Schedule 36 Finance Act 2008 contains information and inspection powers, which HMRC regularly use as an investigative tool against taxpayers during tax investigations and before tax disputes have become litigious. It also includes a penalty regime. HMRC may use this tool in Transfer Pricing investigations and disputes.
Schedule 36 has seen several amendments aimed at strengthening HMRC's powers in areas of particular enforcement interest to HMRC. It can therefore be a useful marker of HMRC's current priorities. The targeted Transfer Pricing amendments made to Schedule 36 in 2023 underscore a growing HMRC appetite for investigation and enforcement action in this area. Below is a brief introduction to Schedule 36 in the Transfer Pricing context.
HMRC’s Schedule 36 powers
Part 1 of Schedule 36 enables HMRC to issue information notices compelling a person to provide information or produce documents (provided they are reasonably required for checking a tax position). Part 2 gives HMRC the power to enter a person's business premises and inspect the premises, business assets and business documents (again, where reasonably required for checking that person's tax position). Part 4 contains restrictions on HMRC’s powers. Part 5 covers appeal rights.
Notably, there is no right of appeal against a requirement in an information notice to produce statutory records. The master file and local file under the Transfer Pricing Records Regulations 2023 are considered statutory records. HMRC also have targeted Transfer Pricing Schedule 36 powers which (as per HMRC’s Transfer Pricing Documentation policy paper published 15 March 2023) are part of a wider package designed to “ensure that businesses maintain, and provide upon request, transfer pricing documentation prepared in accordance with OECD Transfer Pricing Guidelines”. Specifically, Schedule 36 was amended by Schedule 5 to Finance (No.2) Act 2023 so that an information notice can specify the prescribed Transfer Pricing records (i.e. the master file and local file), and can be issued outside an enquiry, and so that the "possession or power" requirement is disapplied where documents are in the possession or power of another member of a multinational group.
In the Transfer Pricing context therefore, taxpayers may see HMRC use its Schedule 36 powers with particular confidence, informed heavily by policy. Schedule 5 to Finance (No.2) Act 2023 also inserted paragraph 3C into Schedule 24 Finance Act 2007 (and parallel provisions into Schedule 18 Finance Act 1998 and TMA 1970) so that where the taxpayer has failed to maintain or produce the specified Transfer Pricing records, an inaccuracy is presumed ‘careless’ unless reasonable care is shown—potentially exposing the taxpayer to substantial tax-geared penalties and extended assessment time limits.
The Schedule 36 penalty regime
Part 7 contains the penalty regime for non-compliance. Penalties range from small, fixed amounts (under paragraphs 39 and 40) to potentially unlimited tribunal-imposed penalties (under paragraph 50).
There is a right of appeal to the FTT against both the decision that a penalty is payable under paragraphs 39 or 40 and the amount of the penalty. No liability arises under paragraphs 39 or 40 if the person satisfies HMRC or the FTT that there was a reasonable excuse for failing to comply with the information notice or for obstructing an HMRC officer.
Paragraph 50 contains a tax-related penalty: where a person has become liable to a paragraph 39 penalty, the failure or obstruction continues after that penalty is imposed, and an officer has reason to believe that, as a result, the amount of tax the person has paid or is likely to pay is significantly less than it would otherwise have been, HMRC can apply to the Upper Tribunal (within 12 months of the relevant date) for an additional penalty. In deciding the amount, the Upper Tribunal must have regard to the tax which has not been, or is not likely to be, paid—this can mean a very substantial penalty in high value Transfer Pricing contexts.
Taxpayers should also be aware that paragraphs 53-55 create a criminal offence where a person conceals, destroys or disposes of a document (or arranges for the same) that is the subject of a Tribunal-approved information notice (or where HMRC has informed the person that the document is or is likely to be the subject of such a notice). This can lead to a fine and / or a custodial sentence of up to 2 years.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
HMRC has published a policy paper and draft legislation that proposes a statutory obligation on taxpayers to correct errors in past tax returns. It is proposed that this new legislation should feature in Finance Bill 2026/27 and would come into effect on a day to be appointed. The draft legislation is presently out for consultation until September and so may change.
