest-misunderstanding claim. Its significance must instead be considered under the concession’s actual requirements, including negligence.

D. “Remote” meant non-integrated in these statements

The court interpreted the statements as a whole, from the perspective of an “ordinarily sophisticated taxpayer” representative of their intended audience. Here that meant an informed member of the amusement-machine industry, familiar with the relevant machines and regulatory constraints.

In the BACTA letters, the words “i.e.” expressly equated an RNG being “remote” with its not being an integral part of the terminal. They did not introduce a requirement concerning distance.

The manual’s concluding explanation was similarly unqualified: the terminals were not gaming machines because their RNGs were outside them. Earlier references to “remotely sited” RNGs had to be understood consistently with that explanation, not used to undermine it.

The industry context reinforced this reading. Unlike FOBT RNGs, the relevant RNGs had to be on the licensed premises. Nothing in the statements suggested that Customs’ policy depended on particular room layouts or an unstated minimum separation. Nor did the legislation identify distance as relevant.

This was not a general ruling that “remote” always means physically separate. It was a contextual interpretation of particular statements and their explanations.

E. Reliance without individual confirmation was not evidence of negligence here

HMRC argued that the claimants should have obtained specific confirmation after showing or describing their machines. The court rejected that argument on the evidence.

The guidance, properly interpreted, communicated a non-integration test. The individual correspondence did not materially qualify it. A reasonable industry taxpayer would not have been left in doubt merely because the RNG was nearby rather than in a distant location.

Consequently, failure to seek additional confirmation could not properly be treated as evidence of negligence in these circumstances. The decision does not remove the need to make inquiries where relevant guidance genuinely leaves an unresolved issue.

F. The remaining conditions could not rationally justify refusal

Knowing evasion: There had been no suggestion that this condition was in issue.

Clear guidance: Condition (c) concerns guidance clearly stating the correct tax treatment. It does not disqualify taxpayers because clear but erroneous official statements helped produce their misunderstanding. There was no clear guidance identifying the disputed machines as liable to category E AMLD.

Passing the tax to customers: Condition (d) asks whether the tax was, could reasonably now be, or would be charged to customers. It does not introduce a separate fairness or hardship assessment. AMLD had not been charged to customers and could not now be charged to them.

The court therefore rejected the High Court’s attempt to adapt that condition into a broader fairness inquiry simply because the concession was being applied outside VAT.

G. Internal evidence confirmed the published meaning

The interpretation of the published statements was sufficient to dispose of the appeal. Nevertheless, contemporaneous internal evidence reinforced the result.

That evidence showed that Customs had adopted the view that a physically separate, non-integrated RNG supported category A treatment. Internal communications distinguished RNGs outside the terminal from those inside it or affixed to its housing.

The argument that “remote” required substantial distance emerged later, particularly in the August 2006 Vale report, after the assessed period. It was not the policy consistently applied throughout that period.

This also undermined HMRC’s negligence argument. The evidence did not support the assumption that, had the claimants sought individual confirmation, they would have been warned that their RNGs were insufficiently distant. Rather, their understanding would apparently have been confirmed.

5. Precedents Cited and Their Influence

A. Extra-statutory concessions and legitimate expectation

Murphy v Revenue and Customs Commissioners [2023] EWCA Civ 497, [2023] STC 944

This supplied the modern summary of the governing principles. Falk LJ organised those principles into two categories: whether a statement can bind HMRC, and how it should be interpreted. That separation prevented the requirements for an enforceable assurance from being indiscriminately applied to every question arising under the misunderstanding concession.

R v Inland Revenue Commissioners, ex p MFK Underwriting Agencies Ltd [1990] 1 WLR 1545

This established the importance of a taxpayer falling clearly within an official representation and the perspective of an ordinarily sophisticated taxpayer. The present court applied that objective perspective to the BACTA letters and manual, while distinguishing the clarity of the concession itself from the characteristics of material producing a misunderstanding.

R (Davies) v Revenue and Customs Commissioners [2011] UKSC 47, [2011] 1 WLR 2625

This confirmed both the clear-and-unqualified representation requirement and the importance of the intended audience. It supported interpreting the statements through the eyes of informed industry participants rather than by isolating a dictionary meaning of “remote”.

