The October 2018 decision of the Upper Tribunal in Vacation Rentals (UK) Limited v HMRC [2018] UKUT 0383 is a rare example of taxpayer success in a judicial review.

In the case, the Upper Tribunal determined that the taxpayer had a legitimate expectation that it would be taxed in accordance with the terms of HMRC’s guidance on the VAT treatment of card handling services, and that HMRC could not seek to apply a different treatment.

While the specific VAT technical issue is only of historical interest, the Upper Tribunal’s decision contains some interesting observations regarding reliance on HMRC guidance that are potentially of much wider relevance.

Vacation rentals

The taxpayer acted as a booking agent between holiday makers and property owners. When a holidaymaker paid for their accommodation using a debit or credit card the taxpayer charged them a separate fee for card handling services.

The VAT treatment of such card handling charges had historically been unclear. However, following the Court of Appeal’s decision in the taxpayer’s favour in Bookit v HMRC [2006] STC 1367, HMRC issued Business Brief 18/06 (BB 18/06) to clarify the situation.

BB 18/06 identified the following four components of card handling services based on the decision in Bookit and the later Court of Session decision in SEC v HMRC [2008] STC 967:

• obtaining the card information with the necessary security information from the customer;
• transmitting that information to card issuers;
• receiving authorisation codes from the card issuers; and
• transmitting the card information with the necessary security information and the card issuer’s authorisation codes to the intermediary bank (known as a ‘merchant acquirer’) which liaises between the card issuer and the taxpayer.

It went on to state that if an agent, acting for the supplier of goods or services, makes a charge to a customer over and above the price of the actual goods or services, for a separately identifiable service of handling payment by credit or debit card, and that service includes the fourth component above, then the charge will be exempt from VAT under s9 of the Value Added Tax Act 1994 (VATA 1994).

The taxpayer treated the card handling charges that it made to customers between 2007 and 2009 as exempt based on BB 18/06. HMRC challenged this treatment, claiming that the charges should instead be standard rated.

It should be noted that the VAT treatment outlined in BB 18/06 was later overturned by the 2016 decision of the European Court of Justice (CJEU) in National Exhibition Centre v HMRC (C-130/15) (NEC) and in fact card handling services are taxable rather than exempt. However, that decision has no implications for the earlier periods covered by the case.

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The Upper Tribunal noted that guidance should not be dissected with the same rigour appropriate to a statute, or interpreting a deed or contract.

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The taxpayer’s arguments

The taxpayer argued that BB 18/06 was an unequivocal policy statement by HMRC prescribing how booking agents should treat card handling fees following the judgments in Bookit and SEC, and that the policy was expressed in a way that was ‘clear, unambiguous and devoid of relevant qualification’.

During the period covered by the case, BB 18/06 was not revoked or qualified in any way. The taxpayer claimed that, in those circumstances, they had a legitimate expectation that they would be taxed in accordance with it.

They therefore challenged HMRC’s decision by way of a judicial review.

HMRC’s arguments

HMRC accepted that BB 18/06 was capable of giving rise to a legitimate expectation, but argued that the taxpayer did not have grounds for legitimate expectation based on their specific fact pattern.

HMRC’s main grounds for arguing this were the existence of minor differences between the taxpayer’s card handling processes and those in Bookit.

Specifically, in the third of the of the four components outlined above, the agent obtained the authorisation codes directly from the card issuer, but the taxpayer acquired the codes indirectly via a chain of intermediaries which included the merchant acquirer.

HMRC contended that the guidance in BB18/06 was only envisaged to apply in situations where, as in Bookit, the agent directly obtains the authorisation code from the card issuer and the merchant acquirer does not have possession of the code until it is transmitted by the agent in the fourth component of the process.

In support of this they argued that:

• the guidance in BB 18/06 had to be read in light of the decision in Bookit, where there was a finding of fact that the agent had communicated directly with the card issuer;
• the taxpayer was very sophisticated and had access to high quality advice - both the taxpayer and their advisers would have had access to the underlying decisions in Bookit and SEC and so could make up their own mind as to whether the taxpayer’s circumstances fell within the scope of the exemption;
• the use of the word ‘transmission’ in the fourth component means that the information must not have previously passed through the merchant acquirer, as that word means sending information which has not been previously provided; and
• as the merchant acquirer is only mentioned for the first time in the fourth component, it is to be inferred that it has had no part to play in the first three components.

Based on the above, HMRC argued that BB 18/06 did not unambiguously support or cover the taxpayer’s position, and that the essential requirement for a legitimate expectation of a promise which is clear, unambiguous and devoid of relevant qualification was not met.

The Upper Tribunal’s reasoning

The Upper Tribunal identified two issues as arising in the case: whether the taxpayer’s circumstances fell within the terms of the BB 18/06 as those terms would be understood by an ordinarily sophisticated taxpayer. If so, the question remains of whether it would be unfair and an  abuse of power for HMRC to seek to depart from the guidance in the particular taxpayer’s case.

Issue one

The Upper Tribunal concluded that the taxpayer was clearly correct in its arguments regarding legitimate expectation - the guidance in BB 18/06 was clear, unambiguous and unqualified.

The guidance, and the decisions in Bookit and SEC, made it clear that it is the presence of the fourth component which was key to whether exemption was available, and the distinction HMRC sought to make between direct and indirect communications between the agent and the card issuer was of no material significance.

