Medical Protection Society Ltd, R (on the application of) v HM Revenue & Customs

Factual and Procedural Background

This case concerns an application for judicial review by the Claimant, Medical Protection Society Ltd ("MPS"), against the Defendants, collectively referred to as HMRC, regarding a decision to require MPS to account for value added tax ("VAT") under the reverse charge provisions of the Value Added Tax Act 1994 ("VATA") for legal services received from foreign providers. MPS relied on a ruling letter from HMRC dated 3 March 1998, which confirmed that no reverse charge VAT was payable on these legal services, a ruling which HMRC later withdrew by letter dated 14 January 2008. HMRC contended that the original ruling was not binding due to alleged nondisclosure of material facts by MPS, and sought to recover VAT for a three-year period prior to the withdrawal. MPS maintained that full disclosure had been made in a letter dated 13 February 1998 ("the disclosure letter") and alternatively argued that HMRC were precluded from recovering VAT due to a "misdirection by omission" arising from a 2001 site visit by an HMRC officer who did not challenge MPS's VAT treatment of the legal services.

Legal Issues Presented

1. Whether the disclosure letter provided full and proper disclosure of material facts to HMRC such that HMRC are bound by their 1998 ruling that MPS was not required to account for reverse charge VAT on the legal services;
2. Whether HMRC are precluded from requiring MPS to account for VAT due to a "misdirection by omission" during a 2001 site visit;
3. The applicability and scope of the doctrine of legitimate expectation and HMRC’s Extra-Statutory Concession (the Sheldon statement) in relation to the withdrawal of the VAT ruling.

Arguments of the Parties

Appellant's Arguments

• The disclosure letter fairly and squarely presented all material facts indicating the high level of control MPS exercises over claims against its members, including an analogy to insurers' control under insurance contracts.
• The letter indicated that lawyers would not act on members' instructions without MPS's review and approval, and that members undertook not to take steps without MPS's consent, reflecting significant control.
• The disclosure described the relationship between members and legal advisers as client/adviser with duties owed to both members and MPS, supporting the position that MPS did not have to account for VAT on a reverse charge basis.
• The Guidelines produced in 2006 merely illustrated the control already disclosed in the disclosure letter.

Respondent's Arguments

• The Guidelines reveal a practical level of control by MPS over claims handling that far exceeds the picture presented in the disclosure letter.
• HMRC identified material facts not disclosed in the disclosure letter, including MPS's power to veto expert witnesses, decide settlements, approve case progression, control lawyers, and conduct audits, which informed their decision to withdraw the ruling.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analysed whether the disclosure letter provided a full factual picture of MPS's control over legal claims management sufficient to bind HMRC to their 1998 ruling. The court compared the disclosure letter with the 2006 Guidelines and HMRC's 2008 factual summary. It found that the disclosure letter gave an impression that members were primarily responsible for instructing lawyers and managing claims, with MPS having a formal but limited veto power. In contrast, the Guidelines showed that MPS exercised proactive and extensive control over claims handling, including instructing lawyers, deciding settlements, monitoring lawyers, and managing the process comprehensively. This disparity indicated that the disclosure letter did not fairly and fully present the material facts to HMRC.

Regarding the alternative case of misdirection by omission, the court held that such misdirection requires a clear expectation that HMRC would act and that failure to act would mislead the taxpayer to their detriment. The 2001 site visit by an HMRC officer focused on corporate advice VAT treatment and did not involve the legal services VAT issue. There was no evidence that MPS was misled by omission, nor that the officer had a duty to revisit the legal services VAT treatment. Further, since misdirection by omission is a subset of the Sheldon statement and legitimate expectation doctrines, it also requires full disclosure of material facts, which was not met here.

Holding and Implications

The court dismissed MPS's claim for judicial review of HMRC's decision to withdraw the VAT ruling and require MPS to account for reverse charge VAT on legal services for the three years preceding 14 January 2008.

Holding: The claim is DISMISSED.

Implications: The decision permits HMRC to recover VAT for the specified period based on the finding that MPS did not provide full disclosure to HMRC in 1998. No new precedent was established; the ruling applies the established principles of legitimate expectation and the Extra-Statutory Concession requiring full disclosure. The direct effect is that MPS must comply with the VAT assessment as determined by HMRC.