R (Accenture Services Ltd) v Revenue and Customs Commissioners [2009] EWHC 851 (Admin), [2009] STC 1503

This characterised reliance on a concession as a substantive legitimate-expectation claim. It also supported treating evaluative factual application as primarily HMRC’s responsibility, reviewable for irrationality. The Court of Appeal accepted that principle but held that it could not transfer responsibility for interpreting published policy from the court to HMRC.

R (ELS Group Ltd) v Revenue and Customs Commissioners [2016] EWCA Civ 663, [2016] STC 2417

This required a fair and normal reading of a concession, without treating it as legislation or extending it beyond its language. It also supported restraint in reviewing evaluative application. The present decision applied that discipline in both directions: concessions should not be enlarged, but neither should additional conditions be inserted through analogy with a different doctrine.

R (Teleos plc) v The Commissioners of HM Customs and Excise [2004] EWHC 1036 (Admin)

This supported the possibility that assessing evidence of negligence under the misunderstanding concession is primarily for HMRC. Falk LJ recognised that possibility without deciding the entire standard-of-review debate, because the decisions here rested on erroneous interpretations and unsupported reasoning.

R (Medical Protection Society Ltd) v Revenue and Customs Commissioners [2009] EWHC 2780 (Admin), [2010] STC 555

This considered the misdirection concession, also called the Sheldon statement, alongside common law legitimate expectation. Its examination of disclosure and misdirection without confinement to rationality review supported the claimants’ argument for closer judicial scrutiny. Falk LJ acknowledged the analogy but did not finally determine the misdirection claims.

R (Aozora GMAC Investment Ltd) v Revenue and Customs Commissioners [2019] EWCA Civ 1643, [2020] 1 All ER 803

This illustrated the court’s role in determining legitimate expectation and whether departure would be sufficiently unfair, taking account of the public interest in collecting tax. Crucially, HMRC was not arguing here that it could refuse relief despite the concession’s requirements being met. The dispute concerned whether those requirements applied, not a separately justified departure from an established expectation.

B. Interpretation of public policy

Tesco Stores Ltd v Dundee City Council [2012] UKSC 13, [2012] PTSR 983

This supplied the wider public-law principle that public bodies do not authoritatively interpret their own policies. Although arising in planning, it directly supported the court’s responsibility to determine the meaning of Customs’ published statements. Its use demonstrates that the interpretative principle extends beyond tax concessions.

C. Gaming-machine taxation and the Rank litigation

Commissioners for Her Majesty's Revenue and Customs v The Rank Group Plc [2015] UKSC 48, [2015] 1 WLR 3472

This settled the underlying statutory issue: RNG separation did not prevent gaming-machine classification for VAT. Its reasoning was accepted as equally applicable to AMLD. It therefore established why concessionary relief mattered—the claimants’ preferred classification was not correct as a matter of legislation.

The Rank Group Plc and Another v HMRC [2020] UKUT 117 (TCC), [2020] STC 960

This explained why the VAT assessments were withdrawn despite the Supreme Court’s statutory ruling. EU fiscal neutrality required equivalent treatment because FOBTs’ exempt treatment had remained undisturbed. That principle did not affect AMLD, leaving the excise assessments dependent on the present concessionary challenge.

Case C-453/02 Finanzamt Gladbeck v Linneweber [2008] STC 1069

This underpinned the industry’s fiscal-neutrality repayment claims. Those claims also explained the context in which HMRC reconsidered machine classification and anti-avoidance concerns intensified. The Court of Appeal did not treat that policy context as evidence of knowing evasion by these claimants.

Revenue and Customs Commissioners v Rank Group plc [2013] EWCA Civ 1289, [2014] STC 470

Falk LJ noted that earlier observations concerning the manual and HMRC’s changing views were consistent with her conclusions. However, she did not use factual findings from separate litigation as substitutes for findings on the evidence properly before the court.

The Rank Group plc v HMRC [2009] UKFTT 363 (TC)

This decision was procedurally significant because the unredacted Vale report had been included in the hearing materials and referred to publicly. That earlier deployment explained why HMRC no longer maintained privilege over the passages withheld in the present litigation.

D. Evidence and appellate procedure

Hollington v Hewthorn [1943] KB 587

This supported the general inadmissibility of factual findings from separate proceedings. The court therefore largely disregarded invitations to rely on findings in the Rank litigation, while examining admissible documents and evidence for itself.