The same draft legislation also covers a proposed power for HMRC to issue correction notices where it has reason to suspect an error in a document that can be corrected. This note concentrates on the proposed obligation to self-correct.
The genesis of this proposal is the HMRC Tax Administration Framework Review in 2024/25. Responses to that review were published in April 2025 and one of the proposals that the Government said it would take forward was approaches to taxpayer self-correction. This current proposal is presented as part of an approach to modernise and simplify tax administration.
To date the precise legal (as opposed to professional or ethical) obligation to correct the position when a taxpayer discovers a mistake in a tax return already submitted to HMRC may have been unclear. This proposal intends to address that situation.
Under the new proposal, when a person “becomes aware” of an inaccuracy in a return that has led to an underpayment of tax and, at that time, the inaccuracy may be corrected either by the taxpayer themself or HMRC in some way, the taxpayer must either correct the inaccuracy themselves if they are able to do so or inform HMRC of the inaccuracy. Section 118(6) TMA 1970 is amended so that failure to comply with the obligation to correct will lead to the inaccuracy being treated as deliberate on the taxpayer’s part. Such treatment would impact upon HMRC’s assessing powers, the quantum of any penalty for non-compliance and open the possibility of ‘naming and shaming’ in connection with what may previously have been an innocent error.
It should be noted that the draft legislation is not restricted to a particular type of inaccuracy or error. The governing concept is an “inaccuracy in relation to which Condition 1(2) of [Schedule 24 FA 2007] is satisfied”. So, the test proposed is: does the inaccuracy “amount to or lead to (i) an understatement of a liability to tax, (ii) a false or inflated statement of loss or (iii) a false or inflated claim to repayment of tax.” Consequently, a wholly innocent mistake is within scope.
The trigger for the obligation to self-correct is that the taxpayer becomes “aware” of the inaccuracy. The concept of ‘becoming aware’ is not unknown in tax legislation but is a term that has an inherent vagueness of meaning. Actual knowledge is clearly within scope but what about the jurisprudence on ‘blind eye knowledge’? Is a decision not to look at what the taxpayer suspects might be a problem within scope?
There are a number of questions and concerns with this proposed legislation. For example;
• How does this proposal interact with the declaratory nature of judicial decisions? Does a return that was submitted based upon a particular view of the law become inaccurate and liable to correction when a subsequent judicial decision overturns that view of the law? How does the taxpayer deal with conflicting decisions as a case proceeds on appeal? Suppose the initial view of the law was arguably “in accordance with the practice generally prevailing at the time when it was made”?
• Precisely when does the taxpayer “become aware” of the inaccuracy so as to become subject to the obligation to correct? Suppose that the taxpayer is not an individual?
Hopefully these and other questions will be answered by the current consultation on the draft clauses. However, it does seem likely that some provision relating to an obligation to self-correct will appear in next year’s Finance Bill. Taxpayers should be aware of this upcoming new obligation.
Should you wish to discuss this Insight, please contact:
Iain MacWhannell, Partner in our Tax Disputes Team:
imw@jha.com
+44 (0)20 7851 8888
Steve Bousher
*The class of documents potentially within the new obligation is wider than simply tax returns. The class includes all documents of types that fall within paragraph 1(4) of schedule 24 Finance Act 2007. This note refers simply to ‘returns’ as a convenient shorthand.
On 19 March 2026, the Upper Tribunal (‘UT’) released its decision in the case of L Rowland & Co (Retail) Ltd v HMRC [2026] UKUT 00130 (TCC). The decision concerns the FTT’s approach to case management directions regarding witness evidence and raises important strategic considerations for taxpayers. A copy can be found here: Rowland_v_HMRC_Final_Decisison_for_release_to_the_parties.pdf
The underlying FTT appeal concerns whether around 1400 locum pharmacists were employed or self-employed for the purposes of PAYE and National Insurance (HMRC having issued Regulation 80 Determinations and Section 8 Decisions with a total value of c.£16M. A further £12M is at issue in subsequent tax years).