The Upper Tribunal went on to expand on this conclusion, stating that HMRC’s analysis was wrong for the following reasons:

• they misinterpreted the basis of the judgments in Bookit and SEC as depending crucially on communication between the card issuer and agent being direct - this was not a factual finding in SEC, and was not material to the decision in Bookit;
• they treated the ‘background’ section of BB 18/6 as being the key guidance to interpret, when it was just an explanation of the circumstances in which the issue arose;
• they took an inappropriately technical and rigorous approach to construing the words of the four components, in particular the meaning of the word 'transmitting';
• there was nothing in the guidance to suggest exemption only applies if all components are satisfied according to strict terms; and on a fair reading, the second and third components do not require a direct transmission between the agent and card issueer just because those were in the facts in Bookit.

The Upper Tribunal also believed that HMRC would have understood this to be the position when BB 18/06 was issued, noting that that it is  clear from its wording that HMRC did not draw a distinction between the judgment in Bookit and that in SEC, and that those judgments did not lend any support to the argument that the exemption was limited to the precise facts in Bookit.

They also observed that the arguments advanced by HMRC were ‘a mixture of over-literalism, unjustified by the terms or the purpose of the exemption in question, and reading into the terms of the fourth component words that are simply not there, such as “for the first time” after “transmitting”.’

The Upper Tribunal noted that guidance should not be dissected with the same rigour appropriate to a statute, or interpreting a deed or contract. They also highlighted that the clarity of a representation is in part dependent upon the identity of the person to whom it is made.

In this case that was the ordinarily sophisticated taxpayer, irrespective of the level of sophistication of the actual taxpayer and whether they were in receipt of professional advice.

Issue one was therefore determined in favour of the taxpayer.

Issue two

HMRC argued that, on the facts of the case, even if the taxpayer had a legitimate expectation arising from BB 18/06, it would not be an abuse   of power for them to seek to deviate from the position expressed in that guidance.

The Upper Tribunal expressed surprise that HMRC would seek to make such an argument in circumstances where a taxpayer had a legitimate expectation that it would be dealt with in the manner described in HMRC’s own guidance.

In the Upper Tribunal’s view, it is only open to HMRC to override a legitimate expectation that it has encouraged if there is sufficient public  interest to do so. Once a legitimate expectation has been established (as it had in this case) the onus shifts to HMRC to justify the frustration of   it. The Upper Tribunal noted that, in the current case, HMRC had not even begun to discharge that obligation.

The ability of the taxpayer to obtain legal advice on the guidance was considered irrelevant. The guidance was meant to be clear and readily understood by the ordinarily sophisticated taxpayer. In any event, the legal advice would almost inevitably have been that BB 18/06 was clear and that the taxpayer fell squarely within it.

The Upper Tribunal therefore also determined issue two in favour of the taxpayer and quashed HMRCs decision not to apply the terms of its guidance to the taxpayer’s card handling services.

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It appears that this case may lend some comfort to those seeking to rely on specific and clear guidance from HMRC.

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Relying on HMRC guidance

The case highlights a number of interesting points regarding the circumstances in which taxpayers may (and may not) be able to rely on HMRC guidance.

It is clearly important to look closely at the specific facts and compare these to the wording of the guidance. Although, in this case, the Upper Tribunal rejected HMRC’s attempts to read extra conditions or restrictions into their guidance, it is clear that taxpayers will not be able to rely on guidance if their facts do not sit squarely within it.

An interesting point from the decision is the Upper Tribunal’s focus on what the ordinarily sophisticated taxpayer would understand from the  words of HMRC’s guidance. In taking this approach the Upper Tribunal rejected HMRC’s suggestion that the level of sophistication of the actual taxpayer in question, and their access to external advice, needed to be taken into account.

HMRC quoted Lord Mance in R (Davies & Anor) v HMRC; R (Gaines-Cooper) v HMRC [2011] UKSC 47 as support for the argument that the particular circumstances of a taxpayer might be material to the question as to whether they were entitled to rely on a legitimate expectation.

However, the Upper Tribunal noted that this statement was both said in passing and formed part of a dissenting judgment.

It was also made in the context of much broader guidance on which it might be expected taxpayers would seek further advice. This indicates  that the nature and scope of the guidance in question may affect whether it is the understanding of the ordinarily sophisticated taxpayer or the actual taxpayer that needs to be considered when establishing a legitimate expectation.

Legitimate expectation

HMRC also sought to rely on Simon Brown LJ’s judgment in R v IRC ex p Unilever plc [1996] STC 681 which identified the principle of ‘conspicuous unfairness amounting to an abuse of power’.

However, the Upper Tribunal noted that this is not directly applicable where the taxpayer has established a legitimate expectation based on clear guidance by a public authority.

Another interesting observation of the Upper Tribunal in making their decision was that guidance should not be dissected with the same rigour    as law. The question is how, on a fair reading, the guidance would be understood by those to whom it was addressed (in this case the ordinarily sophisticated taxpayer) - the guidance is not to be construed as a tax statute would be.

It appears that this case may lend some comfort to those seeking to rely on specific and clear guidance from HMRC. However, that comfort will be limited if there is the potential for fact patterns to diverge, or where guidance is broad, unclear or less specific in nature.

It is also, of course, possible that HMRC could appeal the decision of the Upper Tribunal, in which case it will be all eyes on the Court of Appeal to see what their take is on this important issuse.