Erase and Rewind: developments on estoppel and public law in the FTT

In two recent appeals, taxpayers have run public law and estoppel arguments to challenge HMRC’s decision to assess the taxpayer despite – and in the face of – a previously agreed position. Although public law arguments can always be run in a claim for judicial review in the High Court, the position is far from clear cut in the First-tier Tribunal (FTT). As for estoppel, the FTT’s jurisdiction was confirmed by the Supreme Court when it allowed an estoppel challenge by HMRC against a taxpayer in Tinkler v Revenue and Customs Commissioners [2021] UKSC 39, [2022] AC 886 (Tinkler). But there remains some ambiguity as to the scope of any estoppel challenge by a taxpayer against HMRC.  

The FTT’s decisions highlight issues to be aware of and what options are available to taxpayers who want to challenge a potentially unfair decision by HMRC. Taxpayers who rely on agreements with HMRC or representations need to be aware of the potential options available to them.

The taxpayers had reached an agreement with HMRC in 1993 regarding the National Insurance Contribution (NIC) treatment of the taxpayer’s company car fleet (‘the 1993 Agreement’). In essence, HMRC had agreed that NICs would not be due if, as HMRC had accepted, the fleet met certain conditions.

Many years later, HMRC concluded that NICs were in fact due. The taxpayers appealed that decision on substantive issues of law. They also challenged the decision on the basis that: (i) following the 1993 Agreement, HMRC was estopped from making the decision under challenge; and/or (ii) the decision was in breach of a legitimate expectation and was therefore unlawful in a public law sense.

In its decision, the FTT rightly applied Tinkler and accepted that the principles of estoppel by convention were satisfied. Nonetheless, the FTT dismissed the appeal because it concluded that HMRC could not be estopped from applying a statutory provision. The FTT added that this would be the case “whether or not [HMRC] have a discretion as to its application”. As a result, the FTT’s decision could arguably prevent estoppel from applying against HMRC in any case, including those where HMRC have discretion to raise an assessment (as in VAT and income tax) and those where they don’t (as in the case of NICs). That conclusion may well be open to challenge on a further appeal, as it appears to severely limit the scope of any estoppel challenge by a taxpayer.

In addition, the FTT found the 1993 Agreement to be ultra vires HMRC’s collection and management powers. Contrary to the taxpayers’ argument that the legality of the 1993 Agreement was irrelevant to the issue of estoppel, the FTT found that “a void and illegal agreement cannot form the basis for an estoppel”.

As for the public law arguments, the FTT undertook an extensive review of the relevant case law. On the basis of those decisions, the FTT found that whether it had jurisdiction to consider public law arguments ultimately depends on the proper construction of the statute which confers a right of appeal on the taxpayer in any given case. In the context of NICs, the FTT found that the statute did not confer a public law jurisdiction. 

This case concerned the VAT treatment of the supply of a dip pot as part of a takeaway meal deal. The taxpayer had previously accounted for VAT on the basis that the dip pots formed part of a single standard rated supply. But it then changed its mind and submitted an error correction notice (ECN) to reclaim the VAT it considered it had wrongly accounted for. HMRC agreed to repay the VAT in question. The taxpayer then submitted a further ECN for a different period. But that second claim was reviewed by a different HMRC officer, who took a different view. The new officer therefore refused the ECN and made assessments to recover VAT repaid under the first ECN.

The taxpayer appealed both decisions. It did so on the basis of substantive issues of law. But it also argued that HMRC were estopped from making the decisions and/or were in breach of a legitimate expectation. On the last point, the taxpayer’s argument was that, following KSM Henryk Zeman SP Z.o.o v Revenue and Customs Commissioners [2021] UKUT 182 (TCC), [2021] STC 1706, the FTT had jurisdiction in this appeal to consider public law arguments.

On the question of estoppel, the FTT held “we do not see any obvious reason why the Tribunal would not have jurisdiction to consider arguments based on estoppel by convention in the context of an appeal against a recovery assessment”. However, the FTT found that estoppel did not apply because there had been no detrimental reliance by the taxpayer on the mutual dealings between it and HMRC. As a result, the final but crucial ingredient of estoppel by convention was not satisfied.

As for the alleged legitimate expectation, the FTT accepted (as it had in MWL) that the question was one of statutory construction. It also accepted that in Queenscourt, it did have jurisdiction to consider public law arguments against a decision by HMRC to make VAT assessments. Despite that, the FTT ultimately rejected the claim: although the FTT accepted that the taxpayer had a legitimate expectation, it concluded that it would not be unfair for HMRC to depart from it in all the circumstances of the case. This was largely because there was no evidence of any serious detriment to the taxpayer as a result of HMRC’s decision. 

Both decisions are an important reminder of the difficulties which taxpayers will face if HMRC either apply a change of position retrospectively or assess for historic tax contrary to a previous agreement or representation. In these cases, it is vital to identify if the FTT has a public law jurisdiction in light of the statutory scheme which is applicable. It is important to understand that the FTT will not have such a jurisdiction in all cases and, if there is any doubt, taxpayers should file a judicial review in parallel with or instead of a tax appeal. Judicial review has a strict three-month time limit from the date of the decision under challenge and if taxpayers wait until a statutory review then they may be too late to bring a claim.

As for estoppel, HMRC can unquestionably estop a taxpayer from running certain arguments. But the case law is now conflicting on when taxpayers can do the same. MWL is probably right that HMRC cannot be estopped when – as in the case of NICs – there is no element of discretion. But in other cases, including VAT, HMRC do have a discretion to raise an assessment. That was the point recognised in Queenscourt and it remains to be seen how the case law will develop.

In any event, Queenscourt is an important reminder that in the case of both public law and estoppel, it is vital that taxpayers adduce evidence of detrimental reliance. This is true regardless of whether the arguments are being run in the FTT or in a claim for judicial review. 

Taxpayers may want to review any agreements reached with HMRC and/or any representations which have previously been given to them, including any clearance rulings which are still relied on. It is particularly important that taxpayers can identify and evidence the agreement or representation. In addition, any historic agreement or representation may need to be revisited and confirmed in light of any relevant changes to the facts or law. They include, but are not limited to, the legislative changes enacted following Brexit.

In the event of a dispute or potential dispute with HMRC, it is vital that taxpayers seek specialist legal advice. Both public law and estoppel are complex specialist areas of law and involve interpreting as well as applying complex legal principles. These matters are influenced by case law across the legal field, including immigration, regulation, tax and contract. In addition, the conduct of litigation in judicial review is a reserved legal activity, as is the right of audience in the High Court. 

KPMG Law’s Tax Disputes team has significant experience in this specialised area and can provide practical guidance to help you minimise the risks. Our team of more than 40 dispute specialists includes barristers, solicitors and other disputes professionals with a wealth of experience across the spectrum of tax and public law cases. 

For further information please contact:

• Lee Ellis
  
• Christopher Leigh