The taxpayer provided witness statements for only two locums. HMRC had wanted to interview and obtain documents from locums during the inquiry stage, but the taxpayer refused to give HMRC access and suggested that they would seek judicial review and an interim injunction if HMRC approached the locums. HMRC therefore decided not to proceed with this strategy, which (as HMRC went on to acknowledge) in turn meant that they were unable to fully plead their case.
The FTT directed each party to name five locums as witnesses to form a ‘sample’ and that if the taxpayer would not call the witnesses voluntarily, the FTT would issue witness summonses. The FTT directed HMRC to then provide ‘further and better particulars’ on the issue of whether a relationship of employment existed between each locum and the taxpayer, in all the relevant circumstances.
The taxpayer appealed to the UT on the grounds that the FTT had no jurisdiction to require a party to call evidence from a particular witness (‘Ground 1’) and that even if the FTT had such jurisdiction, the FTT had exercised its discretion incorrectly (‘Ground 2’). The UT allowed the appeal on Ground 2, deciding that the FTT can call additional witnesses on its own initiative, but that it should do so very sparingly, especially in proceedings akin to a commercial case where both parties are well-represented. The UT decided that the FTT had not acted neutrally, but had undermined the principle of ‘party autonomy’—it encroached upon the strategic choices of the parties by effectively allowing witnesses to be cross-examined by HMRC which the taxpayer did not wish to call.
The UT also said that the FTT had erred in its further and better particulars direction because it reversed the usual order of witness evidence coming after pleadings, effectively allowing HMRC to unfairly delay the completion of their pleadings and prevent the taxpayer from being fully aware of HMRC’s case / knowing which witnesses to select. This also made it impossible for the taxpayer (and the FTT) to know whether any sample would be representative. The UT’s view was that HMRC ought to know what their case is, having issued high value ‘best judgment’ assessments concluding that all the locums were employees, and that “HMRC are not entitled to use the tribunal litigation process to discover what their case will be”.
HMRC have now been directed to produce further and better particulars within 28 days of the decision i.e. without sight of the witness evidence that they had hoped for, in a case where such evidence is critical. The UT did not accept that the taxpayer’s threat of judicial review was a good reason for HMRC’s failure to try and interview the locums or apply for summonses in respect of them.
The UT also highlighted risks for the taxpayer, including: (1) HMRC could argue that the taxpayer had only established the position in relation to two locums, proving nothing about the employment status of the other 1,398 (i.e. the appeal could be dismissed in relation to the majority of the assessments); (2) HMRC could invite the FTT to draw adverse inferences from the taxpayer’s failure to call witnesses.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Julia Glukhikh, Associate:
https://uk.jha.com/our-people/profile/julia-glukhikh
Julia.Glukhikh@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
From 6 April 2026, amendments to the CIS legislation will enable HMRC to adopt a stricter approach against CIS scheme businesses that engage with other businesses involved in the alleged fraudulent evasion of tax.
This follows previous measures in 2021 to tackle abuse of the CIS and VAT lost from supply chain fraud, and 2024 legislation regarding Gross Payment Status (‘GPS’) tests. HMRC’s policy paper on the latest changes can be found here: Tackling Construction Industry Scheme fraud - GOV.UK
The legislation will be amended to introduce a Kittel-style test so that where it can be shown that a business ‘knew or should have known’ that they entered into a transaction connected with the fraudulent evasion of tax, the following may occur:
The time limit for reapplication following immediate cancellation of GPS will also increase from one to five years. Other grounds for immediate GPS cancellation include where a business has:
Next steps
Businesses operating within the CIS should be aware of these changes and conduct due diligence on their supply chains.
JHA&B have considerable expertise in successfully resolving tax disputes, especially involving HMRC’s application of Kittel, where HMRC have alleged fraud or that a business ‘knew or should have known’ that they entered into a transaction connected with the fraudulent evasion of tax.
If you have a dispute with HMRC concerning any of the issues mentioned above and would like us to assist, please contact:
HMRC is consulting on proposals that would, for the first time, require individuals and trusts to notify HMRC when they adopt an uncertain tax treatment (“UTT”) that confers a tax advantage.
All individuals and all trusts will fall within the UTT regime, without any turnover, balance sheet or “wealth” threshold albeit a notification would only be required where the tax advantage exceeds £5 million.