Ladd v Marshall [1954] 1 WLR 1489

This provided the familiar fresh-evidence criteria: reasonable diligence, probable importance to the outcome, and apparent credibility. They justified refusing additional transcripts and correspondence that could have been sought earlier. They did not, however, operate as an inflexible barrier to seeing the complete version of a document already before the court.

Al Sadeeq v Dechert LLP [2024] EWCA Civ 28, [2024] KB 1038

This confirmed that the fresh-evidence criteria guide, rather than exhaust, appellate discretion. It supported admitting the unredacted report in the interests of justice under CPR 52.21(2)(b), notwithstanding the claimants’ earlier possession of an unredacted copy in their advisers’ files.

6. The Vale Report: Redactions and Fresh Evidence

The High Court had seen the Vale report with passages redacted for legal advice privilege. An unredacted version had already been deployed publicly in the Rank proceedings. Once this emerged, HMRC ceased asserting privilege but opposed admission on ordinary fresh-evidence grounds.

Falk LJ considered that approach inappropriate in these circumstances. The report was already before the court; removing unsupported redactions restored the full context of an existing document. Relevant documents should ordinarily be available in full, subject to genuinely necessary privilege redactions.

Even if admitting the passages required the appellate court’s permission, the overriding objective favoured admission. HMRC’s litigation team already knew their contents, and admission did not unfairly surprise HMRC. The passages were particularly relevant because Customs’ contemporary understanding was itself in issue, rather than merely the correctness of legal advice.

Arnold LJ reserved the narrower question whether the whole document was already in evidence, making “fresh evidence” analysis unnecessary. He nevertheless agreed that the passages should be admitted if permission was required.

This is not a general exception permitting courts to disregard privilege. Privilege was no longer maintained. Nor does the decision dispense generally with diligence requirements: the court refused the other fresh-evidence applications.

7. Likely Impact and Limits

• Concessions must be applied according to their own wording. HMRC cannot import requirements from legitimate expectation, hardship or another concession without textual justification.
• Published policy receives independent judicial interpretation. Administrative expertise does not give HMRC the final say over what its guidance means.
• Industry communications can be general guidance. A letter intended for distribution through a trade association cannot rationally be dismissed as confined to unstated, individual circumstances.
• Individual confirmation is not invariably necessary. Whether further inquiry is required depends on what reasonable members of the intended audience would understand from the guidance.
• Later reasoning cannot establish an earlier policy. Contemporary documents may expose an attempt to present a subsequently developed distinction as longstanding.
• Unnecessary redactions should not be perpetuated on appeal. Restoring the complete context of an existing document may justify a flexible approach to fresh-evidence rules.

The judgment’s direct application is limited by the withdrawal of the two concessions. It does not revive them, extend VAT concessions automatically to other taxes, or create a general exemption whenever official guidance is mistaken.

Its broader significance lies in the distinction between interpretation and evaluation, and in requiring public authorities to administer published protections without adding conditions their language does not contain.

8. Complex Concepts Simplified

Extra-statutory concession

A published practice under which HMRC may refrain from collecting tax that legislation otherwise requires.

Bona fide misunderstanding

A genuine, honest misunderstanding. Honesty does not itself establish reasonable care or satisfy every other condition for relief.

Substantive legitimate expectation

A public-law claim that an authority should honour a sufficiently clear assurance or established policy conferring a benefit.

Rationality review

Judicial scrutiny of whether an administrative conclusion was reasonably available, rather than a fresh decision on its merits.

Fiscal neutrality

An EU VAT principle requiring comparable treatment of relevant competing supplies. Here it explained VAT relief but did not resolve AMLD liability.

Quashing and remittal

Setting aside an unlawful decision and returning the matter to the authority for a fresh decision. It does not necessarily award the underlying relief.

9. Conclusion

The Court of Appeal restored the distinction between an honest-misunderstanding concession and protection based on an unequivocal individual assurance. The claimants had to satisfy the concession’s requirements—not establish an additional legitimate expectation arising from the underlying guidance.

The statutory AMLD liability remained intact, but HMRC’s refusals of concessionary relief could not stand. More broadly, the judgment confirms that courts determine the meaning of published public policy and that administrative decision-makers must apply the protection actually promised, without retrospectively narrowing its terms.