Factual and Procedural Background
This case concerns an appeal by the Appellant taxpayer, Company A, against a judgment of the Upper Tribunal (Tax and Chancery Chamber) following an appeal by the Respondents, the Commissioners for HM Revenue and Customs (HMRC), regarding a disputed VAT assessment dated 25 March 2009. The assessment demanded payment of VAT arrears plus interest for the period from 1 March 2006 to 31 August 2008, based on the Appellant’s failure to comply with self-billing invoice requirements under the VAT Regulations 1995.
Company A, a scrap metal dealer operating a self-billing system without proper self-billing agreements with its suppliers, was assessed by HMRC who disallowed input tax deductions related to four suppliers deregistered for VAT. HMRC relied on the absence of valid self-billing agreements and invoices to reject the input tax claims.
The Appellant challenged the assessment before the First-tier Tribunal (FtT), which found HMRC unreasonable for failing to consider exercising their discretion under regulation 29(2) of the VAT Regulations to accept alternative evidence supporting input tax deductions. The FtT allowed the Appellant’s appeal and discharged the assessment.
HMRC appealed to the Upper Tribunal. The Upper Tribunal’s first judgment held that HMRC had in fact exercised their discretion in March 2009 but not properly in July 2009, and that the discretion needed to be exercised afresh. The Upper Tribunal remitted the matter for further consideration, directing HMRC to reconsider their discretion and the FtT to decide whether HMRC’s refusal to exercise discretion was reasonable.
The Appellant appealed the Upper Tribunal’s order allowing HMRC’s appeal and remitting the case for further consideration. The current appeal concerns whether the Upper Tribunal erred in law by not upholding the FtT’s decision to discharge the assessment outright.
Legal Issues Presented
- Whether the Upper Tribunal correctly applied the legal test regarding the exercise of HMRC’s discretion under regulation 29(2) of the VAT Regulations 1995 in relation to input tax deductions without proper self-billing invoices.
- Whether the FtT was entitled to allow the Appellant’s appeal and discharge the VAT assessment on the basis that HMRC acted unreasonably by failing to exercise their discretion.
- Whether the Upper Tribunal was correct to remit the matter for HMRC to reconsider their discretion and for the FtT to supervise that reconsideration rather than allowing the appeal and discharging the assessment outright.
- What is the nature and scope of the tribunal’s jurisdiction (appellate versus supervisory) in reviewing HMRC’s exercise of discretion under regulation 29(2).
Arguments of the Parties
Appellant's Arguments
- The Upper Tribunal erred by failing to dismiss HMRC’s appeal and by not upholding the FtT’s decision to discharge the assessment, as HMRC’s failure to exercise discretion rendered the assessment invalid.
- The tribunal’s jurisdiction is appellate, requiring review of the validity of the assessment, not supervisory over HMRC’s discretion. Once HMRC acted unreasonably, the assessment must be discharged.
- The Upper Tribunal wrongly allowed HMRC a further opportunity to exercise discretion retrospectively, which is not permitted absent statutory authority.
- The burden should not be on the taxpayer to prove that no reasonable body of Commissioners could refuse the discretion; rather, HMRC must prove that their decision would inevitably have been the same if properly exercised.
- HMRC accepted that the conditions for input tax deduction were met; EU law and relevant case law support the taxpayer’s right to deduction even if formal requirements were not fully complied with.
- The Upper Tribunal’s distinction between “process defects” and “merits defects” is artificial and legally incorrect.
Respondents' Arguments
- The Upper Tribunal correctly held that the FtT’s jurisdiction is supervisory in relation to HMRC’s exercise of discretion under regulation 29(2), and appellate in relation to the assessment.
- Since HMRC had not properly exercised their discretion, it must be exercised afresh by HMRC, not by the tribunal substituting its own discretion.
- The test for allowing the appeal is whether HMRC’s decision would inevitably have been the same if discretion had been properly exercised; in this case, it was not clear, so remitting for reconsideration was appropriate.
- The distinction between “process defects” (failure to consider discretion properly) and “merits defects” (wrong exercise of discretion) is logical and supported by case law.
- Tribunals cannot stand in the shoes of HMRC and exercise discretion themselves.