The current proposals will extend the UTT regime beyond income tax to also include:
This increases the likelihood that complex transactions such as asset restructurings, trust appointments, property transactions or succession planning could fall within scope.
Since April 2022, the UTT regime has required certain large companies and partnerships to notify HMRC when they have adopted a UTT in relation to Corporation Tax, VAT or Income Tax (including PAYE).
Under the current UTT regime, an uncertain treatment is defined by two triggers and notification is required where: (i) one or both of the statutory triggers are met, (ii) the tax advantage exceeds £5 million and (iii) no exemption applies.
The existing statutory triggers are:
In addition to the existing triggers, HMRC proposes a new notification trigger where:
This is particularly relevant for individuals and trusts, where planning often relies on areas of law that are technically uncertain but not directly addressed in HMRC guidance. Where a trust holds assets through a company or partnership, the notification obligation would arise only if the trust itself adopts an uncertain legal interpretation. This may be difficult to apply in practice, particularly for employee benefit trusts and other sponsored arrangements.
Currently, no notification is required if it is reasonable to conclude that HMRC already has all relevant information. HMRC proposes to tighten this exemption so that individuals and trustees would need explicit confirmation from HMRC that it is aware of the uncertainty.
This change would significantly reduce reliance on informal disclosures made through correspondence, returns or enquiries, and may encourage earlier and more formal engagement with HMRC. It may be wise to engage proactively with HMRC where uncertainty arises, with a view to obtaining the confirmation needed.
Although the £5 million threshold limits the scope, the proposals would require individuals and trustees to:
HMRC acknowledges that this will increase compliance obligations, even where HMRC ultimately agrees with the taxpayer’s position.
The present consultation closes on 4 June 2026, with HMRC’s response expected later in the summer. Those likely to be affected may wish to consider responding to the consultation, particularly on the practical and administrative challenges. Any legislation would be introduced in the next Finance Bill and would apply to returns filed from 1 April in the following tax year.
1 Linked to the Sept 2025 Guideline for Compliance GfC13
Shortly before a 4-week trial was due to commence, HMRC conceded that the appeal of Ducas Ltd (part of the Maxipay group) should be allowed in full and the associated Freezing Orders discharged. HMRC are also to pay Ducas’ costs on the indemnity basis. There will also be an enquiry as to damages caused by the Freezing Orders.
The background to the appeal was that, in November 2024, HMRC issued Ducas with a £171m assessment under the agency legislation - the NICs equivalent of s. 44 ITEPA 2003. HMRC also obtained Freezing Orders against Ducas and other Maxipay companies on an ex parte (without notice) basis. HMRC also later brought proceedings against the Maxipay UBO and secured a Freezing Order on an ex parte basis - that claim has also been discontinued and the Freezing Order discharged.
Since November 2024, there have been numerous hearings in the High Court and the FTT in which we secured:
- the listing of a speedy trial;
- the continuation of a cross undertaking in damages on the Freezing Orders (which will now form the basis of the enquiry as to damages);
- a very favourable High Court costs decision after various interlocutory hearings in which the Judge praised the companies’ ‘mature’ and ‘sensible’ approach to the Freezing Orders (HMRC v Ducas Ltd and Others [2025] EWHC 226 (Ch) [2025] Costs L.R. 1095); and
- heightened disclosure from HMRC.
The team also successfully resisted an appeal by HMRC to the Upper Tribunal in relation to disclosure which resulted in HMRC being ordered to pay Ducas’ costs of that appeal (HMRC v Ducas Ltd [2025] UKUT 362 (TCC) [2025] S.T.C. 1843): https://assets.publishing.service.gov.uk/media/6903308692779f89baa51fc2/HMRC_v_Ducas_Ltd_-_Final_Decision_.pdf
Iain MacWhannell instructed David Bedenham KC and Chris Stone KC of Devereux Chambers.
Iain, David, and Chris were greatly assisted by the wider JHAB team which included Thomas Hemming, Julia Glukhikh, Jono Gould, Tessa Hocking, John Hayton, Charlotte Agnew-Harington and Seth Cumming.
In September 2025, HMRC published “Guidelines for Compliance - GfC13” relevant to taxpayers who are:
• Uncertain of the correct interpretation of the law after making their best efforts to resolve the ambiguity.
• Considering / adopting a novel or improbable interpretation of the law, including after taking professional advice
The guidelines highlight the legal obligation of the taxpayer to provide a tax submission document that is correct (in both fact and law) and complete to the best of their knowledge. In adopting a filing position, HMRC make it clear that:
• A taxpayer has an obligation to make best efforts to resolve uncertainty on how the law should be applied before making tax filings.
• When seeking professional advice, this must be from a suitably qualified advisor.
• Where more than one interpretation of the law might be applied, the taxpayer must choose the interpretation that they believe is, on balance, most likely correct.
• The taxpayer is encouraged to disclose any novel interpretation / uncertainty to HMRC.
One to many postal campaign
Since the publication of the new guidelines, HMRC have written to wealthy taxpayers, asking them to review this guidance and complete an anonymous survey to collate feedback.
Implications for taxpayers
The issued guidelines do not represent a change in the law but HMRC will no doubt refer to them when making an assessment of taxpayer behaviour in relation to penalties. Careful reference to the guidelines should help the taxpayer (in a self-assessment system) reduce the risks of compliance checks and unexpected tax liabilities.
The publication of these guidelines forms a significant part of HMRC’s broader efforts to enhance compliance standards targeted at both taxpayers and also advisers who from May 2026 will be subject to mandatory government registration.
To read the article on Tax Journal click: here
There were several measures introduced by the 2025 Budget that will be of particular interest to HNW internationally mobile individuals, and I highlight a few of these below.
£5m IHT cap for pre-October 2024 EPTs: There will be a £5m cap on IHT payable by a discretionary trust over a ten-year period (to include exit charges and the decennial charge) for pre-30 October 2024 excluded property trusts to be introduced with retrospective effect from 6 April 2025. This broadly means that trusts with more than £83m of excluded property will pay less IHT.
The cap will be stepped from 6 April 2025 (the date upon which these trusts will have become relevant property) to the first ten-year anniversary after that date as that period will not be as long as 10 years, in this period the cap is £125,000 per quarter.
This is a welcome concession given that the IHT trust changes were a key part of what made FA 2025 so troublesome for EPTs. The £5m cap applies per trust.
APR/BPR £1m allowance to be transferable between spouses: In relation to the changes to APR/BPR due to come into force from 5 April 2026, the Budget sets out that any unutilised amount of the £1m 100% relief allowance can be transferred between spouses.
Miscellaneous IHT provisions: Anti-avoidance IHT provisions are being introduced to address various government concerns, including in relation to situs of IHT chargeable assets, as well as restricting charitable exemption to gifts made directly to UK charities and community amateur sports clubs.
Extension to temporary non-residence rules: Currently the temporary non-UK resident anti-avoidance provisions do not apply where there is a dividend or distribution from post departure trade profits to the individual in a non-UK resident year. Where the year of return is 2026/27 or later this will change. The post-departure trade profits legislative provisions are to be removed. This means that an individual who returns to the UK, without more than five complete tax years of non-UK residence, will be taxed on all distributions/dividends they receive in the years of non-residence from: (i) UK resident close companies; and (ii) non-UK resident companies that would be close if UK resident where:
• they held the shares prior to departure; and
• they are either (a) a material participator in the company or (b) an associate of a material participator in the company.
Specific legislation will allow for relief in respect of any foreign tax paid.
Remittance basis: Specific technical amendments (to ensure that the legislation operates as intended) are to be made to the FA 2025 legislation that removed the remittance basis from 2025/26 onwards and introduced the residence-based tax system. There is no specific detail as yet, but it has been announced that there will be further developments to bolster tax incentives for high talent new arrivals. This appears to mean making changes to the current four-year FIG and foreign employment earnings regimes.
Offshore anti-avoidance legislation: The Budget documentation refers to the Government’s commitment to substantially simplify the offshore structure anti-avoidance provisions (such as the CGT attribution provisions and the transfer of assets abroad legislation). The Government has pledged to proactively engage with representative bodies and stakeholders in this regard. It seems unlikely that there will be any significant changes here before 2027/28.