- Reconsideration of discretion by HMRC is necessary and fair, especially given the factual uncertainties and the elapsed time.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| John Dee Ltd [1995] STC 941 |
Test for tribunal’s appellate jurisdiction over discretionary decisions; tribunal cannot substitute its discretion but can allow appeal if no reasonable decision-maker could have acted as HMRC did. |
Applied to confirm that if HMRC failed to exercise discretion or exercised it unreasonably, tribunal may allow appeal and discharge assessment unless HMRC can show decision would inevitably have been the same. |
| Best Buys Supplies Ltd v Revenue & Customs Commissioners [2012] STC 885 |
Clarifies supervisory jurisdiction of tribunal over HMRC discretion under regulation 29(2); tribunal cannot direct HMRC to reconsider but can allow appeal if discretion was unreasonably exercised. |
Followed to support remitting the matter to FtT to assess if HMRC’s decision would inevitably have been the same and to supervise HMRC’s reconsideration. |
| Kohanzad v Customs and Excise Commissioners [1994] STC 967 |
HMRC’s discretion to allow input tax credit notwithstanding absence of valid invoice under regulation 29(2). |
Accepted as common ground that HMRC has discretion under regulation 29(2) to allow input tax deductions without valid invoices. |
| Dankowski v Dyrektor Izby Skarbowej w Lodzi (Case C-438/09) [2011] |
EU law principle that Member States cannot impose conditions on VAT deduction beyond those in the Directive to effectively deny the right to deduct input tax. |
Considered by FtT and Upper Tribunal in assessing whether invoices were invalid and whether discretion should be exercised in taxpayer’s favour. |
| UDL Construction PLC v CCER [1995] V&DR 396 |
Self-billing system must be strictly controlled to preserve VAT system integrity. |
Referenced by Upper Tribunal to justify HMRC’s caution in exercising discretion given lack of self-billing agreements. |
| Customs and Excise Commissioners v JH Corbitt (Numismatists) Ltd [1981] 1 AC 22 |
Principles regarding supervisory vs appellate jurisdiction of tribunals over Commissioners’ discretionary decisions. |
Supported the view that tribunals have supervisory jurisdiction over HMRC’s exercise of discretion. |
| Customs & Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 |
Limits on tribunal’s power to substitute its own discretion for that of HMRC. |
Applied to confirm supervisory jurisdiction and that tribunal cannot direct HMRC to reconsider discretion except in limited circumstances. |
Court's Reasoning and Analysis
The court analysed the nature of the tribunal’s jurisdiction in appeals against HMRC assessments and discretionary decisions. It confirmed that the tribunal’s jurisdiction is appellate with respect to the assessment itself but supervisory with respect to HMRC’s exercise of discretion under regulation 29(2). The tribunal cannot substitute its own discretion for HMRC’s, but can review whether HMRC exercised discretion lawfully and reasonably.
The court accepted that HMRC had failed to properly exercise their discretion in July 2009 due to an erroneous view that discretion could not be exercised absent self-billing agreements. The March 2009 decision was treated as an exercise of discretion, albeit one that could be revisited.
Following established authority, notably John Dee Ltd, the court held that if HMRC’s failure to exercise discretion rendered the assessment flawed, the tribunal should allow the appeal and discharge the assessment unless HMRC could demonstrate that their decision would inevitably have been the same if discretion had been properly exercised. In this case, HMRC conceded they could not show inevitability.
The Upper Tribunal had remitted the matter for HMRC to reconsider the exercise of discretion and for the FtT to supervise that reconsideration. The court found this approach legally flawed because it effectively preserved an invalid assessment and allowed HMRC a further opportunity to justify a flawed decision retrospectively, which is not supported by statute or precedent.
The court rejected the Upper Tribunal’s distinction between “process defects” and “merits defects” as unhelpful and inconsistent with legal principles. It emphasised that establishing a process defect (failure to exercise discretion) is sufficient to invalidate the assessment, requiring its discharge.
Consequently, the court concluded that the FtT’s original decision to allow the appeal and discharge the assessment was correct and should be restored.
Holding and Implications
The court’s final decision is to ALLOW the Appellant’s appeal, restore the FtT’s decision, and discharge the VAT assessment dated 25 March 2009.
The direct effect is that the assessment against Company A is set aside as invalid due to HMRC’s failure properly to exercise their discretion under regulation 29(2). HMRC may consider issuing a new assessment if legally permissible within statutory time limits, but the existing assessment cannot be retrospectively validated by reconsideration of discretion.
No new precedent is established beyond applying established principles concerning the supervisory and appellate jurisdiction of tribunals over HMRC discretion and the consequences of failure to exercise discretion properly.