Property: The tax burden on holding UK property will increase. A new separate tax rate is being introduced for property income which will be taxed at 22/42/47%, so at a higher income tax rate than any other income (relief for finance charges will continue to be restricted). In addition, the Budget introduced a high value council tax surcharge (HVCTS) to be introduced from 2028/29 with respect to properties valued at over £2m. Like ATED borrowing is not deducted and there are different rates depending on the value of the property. For 2028/29, the lowest rate is £2,500 for property worth between £2m and £2.5m with the highest charge being £7,500 for £5m plus properties. There will be specific provisions applying to properties held within structures. Specific reference is made to relief for those who are required to live in the property as a condition of their job.
Lynnette Bober, Director, Joseph Hage Aaronson & Bremen
• Original Article
Higher earners facing a barrage of tax threats are turning to investments overseas as they try to shelter their cash from HMRC
Investors are ploughing record-breaking amounts into foreign bonds as they seek to lower their tax bills.
Financial advisers said that Ireland, Luxembourg and the Isle of Man were among the most popular jurisdictions for buying bonds because they offer significant tax advantages.
Some £10.5 billion was placed in offshore bonds in the 12 months to the end of June, more than double the £5.1 billion from the previous year, according to data reviewed by the Financial Times.
The trend is being driven by the barrage of tax threats that high earners are facing, including frozen income tax thresholds and Isa allowances and higher capital gains tax rates. Some pension pots will also be subject to inheritance tax from 2027.
• Income tax raid could cost higher earners £754 a year
Capital gains tax (CGT) for those in higher and additional rate income bands went from 20 per cent to 24 per cent in the last budget. The tax-free CGT allowance has also dropped from £12,300 to £3,000 over the past two tax years.
The anticipation of further taxes in the budget on November 26, aimed at those with the “broadest shoulders” is partly driving the trend, according to Claire Trott from the wealth manager St James’s Place.
Trott said: “Some investors may be concerned about potential tax increases in the UK, as offshore bond funds allow tax to be deferred while the investment remains within the bond. For others, it may reflect plans to relocate overseas.”
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Offshore bonds offer tax deferral, meaning you only pay tax when you take the money out of the bond. The investment wrapper is legally structured as a life insurance policy, allowing you to invest income and accrue gains without immediately paying tax.
You can withdraw 5 per cent of the investment every year for 20 years, tax-free.
When you finally withdraw all the money, or more than 5 per cent, it will be subject to income tax at your marginal rate. This can be helpful for those who want the money for retirement, when their income tax rate is likely to be lower than it is when they are earning.
• I’m buying a house with my daughter. Will it land her with a big tax bill?
Offshore bonds can also serve as a tax-efficient way to pass down wealth, for example to grandchildren who have little or no income and so will pay less tax on the investment.
Helen McGhee from the London law firm Joseph Hage Aaronson & Bremen said that while offshore bonds were becoming popular, they weren’t for everyone because the rules were complicated — and the tax office had them in its sights.
“Offshore bonds are being heavily marketed by some firms, but investors should be cautious. In most cases they do not reduce tax payable; they defer it, and the deferral objective can be compromised in some circumstances.
“HM Revenue & Customs’ Personal Portfolio Bond legislation can trigger an earlier than envisaged tax bill, which could wipe out the expected benefit. Equally, with increasing popularity comes increasing attention from HMRC.”
Summary of facts
The Claimant, Hotelbeds UK Limited (“Hotelbeds”) is a business which purchases hotel accommodation from UK VAT registered hotels and sells this to other suppliers of hotel accommodation (self-described as a “bed-bank”) for onward distribution.
Hotelbeds made standard rated supplies of hotel accommodation to its business customers and paid VAT on the purchase of hotel rooms from its suppliers. Under normal VAT principles Hotelbeds could deduct the input tax paid on the purchase of hotel rooms. However, Hotelbeds had difficulties obtaining VAT invoices from its suppliers to support its input tax deductions.
Hotelbeds’ practice (in accordance with the industry norm) was to pay for hotel rooms by means of a virtual credit card when the hotel guest checked in or checked out of the hotel (not following issue of a VAT invoice by its suppliers). Despite the suppliers being legally obliged to issue a VAT invoice, this was rarely done in practice. It was not disputed that Hotelbeds made some efforts to obtain the VAT invoices from its suppliers, but HMRC’s position was that Hotelbeds could have tried harder to obtain the VAT invoices but did not.
Hotelbeds submitted two Error Correction Notices (“ECNs”) to HMRC to recover the input tax, but the ECNs were rejected by HMRC on the basis that Hotelbeds had “systematically failed” to obtain valid VAT invoices. This was despite HMRC making input tax repayments in relation to two ECNs submitted for earlier VAT periods on the same facts.
Under Regulation 29 Value Added Tax Regulations 1995, HMRC has a discretion to allow claims for input tax which are not supported by a valid VAT invoice where the taxpayer holds other evidence of the VAT charge. Hotelbeds relied on three policy documents published by HMRC which deal with the application of HMRC’s discretion: VIT31200; HMRC’s Statement of Practice dated March 2007 (the “SOP”); and VAT Notice 700.
Hotelbeds particularly relied on VIT31200 which stated, “where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction.”
Hotelbeds brought a judicial review claim against HMRC on the basis that HMRC’s refusals to allow the deductions was unlawful because i) HMRC failed to apply their own guidance, ii) alternatively, it had a “legitimate expectation” that it would be entitled to deduct input tax based on statements in HMRC’s guidance; the SOP; and / or because HMRC accepted two earlier ECNs on the same facts, and iii) the HMRC
decision was “irrational” given that there was sufficient evidence of the relevant supplies.
What did the Court decide?
The Court determined that none of the three HMRC policy documents were drafted with a “no invoice” situation in mind. Instead, they each make references to circumstances where a taxpayer has an “invalid invoice” which did not apply in this case. Therefore, given the absence of any directly applicable policy the Court determined that, “the [HMRC] decision maker was required to go back to the scope of the discretion and to judge the request made against the principles of the tax and HMRC’s duty to protect the revenue.”
The Court concluded that:
· HMRC’s guidance was “inconsistent, ambiguous and, in [the Court’s] judgment, difficult for a decision-maker to navigate.”
· In relying upon the written policy contained in VAT Notice 700 HMRC has misconstrued and/or misapplied its own policy.
· The strong driver against recovery without a valid invoice is fraud but there was no real risk of fraud in this case
· The Court did not agree with HMRC that a “systematic” failure to obtain VAT invoices meant simply a “repeated” failure.
· The Court held that HMRC’s decision “erred in law” because it “failed to take the principles of neutrality and the right to deduct properly into account.”
· HMRC’s refusal was inconsistent with the payment of earlier ECNs and was “unfair and unreasonable, and unsustainable in public law terms.”
On that basis Hotelbeds’ application for judicial review was allowed. The Court did not consider it necessary to deal with Hotelbeds’ “legitimate expectation” argument because Hotelbeds succeeded on its main argument.
Comment
Hotelbeds main argument was that HMRC had not followed its own guidance. However, HMRC’s guidance is not law, rather it contains HMRC’s interpretation of the law and how the law should be applied. It is not unknown for HMRC to take a position which is contrary to its own guidance.
Unfortunately the Court did not rule expressly on the legitimate expectation argument, which put on the wider basis obliges HMRC as a matter of public law to exercise a discretion in a manner that is consistent with its “acknowledged duty to act fairly and in accordance with the highest public standards.”- per Sir Thomas Bingham MR in Unilever
(1996) STC 681), albeit it might well have reached the same decision. Whilst acknowledging the centrality of the invoice to the VAT system, this case involved similar claims from the Claimant being accepted in the past, HMRC being in a net positive position as regards the tax it received – contrary to the “adventitious windfall” in Unilever – here there was adequate evidence of the transactions in question, no risk of fraud and no risk of the issue continuing in future periods owing to a change of system. It is difficult to see how an HMRC officer properly instructed as to the true scope of the discretion could have reached the same decision rationally.
